The Omitted Spouse Claim Against an Estate
Despite an intention to add a spouse or domestic partner to their Will, at times a decedent may neglect to do so prior to his/her death. Under such circumstances, however, a surviving spouse or domestic partner may be entitled to a share of the decedent’s estate pursuant to the omitted spouse statute. This statute directly addresses scenarios where the marriage or domestic partnership occurs after the decedent had previously executed a Will, however, did not amend his/her Will after marriage to the surviving spouse or the formation of the domestic partnership.
This New Jersey statute is codified under N.J.S.A. 3B:5-15. In order to be entitled to take as an omitted spouse or a surviving domestic partner, the surviving spouse or domestic partner must have either formed the domestic partnership or married the decedent after the decedent had executed their Will. Provided that threshold issue is met, then the surviving spouse or domestic partner would be entitled to a share of the decedent’s estate as if the decedent had died without a Will.
The relevant New Jersey statute which governs the surviving domestic partner’s or the surviving spouse’s share is N.J.S.A. 3B:5-3. This statute is highly technical in determining the precise share that the surviving domestic partner or surviving spouse is entitled to receive. In general, the statute looks at whether the surviving domestic partner or surviving spouse had children with the decedent, whether the decedent had his/her own children, and finally, whether the decedent has surviving parents. As such, it is suggested that if you are a surviving domestic partner or surviving spouse that you retain counsel to assist you with this technical calculation.
Pursuant to the omitted spouse statute, however, there are exceptions where the surviving domestic partner or surviving spouse may not be entitled to receive a portion of the decedent’s estate. These exceptions are as follows. The first exception is if it appears from the will or other evidence that the will was made in contemplation of the testator’s marriage to the surviving spouse or in contemplation of the testator’s formation of a domestic partnership with the domestic partner. The next exception would be if the will expresses the intention that it is to be effective notwithstanding any subsequent marriage or domestic partnership. The final exception that would disqualify a surviving domestic partner or spouse from taking would be if the testator provided for the spouse or domestic partner by transfer outside the will and with the intent that the transfer be in lieu of a testamentary provision which is evidenced by the decedent’s statements or intent. All of these scenarios would disqualify a surviving domestic partner or spouse from taking under this statute, however, there may be another resolution under the NJ Elective Share Statute which is discussed in my other recent blog.
Why Having a Special Needs Child Sign a Power of Attorney Is Not a Good Idea
In a previous blog, I discussed the process of a parent obtaining a guardianship for their special needs child. This blog discusses why it is not a good idea to try to shortcut this process and to simply have your child sign a power of attorney. Unfortunately, I have heard practitioners suggest this approach, and frankly, it made me cringe as it would be committing legal malpractice to have most special needs children sign a power of attorney.
In order for a power of attorney to be considered legally valid, the person granting the power of attorney would have to fully comprehend the power of attorney, including the powers that it grants to others to act on their behalf. The reality is that the majority of special needs children would be unable to fully comprehend a power of attorney to the extent they are legally required to do so in order to be able grant such authority. While some special needs children may possess the necessary intellect and understanding to grant a power of attorney, most special needs children could not meet this burden. Despite this reality, I have seen practitioners have special needs children sign powers of attorneys when they were simply not competent to do so. Unfortunately, this can lead to future problems for both the parent and child as discussed below.
One potential problem could arise if an individual, who is a family member or any other party with a potential interest, seeks to challenge the power of attorney in court. Should such a challenge be levied, an evaluation would be performed as to legal capacity of the child to grant a power of attorney. Should the challenge prove successful it would result in the invalidation of the power of attorney, and further, can lead to the invalidation of other transactions wherein the power of attorney was utilized, as well as the assessment of counsel fees and sanctions against the parent who improperly obtained the power of attorney. This could lead to a disastrous result for both the child and his/her family. Another problem that could arise is that the power of attorney does not legally establish that the child is legally incapacitated. As such, in the absence of this finding by a court, which is always made during a guardianship proceeding, the child may be able to legally bind himself/herself to transactions that they undertook, or they may undertake other transactions contrary to their interest which may be difficult to unwind. On the contrary, once a legal guardianship is granted by a court and there is a finding of legally incapacity, the guardian would be able to quickly void any such transactions which may not be in the best interests of the child.
As such, for the reasons discussed above it is bad idea to attempt to utilize a power of attorney when a guardianship is more appropriate. Frankly, this blog simply touches the tip of the iceberg as to potential issues, however, it should be clear that a guardianship is vastly preferred for most special needs children. Obviously, parents who are interested in this process should consult with competent legal counsel to guide them through it.
Trusts as Qualified Purchasers: Navigating the Qualified Purchaser Threshold for Trusts Investing in Private Securities
This article is the third and final part in a series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “qualified purchases” under the Investment Company Act.
What is the Investment Company Act and Why Does It Matter?
The Investment Company Act of 1940 regulates “investment companies,” which are entities that primarily engage in buying, selling, and holding securities. Typically, the Company Act requires entities that fall under the definition of an investment company to register with the SEC. However, many private offerings rely on exclusions from the definition of investment company under Section 3(c)(1) and Section 3(c)(7).
Section 3(c)(1) excludes from the definition of investment company entities with fewer than 100 investors.
Section 3(c)(7) excludes from the definition of investment company entities whose securities are owned solely by “qualified purchasers” and which are not making or intend to make a public offering of their securities. This section is crucial for funds targeting institutional investors and ultra-high-net-worth individuals.
For trusts, investing in private securities through a Section 3(c)(7) fund requires meeting the qualified purchaser criteria, which are more stringent than those for accredited investors or qualified clients.
How Trusts Can Qualify as Qualified Purchasers
A trust may qualify as a qualified purchaser in three ways:
Large Investment Trusts:A trust qualifies if it owns or invests at least $25 million in investments on a discretionary basis. It must meet this threshold independently, even if the trustee is a qualified purchaser.
Family Companies:If a trust is a family company (established for the benefit of two or more related individuals such as siblings, spouses, direct lineal descendants by birth or adoption, or their spouses (including former spouses)) and holds at least $5 million in “investments,” it qualifies as a qualified purchaser.
Non-Family Companies:A trust that is not a family company qualifies only if each trustee (or decision-maker) and each settlor (or contributor of assets) is a qualified purchaser.
Why This is Important for Trusts Investing in Private Securities
The qualified purchaser threshold is critical for trusts seeking to invest in private securities under Section 3(c)(7) of the Investment Company Act. As private markets expand and wealth transfers increase, understanding these requirements will become even more essential. Trusts that meet the qualified purchaser criteria can access a wider range of private investment opportunities, including private equity and hedge funds, which often require this designation.
When advising clients, it is vital to ensure that trusts are structured correctly to meet the qualified purchaser threshold. Thereby allowing access to invest in certain private offerings.
The surge in wealth transfers and the growth of private securities will likely lead to more trusts investing in these asset classes.
Advisors to trusts seeking to participate in institutional-grade private funds that rely on Section 3(c)(7) must structure such trusts to meet the qualified purchaser threshold. By doing so, they can help trusts capitalize on the expanding opportunities in private securities, benefiting from both wealth transfer strategies and access to high-growth investments.
For more information, please see the article prepared by Andrew Rosell, Nick Curley, and Sarah Ghaffari, SEC Considerations – Investments in Private Securities.
New Michigan Law Strengthens Legal Protections for Assisted Reproduction
The Assisted Reproduction and Surrogacy Parentage Act (ARSPA), also known as the Michigan Family Protection Act, enhances legal protections for families using assisted reproductive technology. Effective April 2, 2025, this legislation updates parentage laws to account for the use of assisted reproductive technology, providing greater clarity and legal security.
Legal Parentage for Children Conceived Through Assisted Reproduction
One of the law’s most impactful components is Part 2, which addresses the parentage of children conceived through assisted reproduction without surrogacy. The law defines assisted reproduction as “a method of causing pregnancy through means other than by sexual intercourse” and includes in vitro fertilization (IVF), gamete donation (i.e., sperm, egg, and embryo), artificial insemination, and other assisted reproductive technologies.
Before the new law, non-biological parents in Michigan had to undergo a lengthy and costly stepparent adoption process to establish legal parental rights. Now, intended parents who conceive a child through assisted reproduction can petition the court for a judgment of parentage, legally establishing them as a child’s parent and granting them all rights and responsibilities associated with being a legal parent.
This change removes unnecessary barriers for many families, including non-biological mothers in same-sex couples who conceive using sperm donors and heterosexual couples using sperm, egg, or embryo donors due to infertility.
Estate Planning Considerations
With ARSPA in effect, individuals who have children or grandchildren through assisted reproduction should review their estate planning documents to ensure their children and grandchildren are included. Many estate plans define “child” to include adopted children but may not explicitly cover non-biological children conceived through assisted reproduction. Updating these documents can help avoid potential legal complications and ensure all children and grandchildren are treated equally.
U.S. Trustee Objects to Stalking Horse Bid Protections in Three Recent Delaware Bankruptcy Cases
Recently, the Office of the United States Trustee (the “UST”) has been objecting to debtors’ motions to establish bidding procedures to sell some or all of an estate’s assets pursuant to section 363 of the Bankruptcy Code. As highlighted in three recent Delaware cases, the UST has objected to stalking horse bid protections on a number of grounds, including: (a) when such protections would be payable; (b) the proposed priority classification for such protections; (c) the scope of the bid protections; and (d) whether the debtor has demonstrated that such protections benefit the estate and are necessary to preserve estate value. Understanding the UST’s concerns is critical when negotiating with a stalking horse bidder.
Jo-Ann Stores[1]
On January 15, 2025, the Jo-Ann Stores debtors filed chapter 11 bankruptcy petitions. Alongside the petition, the debtors filed a motion to approve bidding procedures and a stalking horse agreement with Gordon Brothers Retail Partners. The proposed bid protections for the stalking horse included (a) up to $500,000 for reasonable out-of-pocket expenses and (b) up to $1.6 million for the reasonable costs incurred to acquire signage for going-out-of-business sales. On February 5, 2025, the UST objected to the bidding procedures motion and raised the following points concerning the stalking horse agreement:
The stalking horse was an affiliate of the debtors’ prepetition lenders’ first-in-last-out (“FILO”) agent and therefore did not need to conduct significant due diligence or be induced to bid in exchange for its affiliate to be paid in full from the sale proceeds.
The initial minimum overbid of $2.2 million was too large and would chill bidding.
The bid protections were not eligible to receive super-priority administrative expense status because the stalking horse was not providing postpetition financing (section 364(c)(1)) and was not a secured creditor who received insufficient adequate protection for the postpetition diminution in value of their collateral (section 507(b)).
Because the debtors’ prepetition FILO agent was an affiliate of the stalking horse, the affiliated prepetition lenders should not be a consultation party or at least should be shielded from sharing information with the stalking horse.
The bankruptcy court ultimately agreed that as an affiliate of the stalking horse bidder, the prepetition FILO agent could not be a consolidation party during the bidding process but otherwise overruled the UST’s remaining objections.
Ligado Networks[2]
On January 6, 2025, a day after filing chapter 11 bankruptcy petitions, the Ligado Networks debtors filed a bidding procedures motion, which included a stalking horse agreement with AST & Science, LLC. If consummated, the stalking horse agreement would provide the debtors with hundreds of millions of dollars through several different payment streams (e.g., common stock, convertible notes, warrants, percentage of net revenue, annual usage rights payment), the sum of which did not have a fixed value. The stalking horse agreement included a $200 million bid protection, which the debtors argued was reasonable based on the complex transaction, similar transaction fees approved in prior Delaware cases, being required by AST, and providing a material benefit to the estates. The UST objected to the bidding procedures motion and raised the following points concerning the stalking horse agreement:
No bid protection should be paid if the transaction could not be consummated for regulatory reasons because the debtors have no control on whether regulatory approval is obtained, and regulatory denial would force the debtors to begin negotiating with alternative purchaser(s) and lose $200 million.
Any alternative purchaser the debtors select as the successful bidder must result in not merely any transaction, but one that is a higher and better bid than AST’s.
It would be improper to include a second-protection fee of an additional $250 million if the debtors’ $40 billion takings lawsuit against the U.S. related to the debtors’ wireless terrestrial 5G services adversely affected AST’s use of the debtors’ L-band spectrum (i.e., a range of radio frequencies used for satellite navigation, maritime and aviation safety, and radars).
Similar to the objection in Jo-Ann Stores, the stalking horse should not be granted super-priority expense status because only sections 364(c)(1) and 507(b) authorize such a classification.
The large $200 million bid protection should be market tested.
The debtors and UST subsequently resolved the UST’s objection by agreeing: (a) that the bid protection would be payable after a failure to receive regulatory approval only if the debtors subsequently consummated a higher or better transaction; (b) only the expense reimbursements would receive super-priority administrative expense status and all other bid protections would merely be treated as an administrative expense (although the postpetition DIP lenders voluntarily agreed to subordinate their obligations to the remaining bid protections); and (c) the request to authorize payment of the $250 million second-protection fee related to any potential impact to the L-band spectrum would be removed. The bankruptcy court entered an order approving the revised bidding procedures.
First Mode[3]
On December 15, 2024, the First Mode debtors filed chapter 11 bankruptcy petitions, and the following day filed their bidding procedures motion. The bidding procedures motion included a stalking horse asset purchase agreement with Cummins, Inc., which proposed to grant Cummins bid protections in the form of a 3% break-up fee and expense reimbursements of up to $550,000. The UST objected to the bid protections on the following grounds:
Similar to the objections in Jo-Ann Stores and Ligado Networks, the bid protections should not prime other administrative expenses as super-priority expenses because only sections 364(c)(1) and 507(b) authorize the classification of an expense as a super-priority administrative expense status.
Certain payment triggering scenarios, such as withdrawing the bidding procedures motion or filing a motion to convert or dismiss the case, provided no benefit to the estates as required by section 503(b) (i.e., does not promote competitive bidding or induce the stalking horse to perform diligence and set a floor price).
The debtors and UST resolved the objections by: (a) classifying the bid protections as an administrative expense claim; (b) providing the UST, debtors, and creditors’ committee five business days to review proposed expense reimbursements before such amounts are payable; and (c) slightly narrowing the circumstances that would trigger payment of the bid protections.
Takeaways
Debtors who seek approval of a stalking horse agreement in their bidding procedures motions should be prepared for the UST to object to certain aspects of the bid protections. First, the UST will most likely object if the proposed classification for the bid protections is a super-priority administrative expense claim. Although the debtors in First Mode conceded to the UST’s position, debtors could attempt to bifurcate the classification by authorizing superpriority status for expense reimbursements (Ligado Networks) or push forward with pursuing full superpriority status, which was successfully obtained in Jo-Ann Stores.
Second, debtors should be cognizant of potential objections to the triggering events for paying bid protections. It is unlikely that a debtor would be permitted to pay bid protections in the event the debtor, without demand by its secured creditor(s), files a motion to convert or dismiss its bankruptcy cases. Further, if there are significant contingencies surrounding the future value of the business (e.g., Ligado Networks’ $40 billion takings lawsuit affecting the L-band spectrum), parties may want to consider reflecting that risk in a reduced sale price or increased bid protection amount rather than as a triggering event for payment of additional protection amounts. And if the contingency is related to obtaining governmental consents before the sale can be consummated (e.g., Ligado Networks’ regulatory approval), such contingency should not likely be a triggering event unless it is succeeded by the consummation of an alternative transaction.
Third, in liquidation situations like Jo-Ann Stores where the stalking horse would incur significant expenses to wind-up the debtors’ businesses and liquidate assets, bankruptcy courts may be more lenient to grant bid protections when such expenses clearly are incurred to benefit the estates.
In conclusion, proactive negotiation with the UST concerning bid protection terms is a prudent first step for counsel of both debtors and the stalking horse bidder to pursue in order to resolve the issues the UST has recently identified in the Jo-Ann Stores, Ligado Networks, and First Mode bankruptcy cases.
[1] In re Jo Ann, Inc., Case No. 25-10068 (CTG) (Bankr. D. Del. Jan. 15, 2025).
[2] In re Ligado Networks LLC, Case No. 25-10006 (TMH) (Bankr. D. Del. Jan. 5, 2025).
[3] First Mode Holdings, Inc., Case No. 24-12794 (KBO) (Dec. 15, 2024).
The Big Six Items That Family Offices Need to Consider in 2025
Across all industries, family offices and their owners and management teams face rapidly evolving challenges, opportunities, and risks in the dynamic environment that is 2025. Here are six issues that family offices should consider and be mindful of this year.
1. Impending Sunset after December 31 of Temporarily Doubled Federal Estate, Gift and Generation-Skipping Transfer Tax Exemption — or Maybe Not?
In 2025, the Internal Revenue Service (IRS) increased the lifetime estate and gift tax exemption to $13.99 million per individual ($27.98 million per married couple). Clients who maximized their previous exemption ($13.61 million per individual in 2024), can now make additional gifts of up to $380,000 ($760,000 per married couple) in 2025 without triggering gift tax. Clients who have not used all (or any) of their exemption to date should be particularly motivated to make lifetime gifts because, under current law, the lifetime exemption is scheduled to sunset.
Since the 2017 Tax Cuts and Jobs Act, the lifetime exemption has been indexed for inflation each year. Understandably, clients have grown accustomed to the steady and predicable increase in their exemption. However, absent congressional action, if the exemption lapses, the lifetime estate and gift tax (and generation-skipping transfer tax) exemption will be cut in half to approximately $7.2 million per individual ($14.4 million per married couple) at the start of 2026. That being said, as a result of the Republican trifecta in the 2024 election, it is very plausible that the temporarily doubled exemption may be extended for some additional period of time as part of the budget reconciliation process, which allows actions by majority vote in the Senate (with the vice president to cast the deciding vote in the event of a tie). This is in contrast to the ordinary rules of procedure that require 60 votes out of 100 in the Senate for Congressional action. But there are no assurances that such an extension will occur, and any legislation may not be enacted (if at all) until very late in the year.
To ensure that no exemption is forfeited, clients should consider reaching out to their estate planning and financial advisors to ensure they have taken full advantage of their lifetime exemption. If the exemption decreases at the start of 2026, unused exemption will be lost. Indeed, absent Congressional action to extend the temporarily doubled exemption, this is a use-it-or-lose-it situation.
2. Buy-Sell Agreements and Their Role in Business Succession Planning
The death, disability, or retirement of a controlling owner in a family-controlled business can wreak havoc on the entity that the owner may have spent a lifetime building from scratch. If not adequately planned for, such events can lead to the forced sale of the business out of family hands to an unrelated third party.
A buy-sell agreement is an agreement between the owners of a business, or among the owners of the business and the entity, that provides for the mandatory purchase (or right of first refusal) of an owner’s equity interest, by the other owners or by the business itself (or some combination of the two), upon the occurrence of specified triggering events described in the agreement. Such triggering events can include the death, disability, retirement, withdrawal or termination of employment, bankruptcy and sometimes even the divorce of an owner. Buy-sell agreements may be adapted for use by all types of business entities, including C corporations, S corporations, partnerships, and limited liability companies.
Last June, in Connelly v. United States, the US Supreme Court affirmed a decision of the Eighth Circuit Court of Appeals in favor of the government concerning the estate tax treatment of life insurance proceeds that are used to fund a corporate redemption obligation under a buy-sell agreement. The specific question presented was whether, in determining the fair market value of the corporate shares, there should be any offset to take into account the redemption obligation to the decedent’s estate under a buy-sell agreement. The Supreme Court concluded that there should be no such offset. In doing so, the Supreme Court resolved a conflict that had existed among the federal circuit courts of appeal on this offset issue.
As a result of the Supreme Court’s decision, buy-sell agreements that are structured as redemption agreements should be reviewed by business owners that expect to have taxable estates. In many cases it may be desirable instead to structure the buy-sell agreement as a cross-purchase agreement.
For further information, please see our article that addresses the Connelly decision and its implications: US Supreme Court Affirms the Eighth Circuit’s Decision in Favor of the Government Concerning the Estate Tax Treatment of Life Insurance Proceeds Used to Fund a Corporate Redemption Obligation.
3. Be Very Careful in Planning With Family Limited Partnerships and Family Limited Liability Companies
The September 2024 Tax Court memorandum decision of Estate of Fields v. Commissioner, T.C. Memo. 2024-90, provides a cautionary tale of a bad-facts family limited partnership (FLP) that caused estate tax inclusion of the property transferred to the FLP under both sections 2036(a)(1) and (2) of the Internal Revenue Code with loss of discounts for lack of control and lack of marketability. In doing so, the court applied the Tax Court’s 2017 holding in Estate of Powell v. Commissioner, 148 T.C. 392 (2017) — the ability of the decedent as a limited partner to join together with other partners to liquidate the FLP constitutes a section 2036(a)(2) estate tax trigger — and raises the specter of accuracy-related penalties that may loom where section 2036 applies.
Estate of Fields illustrates that, if not carefully structured and administered, planning with family entities can potentially render one worse off than not doing any such planning at all.
4. The IRS Gets Aggressive in Challenging Valuation Issues
The past year and a half has seen the IRS become very aggressive in challenging valuation issues for gift tax purposes.
First, in Chief Counsel Advice (CCA) 202352018, the IRS’s National Office, providing advice to an IRS examiner in the context of a gift tax audit, addressed the gift tax consequences of modifying a grantor trust to add tax reimbursement clause, finding there to be a taxable gift. The facts of this CCA involved an affirmative consent by the beneficiaries to a trust modification to allow the trustee to reimburse the grantor for the income taxes attributable to the trust’s grantor trust status. Significantly, the IRS admonished that its principles could also apply in the context of a beneficiary’s failure to object to a trustee’s actions, or in the context of a trust decanting.
Next, in a pair of 2024 Tax Court decisions — the Anenberg and McDougall cases — the IRS challenged early terminations of qualified terminable interest property (QTIP) marital trusts in favor of the surviving spouse that were then followed by the surviving spouse’s sale of the distributed trust property to irrevocable trusts established for children. While the court in neither case found there to be a gift by the surviving spouse, the Tax Court in McDougall determined that the children made a gift to the surviving spouse by surrendering their remainder interests in the QTIP trust.
5. The Show Continues: The CTA No Longer Applicable to US Citizens and Domestic Companies
After an on-again-off-again pause of three months beginning in late 2024, the Corporate Transparency Act (CTA) is back in effect, but only for foreign reporting companies. On March 2, the US Department of the Treasury (Treasury) announced it will not enforce reporting requirements for US citizens or domestic companies (or their beneficial owners).
Pursuant to Treasury’s announcement, the CTA will now only apply to foreign entities registered to do business in the United States. These “reporting companies” must provide beneficial ownership information (BOI) and company information to the Financial Crimes Enforcement Network (FinCEN) by specified dates and are subject to ongoing reporting requirements regarding changes to previously reported information. To learn more about the CTA’s specific requirements, please see our prior client alert (note that the CTA no longer applies to domestic companies or US citizens, and the deadlines mentioned in the alert have since been modified, as detailed in the following paragraph).
On February 27, FinCEN announced it would not impose fines or penalties, nor take other enforcement measures against reporting companies that fail to file or update BOI by March 21. FinCEN also stated it will publish an interim final rule with new reporting deadlines but did not indicate when the final rule can be expected. Treasury’s March 2 announcement indicates that the government is expecting to issue a proposed rule to narrow the scope of CTA reporting obligations to foreign reporting companies only. No further details are available at this time, but domestic reporting companies may consider holding off on filing BOI reports until the government provides additional clarity on reporting requirements. Foreign reporting companies should consider assembling required information and being prepared to file by the March 21 deadline, while remaining vigilant about further potential changes to reporting requirements in the meantime.
On the legislative front, earlier this year, the US House of Representatives passed the Protect Small Businesses from Excessive Paperwork Act of 2025 (H.R. 736) on February 10, in an effort to delay the CTA’s reporting deadline. The bill aims to extend the BOI reporting deadline for companies formed before January 1, 2024, until January 1, 2026. The bill is currently before the US Senate, but it is unclear whether it will pass in light of the latest updates.
6. Ethical and Practical Use of AI in Estate Planning
The wave of innovative and exciting artificial intelligence (AI) tools has taken the legal community by storm. While AI opens possibilities for all lawyers, advisors in the estate planning and family office space should carefully consider whether, and when, to integrate AI into their practice.
Estate planning is a human-centered field. To effectively serve clients, advisors develop relationships over time, provide secure and discrete services, and make recommendations based on experience, compassion, and intuition.
Increasingly, AI tools have emerged that are marketed towards estate planning and family office professionals. These tools can (1) assist planners with summarizing complex estate planning documents and asset compilations, (2) generate initial drafts of standard estate planning documents, and (3) translate legal jargon into client-friendly language. Though much of the technology is in the initial stages, the possibilities are exciting.
While estate planning and family office professionals should remain optimistic and open about the emerging AI technology, the following recommendations should be top of mind:
First, advisors must scrutinize the data privacy policies of all AI tools. Advisors should be careful and cautious when engaging with any AI program that requires the input of sensitive or confidential documents to protect the privacy of your clients.
Next, advisors should stay up to date on the statutory and case law developments, as the legal industry is still developing its stance on AI.
Finally, advisors should honor and prioritize the personal and human nature of estate planning and family advising. Over-automating one’s practice can come at the expense of building strong client relationships.
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Trusts as Qualified Clients: Understanding the Qualified Client Threshold for Trusts Investing in Private Securities
This article is the second of a three-part series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “qualified clients” under the Advisers Act.
What is the Advisers Act and Who Does It Affect?
Broadly speaking, the Advisers Act regulates the activities of “investment advisers.” The Advisers Act defines an investment adviser as an individual or entity that provides advice as to securities for compensation. This includes advising clients on the value of securities or the advisability of buying or selling them.
The Advisors Act requires that investment advisers register with the SEC or operate under an exemption if they provide investment advice as to securities for compensation.
Many investment advisers charge what’s known as the “2/20” fee model, where they receive a 2% management fee as a fee on all assets under management and a 20% performance allocation as a fee on profits. These fees place an individual or firm squarely within the Advisers Act’s definition of an investment adviser, meaning they must comply with the registration requirements—unless exempt.
The “Qualified Client” Requirement
The Advisers Act prohibits SEC-registered investment advisers from charging performance fees (e.g., 20% performance allocation) unless the investor is a “qualified client” as defined in the Advisers Act. This is in contrast to the rules for many state-registered investment advisers (which, depending on the state, may or may not require a state-registered investment adviser to charge performance-based fees to do so of qualified clients) and exempt reporting advisers.
A qualified client can be one of the following:
Qualified Purchaser Under the Investment Company Act:If a trust is already classified as a qualified purchaser under the Investment Company Act, they are automatically considered a qualified client under the Advisers Act. See part 3 of this 3-part series: “Trusts as Qualified Purchasers.”
Assets Under Management Test:A trust can qualify as a client if, after entering into an advisory contract with the trust, the SEC-registered adviser manages at least $1.1 million of the trust’s money under an advisory contract.
Net Worth Test:Alternatively, an SEC-registered investment adviser can qualify an investor if they reasonably believe, immediately before entering into an advisory contract with a trust, that the trust has a net worth exceeding $2.2 million.
Advisers should structure trusts accordingly, ensuring they comply with the Advisers Act and other relevant laws, such as the Securities Exchange Act of 1940. By meeting the qualified client requirements, trusts can better position themselves to take advantage of opportunities in private markets, including investments in private equity vehicles and hedge funds.
Conclusion:
As private securities continue to grow and wealth transfers increase, understanding the qualified client threshold is essential for trusts seeking to invest in these assets. Trust advisers must be diligent to ensure a trust is able to participate in certain private securities or engage an investment adviser under an advisory contract under the Advisers Act and other related regulations to facilitate both wealth transfer and access to alternative investments.
For more information, please see the article prepared by Andrew Rosell, Nick Curley, and Sarah Ghaffari, SEC Considerations – Investments in Private Securities.
Second Circuit Renders Important Decision on Vested Retiree Benefits
In a significant ruling on February 5, 2025, the U.S. Court of Appeals for the Second Circuit addressed the enforceability of an arbitration provision in an expired collective bargaining agreement (CBA) in the case of Xerox Corporation v. Local 14A, Rochester Regional Joint Board, Xerographic Division Workers United.
The court’s decision delves into whether certain retiree health benefits promised under the CBA had vested and thus continued beyond the agreement’s expiration. The case underscores the complexities involved in interpreting CBAs and the conditions under which retiree benefits may be considered vested.
Quick Hits
The U.S. Court of Appeals for the Second Circuit found that specific language in a CBA could be reasonably interpreted as promising vested benefits, which would extend beyond the expiration of the agreement.
Provisions in the CBA related to benefits allowances and life cycle assistance programs were deemed capable of being interpreted as forms of deferred compensation, creating rights that vested during the term of the agreement.
The court held that a reservation-of-rights clause in the plan documents did not conclusively preclude the interpretation that the CBA promised vested retiree benefits.
Case History and the Second Circuit’s Decision
The case arose when the company modified health benefits for employees who retired before the expiration of the 2018–21 CBA. The union filed a grievance, arguing that these benefits had vested and could not be terminated. The union sought to enforce the expired CBA’s arbitration provision. The company filed a petition in the U.S. District Court for the Western District of New York for injunctive and declaratory relief, and to stay and enjoin arbitration.
The district court ruled in favor of the company, concluding that the retiree benefits had not vested and, thus, were not subject to arbitration. The union appealed this decision to the U.S. Court of Appeals for the Second Circuit, which vacated the district court’s judgment and remanded the case for further proceedings, finding that the language in the CBA could reasonably be interpreted as promising vested benefits, making the grievance arbitrable.
The court’s analysis focused on several key aspects of the agreement:
Language in the CBA: The court examined the language in the 2018–21 CBA and the incorporated plan documents. Although noting that, in general, an expired CBA is unenforceable, it found that phrases such as “continues participation in the Plan … until” and “shall continue as a Participant in the Plan until his or her death” could reasonably be interpreted as promising vested benefits. This language suggested that benefits would continue beyond the CBA’s expiration, thus making the union’s grievance arbitrable. The court found that on the arbitrability issue, the union did not have to show that unambiguous CBA language supported its position, only that the language could reasonably be interpreted as vesting retirees with benefits.
Deferred compensation: The court also considered the CBA’s “Benefits Allowance” provision, which varied based on an employee’s length of employment and included a “LifeCycle Assistance Program Component.” This provision was seen as a form of deferred compensation, accruing rights during the term of the CBA. The court likened this to severance pay, which is considered deferred compensation that vests during the term of an agreement.
Reservation-of-rights clause: The company argued that the reservation-of-rights clause in the plan documents allowed it to amend or terminate the plan at any time, thus precluding any interpretation of vested benefits. However, the court found this clause ambiguous when read in conjunction with the CBA. It noted that such a clause could not unilaterally vitiate bargained-for rights, especially when the CBA itself did not explicitly incorporate the reservation-of-rights clause in a manner that would allow for the termination of vested benefits.
Conclusion
For unionized employers, this decision highlights the importance of clear and unambiguous language in CBAs regarding the vesting of retiree benefits. Employers should consider carefully drafting and reviewing their agreements to ensure that the terms related to retiree benefits and any reservation-of-rights clauses are explicit and consistent. This case also serves as a reminder that courts will closely scrutinize the language of CBAs and plan documents to determine the parties’ intent, and ambiguities may lead to interpretations favoring the vesting of benefits.
Trusts as Accredited Investors: Navigating Trusts and Private Market Investments
Investments in private markets are rapidly becoming an essential part of a well-rounded investment portfolio, especially for ultra-high-net-worth individuals and families. According to Ernst & Young, the assets under management in private markets more than doubled from $9.7 trillion in 2012 to $22.6 trillion in 2022. This growth is projected to continue, with an estimated $72.6 trillion expected to be transferred to heirs by 2045, marking the largest intergenerational wealth transfer in history.
Given this backdrop, it’s critical for investors to familiarize themselves with the laws and regulations surrounding alternative investments in private securities. In particular, trusts—commonly used as estate planning tools—play a significant role in this arena.
This article is the first part of a three-part series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “accredited investors” under the Securities Act of 1933.
Trusts as Investment Vehicles
Many private securities take advantage of Regulation D of the Securities Act of 1933, which allows for the private offering of securities subject to specific requirements. In Regulation D, Rule 506 requires that investors be “accredited investors”—a term that has significant implications for trusts looking to invest in private markets.
How a Trust Can Qualify as an Accredited Investor
A trust can qualify as an accredited investor under the Securities Act of 1933 in three primary scenarios:
Trust with Assets Over $5 MillionA trust may qualify as an accredited investor if it meets the following criteria:
The trust has assets of over $5 million.
The trust was not specifically formed to acquire the securities offered.
A sophisticated individual, who can demonstrate experience and knowledge in financial matters, directs the trust’s investment decisions.
For more information on whether a trust is formed for the purpose of acquiring the securities offered or whether a person is a “sophisticated person,” please visit: SEC Considerations – Investments in Private Securities.
Bank-Served TrustIf a bank serves as the trustee of a trust and makes investment decisions on behalf of the trust, the trust can qualify as an accredited investor, regardless of the trust’s size or other factors.
Grantor Trusts: Revocable vs. IrrevocableThe qualifications for grantor trusts depend on whether the trust is revocable or irrevocable:A revocable trust qualifies if:
The grantors (the individuals who created the trust) independently meet the criteria to be accredited investors.
The grantors are the only beneficiaries of the trust.
There is also a highly fact-specific test for irrevocable grantor trusts to qualify as accredited investors. For more information, please visit: SEC Considerations – Investments in Private Securities.
What This Means for Trust Advisors:
When advising clients about structuring trusts for investment in private securities, an advisor should understand how a trust may qualify as an accredited investor. Structuring a trust to meet these qualifications can be complex. Still, it offers a valuable opportunity for clients to participate in private market investments—especially given the ongoing wealth transfer and growth of private assets.
Careful consideration of these rules and regulations is essential in helping trusts navigate the world of private market investments. With the right planning, trusts can serve as effective tools for both wealth transfer and participation in private securities, enabling clients to grow their assets in a regulated, secure manner.
The increasing prominence of private market investments and the massive wealth transfer underway highlight the importance of understanding the regulatory landscape for trusts looking to invest in private securities. By keeping these guidelines in mind, advisors can ensure that clients’ trust structures are positioned to take advantage of new opportunities in private markets. As the world of private securities continues to expand, staying informed about these regulations will help trust advisors better serve their clients and ensure the long-term success of investments in private securities.
SECURE 2.0’s Required Changes to Annual Funding Notices Become Effective in 2025
SECURE 2.0 introduced many changes for retirement plans, including updated disclosure requirements for a defined benefit plan’s annual funding notice (AFN). These updated AFN disclosure requirements apply for all plan years beginning after December 31, 2023. For calendar-year defined benefit plans, the first AFNs subject to the revised requirements will be due by April 30, 2025.[1]
Prior to SECURE 2.0, AFNs were generally required to contain information about the plan’s funded status, investment policies, regulatory filings, participant demographics, and other key information to ensure transparency and compliance. Though the goal of keeping relevant parties informed through AFNs remains the same, some of the requirements for the specific information to be included have changed, including:
Information Required:
Before SECURE 2.0 Changes:
Now in effect for plan years beginning after December 31, 2023:
Funded Status
Plans required to provide a statement regarding the plan’s “funding target attainment percentage” (for single employer plans) or the plan’s funded percentage (for multiemployer plans) for the plan year and the two preceding plan years.
Single employer plans no longer report the “funding target attainment percentage” which was determined as of the first day of each plan year, and instead now must report the “percentage of plan liabilities funded” which, along with other changes (including the interest rates used to calculate the plan liabilities), uses year end information.
Demographic Information
Plans required to disclose the number of plan participants, broken out by active employees, retirees receiving benefits, terminated employees entitled to future benefits, and beneficiaries as determined on the first day of the plan year.
Required information is the same, but now must be determined as of the last day of each of the three prior plan years, and must be disclosed in a tabular format.
Funding Policy
Plans required to provide a statement setting forth the funding policy of the plan and the asset allocation of investment under the plan.
Plans now must additionally disclose the “average return on assets” for the notice year.
PBGC Guarantees
Plans required to provide a general description regarding PBGC guarantees, including the circumstances in which the guarantees will apply and an explanation regarding limits of the guarantees.
Single employer plans now must additionally disclose that “if plan assets are determined to be sufficient to pay vested benefits that are not guaranteed by the [PBGC], participants and beneficiaries may receive benefits in excess of the guaranteed amount,” along with a disclosure that in the event of a plan’s termination, the PBGC’s calculation of the plan’s liabilities may be greater than what is disclosed in the AFN (which would mean that the funding status is lower than what is disclosed in the AFN).
Plan sponsors should carefully review the required changes under SECURE 2.0 when preparing AFNs for defined benefit plans with plan years beginning after December 31, 2023. There is currently no updated model notice from the Department of Labor, though a model incorporating the SECURE 2.0 changes could be released prior to April 30, 2025.
[1] Most defined benefit plans that are covered by the Pension Benefit Guaranty Corporation (PBGC) are required under ERISA § 101(f)(3) to send out an AFN to participants for each plan year within 120 days after the end of the plan year.
Why Your Relationship with Your Estate Planning Attorney is Important
When people think about estate planning, they are usually focused on the documents they need, such as wills, trusts, powers of attorney, and healthcare directives. While most of these are essential, they are only part of the entire “estate planning equation.”
At the heart of a successful estate plan lies something arguably more crucial—your relationship with your estate planning attorney. This partnership is one of the most important relationships you can have during your lifetime.
Choosing the Right Attorney for You
When selecting an estate planning attorney, look for someone who embodies these attributes:
A deep understanding of your unique circumstances and goals.
The ability to clearly explain complex legal concepts in an approachable way.
A commitment to building a long-term partnership that evolves with your needs.
Expertise in anticipating and addressing potential challenges.
A trustworthy, communicative, and empathetic approach.
Understanding You and Your Family
No two people – or families– are the same. Your family dynamics, financial situation, fears about the future, and personal values shape your estate plan. When you trust and have a strong relationship with your attorney, you feel comfortable explaining potential difficulties and the unique needs of your surviving loved ones. Your attorney should ensure they understand these nuances and tailor your plan accordingly. Whether it’s addressing sensitive family matters, safeguarding assets, or leaving a legacy, your attorney’s role is to listen and understand without judgment. Your attorney needs to be able to ask the right questions to get to the heart of the matter, so they can better guide you toward achieving your goals. Too often, attorneys forget to address specific issues or ask the right questions.
A Lifelong Partnership
Estate planning is not a one-and-done process. As your life evolves, your attorney should be one of the first to know what this new era entails for your individualized and broader life plans. Whether you just got married (or divorced), children or grandchildren were born, your business(es) grew (or didn’t), or a loved one passed away, your attorney will help you to celebrate and prepare for new beginnings or get you through some of the hardest times in your life. Your attorney becomes a trusted partner and confidant who can help you navigate as circumstances shift.
A successful attorney-client relationship is built on trust. Open and frequent communication ensures that you feel comfortable discussing personal details and asking questions. Knowing that your attorney has your best interests at heart provides peace of mind—not just for you, but for your family as well.
Clarity in Complexity
Estate planning can feel overwhelming, with legal jargon and complex concepts often clouding the process. Having an attorney who can simplify the details and present them in clear, straightforward terms is invaluable. This approach not only ensures that you fully understand your options but also empowers you to make the best-informed decisions for yourself and your family. Having an estate planning attorney who cares, gets to know you, makes sure you understand your options, and fully explains possible outcomes is vital to establishing a plan that can accomplish your goals and needs.
Guiding Your Loved Ones in Difficult Times
Losing a loved one is one of the most difficult experiences in a person’s life. Your estate planning attorney should take the burden off your survivors during these challenging times, helping them navigate complex legal processes with care, giving them time to grieve and focus on what matters most. Having an attorney who knows your intentions and knows about your family dynamics can help prevent disputes when emotions are high.
Your estate plan is too important to leave to chance. By prioritizing these qualities, you can ensure that your attorney is not just a service provider, but a lifelong trusted advisor who will help you make the best decisions for your peace of mind and your family’s future.
Waffles, Passports and Trustee Directors – Part One
What will you be doing during the third week of March? According to a US website, there will be various celebrations underway. Perhaps you will be making the most of national cocktail-making day, or maybe national cleaning week will grab your attention. (Although, on a personal note, I am happy to say that it is not national cleaning week in the UK.) While reading through the possible celebrations (and the list is endless), international waffle day rather caught my eye.
If you are a director of a corporate trustee, however, you might be creating, or logging into, your GOV.UK One Login account. From 25 March, a Companies House timeline indicates that directors of UK registered companies should be able to undertake voluntary verification of their identity. This will become a mandatory requirement during the autumn of 2025. Directors of existing companies, including directors of corporate trustees, will be required to undergo this new identity checking measure as part of their company’s annual confirmation statement. You can find out the date by which your company must submit its annual confirmation statement by heading to the Companies House website and searching against your company’s name.
Given that there is a 14-day window in which to submit an annual confirmation statement, before penalties might be incurred, it makes sense to tackle the verification process well in advance of the deadline. Pensions managers and company secretaries, take note – you never know which trustee directors are going to decide to take a last-minute holiday and head off to the sun (or snow) or worse still, a round the world cruise with no Wi-Fi connection, oblivious to the need to verify their identity before falling foul of the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
The rules for verification should, in theory, be simple to follow but as you will know that is not always the case when trying to log onto a government website, especially when you have a deadline to meet. You might already have a GOV.UK One Login account, for example if you have recently applied for a basic DBS check (perhaps because you were renewing a professional trustee accreditation).
There are three ways that trustee directors (or any director for that matter) will be able to prove their identity with GOV.UK One Login:
First, by using the GOV.UK ID Check app
Second, by answering security questions on the GOV.UK One Login website
Third, at a Post Office
For me, the simplest way would be to use the first option, which involves downloading the app to my phone and then using my phone to scan my passport and take a selfie with my phone camera. The biometric chip in my passport should do the rest. It will also be possible to use your driving licence and for those without a UK passport or driving licence, it will be possible to use a non-UK passport with a biometric chip, a UK biometric residence card, or permit, or a UK frontier worker permit.
The second option is to have a photo identity document to hand and answer some security questions on the GOV.UK One Login website. In theory, this should be simple, I mean how many times did your mother change her maiden name, or how many times did the spelling of your first primary school change? But, for me, trying to remember the exact spelling of security responses that I have used in the past tends to prove futile.
And then there is the “turn up at your local post office” option. That doesn’t get you out of having to negotiate the GOV.UK One Login service, it just means that you have to create an account on the service first and then when you do arrive at the post office, they will scan your passport for you and take your photo. That feels a bit like adding another degree of potential human error into the equation – just stick to option 1 and use a smart phone and passport, is all I can say.
But why will you have to do all of this?
It flows from measures introduced by ECCTA to tackle and thwart the use of UK registered companies for criminal purposes. The government has discovered that it is actually incredibly easy to create a legitimate looking UK registered company around a totally fraudulent business. A shelf company using a person’s (any person’s, it turns out) residential address works quite well as a registered office address for a company.
Until recently, Companies House did not have the resources, or the statutory objectives, to check the legitimacy of company documents being filed with it. Companies House served merely as a filing repository rather than as a regulator.
ECCTA gives Companies House more teeth to act as a regulator, with objectives that include ensuring that information filed at Companies House is accurate, ensuring that records kept by Companies House do not create a false or misleading impression to members of the public, and preventing companies and others from carrying out unlawful activities.
Since 2 May 2024, Companies House has had the power to issue new financial penalties, although sadly the limit is currently set at a maximum of £2,000 per offence, which seems small change compared to TPR’s powers to issue financial penalties of up to £1 million in certain circumstances. Companies House still has some catching up to do, but it’s a step in the right direction.
You might be thinking that this is taking a sledgehammer to crack a nut and that there can’t be that many companies registered for fraudulent purposes. Part two of this blog considers whether that is the case.
In the meantime, what will you be doing on 25 March? I, for one, might be scanning my passport, but I shall make sure that I have a waffle to hand.