A View to the Future

By Incoming Chair Ed Smith, Holbrook & Peterson

The 2006-2007 year has, indeed, been both busy and full of accomplishments. Many thanks to current Chair Paul Hayes for his dedicated work for the Section. His leadership set the tone for the Executive Council and the Section.

I am looking forward to serving as your Chair for the 2007-2008 year, and am pleased that Michael Parham of Williams, McDaniel, Wolfe & Womack, P.C. in Memphis has agreed to serve as Vice Chair. We have a talented and dedicated Executive Council and many exciting plans for the upcoming year.

Look for an email from the Executive Council this summer soliciting your ideas for the activities and focus of the Section. This is your Section. We want it to be both beneficial to you and an outlet for you to share your experiences, knowledge, and talents with Section members statewide.

We will kick off the new year on June 26 with a teleseminar presented by Paul Hayes, Bryan Howard, and Les Wilkinson, providing an update of legislative activity in the estate planning and probate areas. We will continue to grow and develop the e-forum, which many of you already are using to post questions for the statewide membership and to pass along developments that affect our practices. We will build upon the success of the past two February forums with more quality sessions in February 2008, integrating great feedback provided by this year's participants.

Angelia Morie Nystrom of Baker Donelson in Knoxville will continue the work Virginia W. Griffee, sole practitioner in Memphis, has done on our Section newsletter the past two years. (Many thanks, Virginia.) Under Virginia's guidance, the newsletter has been an attractive and informative Section resource, and I look forward to excellence from Angelia's efforts.

Thank you for your membership in the Section and for your future contributions to the Section's activities.

Update on Estate and Trust Related Legislation in Tennessee

By Leslie B. Wilkinson, Jr., Harwell Howard Hyne Gabbert & Manner, PC, Nashville

The following is an update on certain items of enacted legislation of interest to estate planning practitioners as of May 8, 2007. You may view the text of the enacted bills as well as monitor the status of pending bills by visiting the Tennessee Bar Association's website at http://www.tba.org/tba_legismain.html.

Public Chapter Number 8 (HB 0417/SB 1599). This Act makes several changes to various provisions of existing law. It was signed into law on March 28, 2007, and except as otherwise noted below, was effective upon its enactment. Its principal changes include:

* Tennessee Code Annotated Section 30-2-307(d) is amended to provide that claims against an estate arising from a debt of a decedent must be filed within twelve months after the decedent's date of death.

* A new section will be added to Title 32 Chapter 3 regarding the construction and operation of wills. This new section provides that if the residue of a decedent's testamentary estate or revocable trust is devised to more than one person, the share of a residuary devisee that fails for any reason will pass to the other residuary devisees proportionately, unless the will or revocable trust provides otherwise.

* Tennessee Code Annotated Section 32-2-111 provides for the admission of a will to probate for the limited purpose of establishing a muniment of title. Under prior law, this was only effective for establishing title to real property. Under the new law, a muniment of title to personal property may be established under this section as well.

* The law is amended to substantially change the manner of executing a living will (Tenn. Code Ann. Section 32-11-104) or durable power of attorney for healthcare (Tenn. Code Ann. Section 34-6-203(a)). Under prior law, a person was required to execute a living will or durable power of attorney for healthcare in the presence of two witnesses, each of whom were not related to the declarant and neither of whom were beneficiaries of the declarant's estate. The new law provides that that a living will or durable general power of attorney for healthcare may be executed either without witnesses provided that the declarant's signature is attested by a notary public or without a notary public provided that the principal's signature is attested by two adult witnesses. In either instance under the new law, only one of the witnesses must be a person who is not related by blood, marriage, or adoption and who is not a beneficiary of the declarant's estate. These provisions are given retroactive effect.

* Tennessee Code Annotated Section 34-1-106(a) is amended to clarify that a guardian ad litem may serve a respondent with a petition for the appointment of a guardian or conservator.

* The Uniform Durable General Power of Attorney Act provides that an affidavit executed by an attorney-in-fact stating that such person had no knowledge of the termination of such person's powers by revocation, death, disability, or incapacity constitutes conclusive proof of the nonrevocation or nontermination of the power. Tennessee Code Section 34-6-105 is amended to provide that, in the context of a durable power of attorney, the affidavit need only specify that such person's powers have not been terminated by death or revocation.

* The Uniform Durable General Power of Attorney Act is further amended by adding new Tenn. Code Ann. Section 34-6-107, which provides that an attorney-in-fact is a fiduciary with respect to the principal but only to the extent the attorney-in-fact undertakes to act under the power of attorney. It also clarifies that the attorney-in-fact may be compelled to account to the principal or his or her legal representative. This law is given retroactive effect.

* The Uniform Durable General Power of Attorney Act is further amended by providing that where a power of attorney is effective only upon the principal's disability or incapacity, the power of attorney is effective as of signing for the limited purpose of enabling the attorney-in-fact to access the principal's medical records and to talk with medical personnel.

* The Uniform Transfers to Minors Act is amended to permit the creation of a "qualified minor's trust" into which a custodian may transfer custodial property without court order. A "qualified minor's trust" is a trust which may be expended by, or for the benefit of, the donee before attaining 21 years or age and to the extent not so expended, will pass to the donee upon attaining 21 years of age or the donee's estate if he or she does not survive to reach 21 years of age.

* Tennessee Code Annotated Section 56-7-201 governs the disposition of life insurance proceeds in certain instances. The statute is amended to provide that life insurance proceeds payable to the trustee of a revocable trust are exempt from creditor claims in the same manner as proceeds payable to a decedent's estate.

Public Chapter Number 13 (HB 0418/SB 1598). This law amends Tenn. Code Ann. Sections 31-4-101 and 34-1-102 to clarify that, for purposes of determining a surviving spouse's elective share, a decedent's net estate does not include assets over which the decedent held a power of appointment unless the power is exercised in favor of the decedent's probate estate. It also establishes that the net estate excludes the homestead allowance, exempt property, and year's support allowance. It exempts the elective share from allocation for estate taxes and states that the elective share must be elected within nine months of the decedent's death. It further provides that after the elective share amount has been determined, the amount payable to the surviving spouse shall be reduced by the value of all assets which were transferred to the surviving spouse or for the benefit of the surviving spouse, but excluding the homestead allowance, exempt property and year's support allowance. This act is effective July 1, 2007.

Public Chapter Number 24 (HB 1622/SB 1046). This legislation makes several changes to the Tennessee Uniform Trust Code effective April 12, 2007.

* The definition of "power of withdrawal" is amended to mean a presently exercisable general power of appointment other than a power exercisable by a trustee that is limited by an ascertainable standard or exercisable by another person only. Tenn. Code Ann. Section 35-15-103(10).

* The definition of "qualified beneficiary" is amended such that, for purposes of making the determination as to whether an individual is a qualified beneficiary, it is assumed that (i) all powers of appointment are not exercised and (ii) any event not reasonably expected to occur does not occur. Tenn. Code Ann. Section 35-15-103(12).

* A definition of "ascertainable standard" is added. It means any standard relating to an individual's health, education, maintenance or support within the meaning of Internal Revenue Code Sections 2041(b)(1)(A) and 2514(c)(1). Tenn. Code Ann. Section 35-15-103(21).

* Under prior law, Tenn. Code Ann. Section 35-15-110 provided that charitable organizations designated to receive distributions from a trust and persons appointed to enforce trusts created for the care of animals or another noncharitable purpose are treated as qualified beneficiaries. The new law deletes the reference to persons appointed to enforce trusts created for the care of animals or another noncharitable purpose and provides that a charitable organization has the rights of a qualified beneficiary only if the organization is a permissible distributee for trust income or principal, is a future potential distribute of income or principal, or would be a permissible distributee if the trust terminated.

* Under prior law, Tenn. Code Ann. Section 35-15-111 provided that nonjudicial settlements could be entered into by "interested parties" with respect to any matter involving a trust. An "interested party" was defined as persons whose consent would be required in order to achieve a binding settlement if the settlement were to be subject to court approval. The new law eliminates the concept of "interested parties. Now, nonjudicial settlements may be entered into by the trustee and qualified beneficiaries.

* The Trust Code allows for the representation of persons by their fiduciaries. A new provision is added to Tenn. Code Ann. Section 35-15-301 which clarifies that a settlor may not represent or bind a beneficiary with respect to the termination or modification of a trust. Also, under prior law, Tenn. Code Ann. Section 35-15-303 provided that a parent could represent his or her minor or unborn child. The new law expands this concept by providing that a person may bind his or her minor or unborn descendants. That section is further amended by clarifying that a settlor may designate a representative by so providing in the trust agreement or in a writing delivered to the trustee.

* In Tenn. Code Ann. Sections 35-15-408 and 35-15-409, the Trust Code addresses trusts for the care of animals and noncharitable trusts without an ascertainable beneficiary. Under prior law, these trusts could not be enforced for more than 21 years. Under the new law, such trusts may be enforced for 90 years.

* In Tenn. Code Ann. Section 35-15-411, the Trust Code provides for the modification or termination of noncharitable irrevocable trusts by consent. Under prior law, consent was required of all the beneficiaries. Under the new law, consent must be obtained by "qualified beneficiaries" as defined in Tenn. Code Ann. Section 35-15-103(12). The amendment also provides that a trustee can force the beneficiaries to obtain court approval of the proposed modification or termination.

* Tennessee Code Annotated Section 35-15-417 provides for the combination and division of trusts. That section is amended to add a procedure for establishing a trustee where two trusts with different trustees are combined.

* In Tenn. Code Ann. Section 35-15-504, the Trust Code provides that a creditor may not compel a distribution where the distribution is subject to the trustee's discretion. This section is amended to address the situation in which a trustee may make a distribution for his or her own benefit. The new law provides that if the ability to make such a distribution is limited by an ascertainable standard, a creditor may not reach trust assets or compel a distribution except to the extent the interest would be subject to the creditor's claim were the beneficiary not acting as trustee.

* Under Tenn. Code Ann. Section 35-15-505, after the death of a settlor, and subject to the settlor's right to direct the source from which liabilities will be paid, the property of the settlor's revocable trust is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains. The new law establishes that claims which would be barred as to the settlor's estate are also barred as to the trust and the law applicable to probate estates as to priority of claims is applicable to such trusts.

* Tennessee Code Annotated Section 35-15-505 also provides under current law that a creditor of the settlor of an irrevocable trust may reach trust assets only to the extent such assets may be distributed to or for the benefit of the settlor. The new law provides that a settlor's creditors may not reach trust assets to the extent that a trustee may make a distribution to a settlor in an amount equal to the settlor's taxes payable on any portion of the trust principal or income which are included in the settlor's personal income under applicable law.

* Tennessee Code Annotated Section 35-15-506 provides that a creditor may reach an overdue mandatory distribution. This section is amended to define "mandatory distribution" as a distribution which the trustee is required to make to a beneficiary under the terms of the trust but does not include a distribution subject to the exercise of the trustee's discretion.

* Under existing law, Tenn. Code Ann. Section 35-15-704 provides that a vacancy of a trusteeship of a charitable trust that must be filled may be filled, if the trust agreement does not designate a successor, by the person designated by the charitable organization provided that the attorney general concurs with such appointment. The new law provides that the designation will be effective unless the attorney general objects within thirty days after having received notice.

* Tennessee Code Annotated Section 35-15-813 addresses a trustee's duty to inform and report to trust beneficiaries. This provision is amended so that a trustee's duty to inform is limited to beneficiaries who are current mandatory beneficiaries or permissible distributes rather than qualified beneficiaries. Qualified beneficiaries may request information related to the administration of the trust but the trustee shall be reimbursed for any reasonable expenses incurred in responding to such requests for information. This section is further amended to provide that the duty to inform and report can be eliminated by the settlor in the trust agreement or by delivering notice to the trustee. Further, the duties imposed by Tenn. Code Ann. Section 35-15-813 are inapplicable to trusts established under trust agreements which became irrevocable before July 1, 2004.

Public Chapter Number 26 (HB 0734/SB 0189). This Act amends Tenn. Code Ann. Section 34-1-107(e) to remove the requirement that the respondent's social security number be placed on the order appointing the guardian ad litem. Likewise, it amends Tenn. Code Ann. Section 34-1-109 and removes the requirement that the respondent's social security number be given to the clerk and placed in the court record.

Proposed Regulations Under 2053: The IRS Proposes Changes to the Method for Determining Deductions for Claims Against an Estate

By Jay C. Cloud, Boult Cummings, Conners & Berry, PLC, Nashville

On April 23, 2007, the Internal Revenue Service ("IRS") issued proposed regulations to amend current regulations interpreting Internal Revenue Code ("IRC") Section 2053. The proposed regulations, if adopted, will affect estates of decedents dying on or after the date the final regulations are published in the Federal Register. A public hearing on the proposed regulations is scheduled for August 6, 2007. If adopted, the proposed regulations will be published in the Federal Register after August 6, 2007.

Currently, neither IRC Section 2053(a) nor the regulations interpreting Section 2053 require deductible claims to be valued as of the date of the decedent's death. Numerous courts interpreting the issue of whether post death events should be considered in valuing a deductible claim have reached conflicting conclusions with little or no consistency, resulting in similarly situated estates being treated differently for Federal tax purposes depending only upon the jurisdiction in which the case was heard. To combat the perceived unfairness in the administration of the tax laws as they relate to valuation of claims against an estate, the IRS issued the subject proposed regulations amending the current regulations under IRC Section 2053.

Through the proposed regulations, the IRS introduces the principal rules that (i) post-death events are to be considered in valuing a deductible claim against an estate and (ii) deductions from the gross estate are limited to amounts actually paid in satisfaction of deductible expenses and claims.

The proposed regulations contain two exceptions to the two principal rules for deducting claims against estates. First, the proposed regulations contain a provision allowing a current deduction for estimated claims, provided that (i) the amount is ascertainable with reasonable certainty and (ii) will be paid. If a deduction is allowed in advance of payment pursuant to this exception and the payment is thereafter left unpaid, a duty is imposed on the executor to (i) notify the IRS and (ii) pay the resulting tax and applicable interest. Second, the proposed regulations specifically provide that executor's commissions and attorney's fees (collectively, "Fees") may be deducted either (i) in such amount as has actually been paid at the time of filing the estate tax return or (ii) in an amount reasonably expected to be paid. If the Fees have not been awarded by the proper court at the time the estate tax returned is examined, the deduction for the estimated Fees will be allowed if the IRS is reasonably satisfied that, in the case of an attorney's fee, (a) the fee will be paid and (b) the fee does not exceed a reasonable amount, and, in the case of an executor's commission, (x) the commission will be paid, (y) the commission is within the amount allowed by the laws of the jurisdiction in which the estate is being administered, and (z) the commission is paid in accordance with usually accepted practice in the jurisdiction with respect to the size and character of the estate. Again, if a deduction for Fees is allowed in advance of payment and the payment is thereafter left unpaid, a duty is imposed on the executor to (i) notify the IRS and (ii) pay the resulting tax and applicable interest.

The IRS, in furtherance of the principal rules established in the proposed regulations, included a specific section in the proposed regulations providing that claims against an estate cannot be deducted on the estate tax return if the claims are potential, unmatured or contested at the time the estate tax return is filed. To preserve the right to claim a refund for a deductible claim that was potential, unmatured or contested at the time of filing the estate tax return, the estate must file a protective claim for refund prior to the expiration of the period of limitations for claims for refund.

Additional provisions of the proposed regulations provide guidance for other circumstances, including claims against multiple defendants in which the estate is included as a defendant, claims by family members or beneficiaries against an estate, claims representing a decedent's obligation to make recurring payments continuing beyond the final determination of the estate's tax liability, and claims that become unenforceable after the decedent's death.

The impact of the proposed regulations on the administration of a large majority of taxable estates may not be significant because most items deductible under IRC Section 2053 will consist of claims that are paid prior to the filing of the tax return, claims with values that are ascertainable with reasonable certainty prior to the filing of the tax return, and executor commissions and attorney's fees. Under the proposed regulations, as is the case under the current regulations, these expenses will be deductible on the estate's tax return at the time of filing. In taxable estates in which the estate is a party to a civil lawsuit, however, the impact of the proposed regulations will likely be much greater. In these situations, an attorney representing an estate should carefully consider the proposed regulations prior to deducting the claim on the estate's tax return and, if not deducted on the return, should consider steps necessary to preserve the deduction for the claim.