Insights Archives — Lindabury, McCormick, Estabrook & Cooper, P.C. Firm News & Events

CCA 202352018 – A Cautionary Tale

Published on: June 25, 2024 | by Mary Patricia Magee

Since passage of the Uniform Trust Code in New Jersey in 2016, planners now have an established procedure to modify or terminate an irrevocable trust, and it is undoubtedly a valuable tool. Clients frequently have trusts that could be made better if one or two changes were made. However, while attractive, the modification or termination of an irrevocable trust so that the trust will accommodate circumstances unforeseen when the trust was created, can have unintended gift tax consequences.

It was just such a situation that a recent Memorandum issued by the Chief Counsel for the IRS, CCA 202352018 (hereafter the CCA or Memorandum), addresses. In that Memorandum the grantor of the trust established an irrevocable trust for her child for the child’s life. The trustee had the power to distribute income and principal to the child, in the trustee’s discretion, and on the child’s death the trustee was directed to distribute the proceeds to the child’s descendants. The grantor had no right to income or principal from the trust and essentially had relinquished all control over the assets in the trust. As such, the grantor appeared to have successfully removed the assets in the trust from her taxable estate.

The trust included a provision that made the trust income taxable to the grantor under section 671 of the Internal Revenue Code. Using such a provision in a trust is actually very popular. Because the trust will not pay any income taxes, the trust can grow more quickly. In effect, it is as if the grantor is making a tax-free gift to the trust each year in the amount of the tax the trust would otherwise have paid. Sometime after the trust in the CCA was operational, however, the grantor no longer wished to pay those income taxes and instead sought to have the trust reimburse her for those tax payments.

Supreme Court Ruling Sparks Urgency in Reassessing Buy-Sell Agreements for Closely Held Companies

Published on: June 25, 2024 | by Anne Marie Robbins

Ensuring the seamless transition of ownership and safeguarding a company’s stability is of paramount importance to any closely held business. Buy-sell agreements play a crucial role in achieving these objectives. These agreements dictate the terms under which shares of the business can be bought or sold, typically triggered by events such as death, disability, retirement, or voluntary departure of an owner. A recent decision by the United States Supreme Court necessitates that owners of closely held businesses review their buy-sell agreements, particularly those that involve using life insurance proceeds to purchase a deceased shareholder’s interest in the company.

In a unanimous decision issued on June 6, 2024, the Supreme Court held that life insurance proceeds payable to a corporation are includible in the corporation’s value for Federal Estate Tax purposes, with no offset allowed for the obligation to purchase a deceased shareholder’s interest. Estate of Connelly v. United States, 602 U.S. ___ (2024) (No. 23-146, June 6, 2024).

Michael and Thomas Connelly were the owners of Crown C Supply, a building supply corporation (the “Company”). Michael was the CEO and owned almost 80% of the stock, with Thomas owning the rest. The brothers had entered into a buy-sell agreement that was to be effective in the event of their deaths. Under the agreement, the surviving brother was given the option to purchase the deceased brother’s shares. If he did not do so, the Company itself would be required to redeem the shares. The Company obtained life insurance policies of $3.5 million on each brother.

Employers Should Audit Exempt Classifications in Response to USDOL’s Increased Salary Requirements to Qualify For Overtime Exemption

Published on: May 17, 2024 | by Kathleen M. Connelly

On April 24, 2024, the U.S. Department of Labor (DOL) announced a long anticipated final rule increasing the minimum salary requirements that “white collar” and highly compensated employees must meet to qualify for exemption from the overtime requirements of the Fair Labor Standards Act (FLSA). It is estimated that the rule could impact up to 4 million employees who may now be eligible for overtime pay unless employers increase their salaries to meet the new requirements.

Two-Phased Increase for White Collar Exceptions

The DOL’s rule announced a phased-in increase in the salary basis test applicable to the white collar exemptions for executive, administrative and learned professional employees.

NJ Supreme Court Limits Use of Non-Disparagement Provisions in Employment Settlement Agreements

Published on: May 9, 2024 | by Joshua L. Weiner

In a unanimous opinion, the New Jersey Supreme Court recently held that a non-disparagement provision in a settlement agreement that prevented a former employee from revealing details about allegations of sexual harassment, sex discrimination and retaliation was against public policy and cannot be enforced.

The plaintiff, a former police sergeant, appealed a trial court order enforcing a non-disparagement provision in a 2020 settlement agreement reached in her employment discrimination case. Under the non-disparagement clause, the plaintiff was barred from making any statements “regarding the past behavior of the parties” that would “tend to disparage or impugn the reputation of any party.” The agreement clearly stated that the provision extended to statements to the media, government offices and the general public. After the settlement was reached, the plaintiff was interviewed by a reporter for NBC’s Channel 4 News, where she stated that the police department had not changed because “it’s the good ol’ boy system,” among other things. The department and various officers then filed a motion to enforce the non-disparagement provisions of the agreement.

The trial court granted the defendants’ motion, ordering the plaintiff not to give further interviews or to make disparaging statements. The judge declined to award the roughly $23,000 in damages sought by the defendants but awarded counsel fees of $4,917.50 for the plaintiff’s breach of the clause. The Appellate Division affirmed in part and reversed in part, holding that while the terms of the non-disparagement provision were enforceable, the plaintiff did not break them during the television interview.

FTC Issues Final Rule Banning Non-Compete Agreements in the U.S.

Published on: April 26, 2024 | by Kathleen M. Connelly

On April 23rd, 2024, the Federal Trade Commission (FTC) approved a final rule that effectively bans the use of non-compete agreements by U.S. based employers. The final rule is substantially similar to the proposed rule announced in January 2023, and represents a sweeping change in the ability of employers to rely upon preexisting as well as future non-compete clauses to protect against unfair competitive practices. The final rule will go into effect 120 days after its publication in the Federal Register, which is expected shortly.

The final rule defines a non-compete clause as any agreement that prohibits, penalizes or functions to prevent a worker from (1) seeking or accepting work in the U.S. with another employer or (2) operating a business in the U.S., after a separation of employment.

The Scope of the FTC Ban

SCOTUS Ruling Likely to Spawn More Challenges to Job Actions

Published on: April 19, 2024 | by Kathleen M. Connelly

In its April 17th, 2024, ruling in Muldrow v. City of St. Louis, the United States Supreme Court significantly eased the burden for employees challenging mandatory job transfers as a discriminatory action in violation of Title VII of the Civil Rights Act of 1964. The Court’s ruling makes it clear that to advance such a claim, the employee need only show that the transfer resulted in “some harm” rather than “significant harm” to the terms and conditions of employment. The Court’s groundbreaking decision resolves a split among the circuit courts, with numerous circuits applying a heightened standard that required proof of “substantial harm” to the employee.

The Challenged Transfer

Police Sergeant Jatonya Muldrow worked for nine years as a plainclothes officer in the St. Louis Police Department’s specialized Intelligence Division. After a new Division Commander was hired, Muldrow was reassigned to a uniformed position in another district at the same rank and pay, against her wishes. Muldrow claimed that because she was no longer in the Intelligence Division she lost her FBI status, department vehicle, and other perks. In addition, the transfer to the “less prestigious” uniform patrol changed her regular schedule to a rotating schedule that included weekend shifts. Muldrow claimed she was transferred because the new Commander wanted to replace her with a male officer, in violation of Title VII.

What to Expect Under the EEOC’s Final Regulation on the Pregnant Workers’ Fairness Act

Published on: April 17, 2024 | by Kathleen M. Connelly

On April 15, 2024, the U.S. Equal Employment Opportunity Commission issued final regulations that clarify the obligation of employers to provide reasonable accommodation to pregnant workers under the Pregnant Workers’ Fairness Act (PWFA) that went into effect in June 2023. While employers should review the final regulations linked here for further details, some highlights from new regulations are discussed below.

The Employer’s Obligations Under the PWFA:

The PWFA requires employers of 15 or more to provide reasonable accommodations “to the known limitations of a qualified employee related to pregnancy, childbirth, or related medical conditions, absent undue hardship.” The regulations specify that employers are prohibited from:

Crisis Management: Safeguards to Protect Against Financial Elder Fraud

Published on: April 15, 2024 | by Elizabeth Engert Manzo

In an era where digital transactions are becoming increasingly prevalent, the mechanisms by which financial institutions inform customers of potential fraudulent activities are under scrutiny. Recently proposed revisions seek not only to bolster security measures but also to ensure that customers are promptly and clearly notified, thus minimizing the risk of financial loss.

Possible Changes to Bank’s Notice of Suspected Fraud Under Review

On the first day of the 2024 New Jersey legislative session, Assembly Bill No. 1832 was introduced and referred to committee. If approved as enacted, A1832 would require financial institutions to release financial records to adult protective services if there is suspected fraud of a vulnerable adult or senior customer. It would also permit adult protective services to release these records to law enforcement, where necessary.

Impact of Artificial Intelligence on Estate Planning Attorneys

Published on: March 18, 2024 | by Anne Marie Robbins and Chris Cardone

Artificial intelligence (AI) is in the beginning stages of a revolution. For the better part of the last century, this technology saw little application outside of data analytics and computer algorithms.

Today, AI can replicate real communication with surprising ease. ChatGPT, for instance, is known for its ability to draft essays and summarize long passages from a book in mere seconds, a boon for many a student. Recently, ChatGPT even passed the uniform bar exam on its first attempt. Which begs the question, will this technology replace estate planning attorneys? If you ask ChatGPT yourself, you might be surprised. We typed “I have a legal question” in the search bar, and nearly instantaneously ChatGPT responded, “Sure, I can try to help. Please keep in mind that I’m not a lawyer, and my responses are not a substitute for professional legal advice.”

Still curious, we pressed on, and asked ChatGPT the following question:

Converting Excess 529 Plan Account Funds to a Roth IRA

Published on: March 18, 2024 | by Chris Cardone

A 529 plan account is a tax-efficient way to save for a child’s or grandchild’s education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 529 plan accounts have multiple tax advantages, including allowing an individual to contribute up to $18,000 per year, or $36,000 per married couple. These contributions are considered gifts to the beneficiary of the account but are not taxable because they qualify for the so-called “annual exclusion” from taxable gifts. The investments in the 529 plan grow tax-deferred, and withdrawals are not subject to income tax when used for qualified educational expenses.

Considering the high cost of education today, it may seem unlikely that any assets in a 529 plan account would go unused. However, if an account’s beneficiary decides not to attend college, attends a more affordable school, or receives a significant scholarship or financial aid, it is possible there would be funds remaining in the 529 account when the beneficiary’s education is concluded. Withdrawals from 529 accounts that are not used for qualified educational expenses are subject to income tax and excise tax of 10% on the earnings portion of the withdrawals. Certain exceptions to the 10% penalty apply. To avoid the income and excise taxes, account holders have the option to change the beneficiary of the 529 account to an eligible relative of the original beneficiary, such as a sibling, child, or other descendant. Beginning in January of 2024, another option that avoids the income and excise taxes is to roll over the amount remaining in the 529 account to a Roth IRA. Whereas amounts withdrawn from 529 accounts may only be used for qualified educational expenses, withdrawals from Roth IRAs do not have restrictions on their use.

In the Setting Every Community Up for Retirement Enhancement Act 2.0 (“SECURE 2.0”) enacted by Congress at the end of 2022, it is now possible to roll over 529 plan account assets to a Roth IRA in the name of the account beneficiary, free of income and excise taxes.