Benefits Basics – When an Employee Dies: A Resource Guide for HR & Benefits Professionals
As a member of your company’s human resources or employee benefits department, one of the most difficult calls you may receive is from a colleague or an employee’s family member notifying you of the death of an employee. This situation demands you to be at your best – you will be called upon to usher your company’s workforce through the loss of a colleague and to help your HR department and grieving family members navigate many benefits and compensation issues that must be dealt with related to the deceased employee. This guide provides a high-level reference resource, in a plan-by-plan format, on how to approach each type of compensation or benefit arrangement when an employee dies, and offers up some practical tips on employee benefits issues that may come up as you manage your company’s compensation and benefit administration for a deceased employee.
The information given in this guide is general in nature and is not intended to address every benefit or tax issue that may come up when dealing with the death of an employee or other nuances that may arise when considering the deceased employee (or their specific family and probate situation) or the specifics of your company’s benefit plans. In addition, any tax or other rules described in this guide are current as of the date of this guide, and do not infer that the rules described are the only rules (tax or otherwise) that may apply and are subject to change. As a result, we always recommend that you engage your in-house or external legal counsel or other tax or employee benefits advisors when working through compensation and benefits issues related to the death of an employee.
An Overview of Relevant Law
Before we dive into discussing issues for administering your company’s compensation and benefit plans, it is important to have a high-level understanding of the probate process because, as we explain below, what happens in probate can affect who is entitled to certain death benefits. In addition, it helps to understand how the Employee Retirement Income Security Act (ERISA), a federal law governing most retirement and welfare benefit plans, interacts with state laws when death benefits are involved.
Overview of Probate
“Probate”is the legal process through which a court appoints an executor (in some states, called a personal representative) to administer the deceased employee’s estate, and validates a will (if there is one) or decides who inherits the deceased’s estate if there is no will. If the deceased had a will, that document would normally name one or more individuals to serve as the executor of the estate. If the employee dies without a will, then state law provides a list of people who are eligible to fill the role.
A court will ultimately appoint one or more individuals to serve as executor for the deceased employee’s estate, by issuing “Letters of Administration”, “Domiciliary Letters” or simply “Letters”, which give the executor authority to act. (Other terms might also apply to the form of the document used for this appointment.)
However, there are two times when probate may not be needed to determine who has the right to a deceased employee’s outstanding compensation or benefits:
Beneficiary Designations. If the deceased employee has arranged for their assets to pass directly to one or more beneficiaries without going through the probate process, then these items are not counted as part of the probate estate. In the employee benefits context, this would occur when an employee has made beneficiary designations related to a benefit. Thus, if your company’s compensation or benefit plan has a beneficiary designation process that was utilized by the employee, then waiting for the probate process is generally not needed in order to distribute death benefits. This is why it’s important for employer compensation and benefit plans to permit (and encourage the use of) beneficiary designations—it helps employees (especially executives) in their estate planning process and may allow the employee’s accrued benefits to pass directly to their beneficiaries without the hassle and delay of probate.
Small Estate Affidavit. If the value of the deceased employee’s estate is below the dollar threshold set by state law, then the employee’s heirs may be able to use a “small estate affidavit.” This allows heirs to receive the employee’s assets without having to go through probate at all (or permits an expedited probate). In other words, if you receive a small estate affidavit, any payments owed to the deceased’s estate instead are paid directly to the heir(s) listed in the affidavit.
Interaction of ERISA and State Laws
ERISA Section 514(a) explicitly preempts state laws that “relate to” an employee benefit plan that is subject to ERISA, with limited exceptions for certain insurance, banking, and securities laws. Courts have interpreted this preemption language to mean that any state law that refers directly to an employee benefit plan, or that bears indirectly on an employee benefit plan, is not enforceable against an ERISA-governed employee benefit plan. For example, if an ERISA benefit plan says that a death benefit should be paid to a spouse, but state law says that the death benefit under a benefit plan should be paid to the estate, then the terms of the plan will control instead of the state law. The U.S. Supreme Court confirmed this approach in their 2001 opinion in Egelhoff v. Egelhoff (ERISA preempts a state law that revokes beneficiary designations upon divorce). Similarly, in their 2009 opinion in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, the U.S. Supreme Court held that a plan may rely solely on its plan documents to determine the proper beneficiary for a death benefit, and can ignore extraneous documents that contradict the terms of the plan (such as a divorce decree).
What does this mean for you when administering benefit plans?
Where an ERISA plan is involved, you need only look at the terms of the plan (including any beneficiary designations, if applicable under that plan) to determine who is owed payments or benefits following an employee’s death.
But, for non-ERISA plans, the result is less clear. In that case, you would have to look to relevant state law to determine the extent to which you can honor any beneficiary designation. For example, many states provide that upon divorce, any beneficiary designation naming the ex-spouse as the beneficiary is automatically void, unless the divorce decree provides otherwise. For ERISA plans, you ignore that rule because ERISA preempts that state law and would implement the most recent beneficiary designation. For non-ERISA plans, however, if the deceased employee had named his spouse as the beneficiary, and then they divorced, you should generally void that beneficiary designation if required under state law.
A QUICK NOTE ON ERISA VS. NON-ERISA PLANS
Determining whether a benefit plan is covered by ERISA can be complicated. While your company’s most common broad-based retirement and welfare benefit plans, such as 401(k) plans, pension plans, and medical, dental, vision or other welfare benefits, will most likely be governed by ERISA, there are many nuances in the rules that exempt certain benefit plans depending on how the plan is structured. This issue commonly comes up with certain disability or severance benefits or policies. Bonus programs, deferred compensation plans or other voluntary benefits or payroll practices are usually not subject to the ERISA preemption rules. However, due to the complexity of these rules, if you are unsure whether a benefit program is an ERISA or non-ERISA plan, consult with your benefit plan advisors when deciding whether to allow beneficiary designations.
Practical Steps to Take When an Employee Dies
Who You Should Involve
If you receive the initial call about an employee’s death from a family member, it’s imperative that you promptly contact the following individuals within your organization: the head of HR for the employee’s business unit (who should, in turn, contact the deceased’s manager and co-workers), the payroll department, the equity administration team (if any), the compensation team (if any), and all relevant members of the employee benefits team. You may also need to tell your financial or accounting department if the deceased employee has significant amounts of unvested compensation that will vest or need to be paid due to their death. Each individual will play an important part in the weeks (and sometime months or years) to come.
After you’ve surveyed the plans and arrangements in which the deceased participated, you should also contact the relevant plan vendors or third-party administrators, if there is one, who may need to take certain actions to account for the death of the participant.
While not a topic of this guide, work with your HR team (and the deceased’s family) to determine the appropriate format and contents of any messaging to your broader workforce, and possibly even customers or other suppliers, about the employee’s death.
NOTE ON COMMUNICATIONS ABOUT BENEFITS
When an employee dies, there are a significant number of people outside the company’s HR department who will need to be involved in communications related to the deceased’s compensation and benefits or who may inquire about benefits with the HR team, including the executor, family members and other potential beneficiaries. Therefore, remember to be mindful about who is actually entitled to receive communications or information about each type of benefit, depending on the terms of the plan, who is the designated beneficiary, or who is the person authorized to represent the deceased’s estate. And, ensure that you get any necessary documentation identifying who the company or the plan is authorized to speak with on a matter related to the deceased’s benefits before providing detailed benefit information. Consider designating a single point person on the company’s HR team to handle communications related to the deceased’s benefits to maintain consistency throughout the process.
The Information You Need
There are three documents you should get from the executor or deceased’s family or beneficiaries before taking any steps relating to compensation and benefits:
A copy of the death certificate. Not only will this prove the employee’s death, but will provide some important information, such as whether the employee was married, and will be required documentation for processing certain benefits.
Either a copy of the “Letters of Administration”, or simply “Letters”, which is issued by a probate court and names the executor(s) or a copy of a properly completed “small estate affidavit.” This document will let you know who you are authorized to deal with regarding any compensation or benefits for which there is no beneficiary designation on file.
A Form W-9 from the executor regarding the estate or from each heir listed in a small estate affidavit, as well as from any family member or beneficiary entitled to benefits or payments (as described below). The information on the Form W-9 will give your payroll department and your benefit plan administrators the information they need to make sure payments are properly reported to the IRS and state taxing authorities.
You will also need to figure out which benefit plans or programs the employee was enrolled in or otherwise had an accrued benefit under, and whether the employee had any individual agreements in effect with the company (such as equity awards, employment agreements, employee loans, etc.) and make sure you have copies of all of those documents and, if applicable, any beneficiary designations made by the employee. This information may come from internal HR records or from third-party benefit plan administrators or vendors. You also need to determine whether or not the plan in question is governed by ERISA, because as discussed above under “An Overview of Relevant Law”, and as explained below, for non-ERISA plans you may have to review state law to determine who is owed the payment or benefit.
Cash and Equity Arrangements
Overview
When an employee dies, you will need to consider the impact on a variety of compensation amounts or equity benefits. First, you should survey all of the cash and equity compensation that is or may be due with respect to the deceased. Almost certainly, a final paycheck will be due. Also consider:
Does the deceased have any outstanding paychecks that were issued, but not yet cashed as of the date of death?
Does the deceased have accrued vacation or other PTO that may need to be paid based on applicable state law and the company’s PTO policies?
Does the deceased have business expenses that were incurred or submitted to the company, but have not yet been reimbursed?
Does any annual or long-term cash bonus plan provide for a payout upon death, and if so, when? (Bonus plans sometimes will pay out automatically at target upon death, or may provide for payout to occur at the end of the performance period based on the level of achievement of actual performance, and either on a pro-rated basis or in full.)
Are there commissions payable?
Is there an employment agreement that provides for payments upon death?
Does the deceased have equity awards, such as stock options or restricted stock units?
Is there an amount held in an employee stock purchase plan account for the deceased that was waiting to be used to buy employer stock?
On the flip side, does the deceased owe any money to the company, such as under a personal loan? And if so, do the terms of the loan permit the company to offset the loan amount from other compensation?
Second, after identifying the agreements, policies and arrangements under which cash or equity compensation may be due, determine whether the agreement, policy or arrangement is subject to ERISA. If you are unsure, consult with your legal or other benefits advisors on this point.
If it is subject to ERISA, then follow the death benefit payment provisions of the plan, if any. Because ERISA preempts state law, you are permitted to pay according to the terms of the plan, including the beneficiary designation on file for a plan that permits beneficiary designations.
If it is not subject to ERISA, then you need to check whether the program permitted a beneficiary designation (and if so, is a beneficiary designation on file) or whether the terms of the program provided for a default beneficiary, such as a spouse. If so, you need to check relevant state laws to make sure the beneficiary designation or the default provision can be honored. As discussed under “Interaction of ERISA and State Laws”, above, some state laws may override the beneficiary designation or program terms and require you to make payment as required by law, and not as described in your documents.
If the program is silent about beneficiaries, then check whether the state in which the employee worked has a wage payment law that would dictate to whom the compensation items listed above should be paid. If there is no law on point, then the executor of the employee’s estate or the heirs listed in a small estate affidavit, whichever is applicable, are entitled to the payments or equity.
Manner of Payment and Taxation
Any compensation paid to the executor of an estate should be made payable to “[Name of Executor], Executor, Estate of [Name of Employee]” or simply to “Estate of [Name of Employee]” or a similar variation of this. Any compensation paid to the deceased’s heirs under a small estate affidavit should be divided among the named heirs and paid directly to each of them.
For wages paid to the estate, heirs, or beneficiaries during the year when the employee dies, you must withhold FICA (both Social Security and Medicare taxes) and FUTA (federal unemployment taxes) on the payment and report the amount only as wages on the deceased employee’s Form W-2, Box 3 (social security wages) and Box 5 (Medicare wages) issued for the year of death. The FICA and FUTA taxes withheld are reported in Boxes 4 and 6, respectively. But, you do not report the payments in box 1 of Form W-2, and you do not withhold regular federal income taxes. If you make the payments after the year of death, then those payments are not reported on a Form W-2, and you would withhold no taxes.
Whether the payment is made in the year of death or after, you also report the payments made to the estate, heirs, or beneficiaries on a Form 1099-MISC in box 3. In general, no federal income tax withholding is required, although backup withholding rules may apply to these payments if the recipient fails to provide you with the taxpayer ID number or Social Security number for processing payments.
You should always work closely with your payroll department and related tax teams to determine the appropriate tax withholding and reporting for any payments related to a deceased employee’s compensation or equity arrangements.
Special Issues for Equity Awards
Vesting and Transfer of Equity Awards. For all types of equity awards, you will need to determine what happens to unvested awards upon the employee’s death, e.g., is the award forfeited, does vesting accelerate, or does vesting continue after death? How to treat any equity awards after the employee’s death will either be discussed in the equity plan document or in the award agreement issued to the employee at the time of grant. Sometimes, an employment agreement might also describe what happens to equity awards upon death.
If the employee has outstanding stock options, you also need to determine the post-death exercise period for those options. Again, this information should be available in the equity plan document, individual award agreement or possibly in an employment agreement. Inform the deceased’s beneficiary, estate, or heirs, as applicable, of how long they have to exercise the award after the deceased’s death under the terms of the plan or the award agreement and provide them information on how to exercise such awards. In addition, notify the third party administer for your equity plan (if any), of the deceased’s death and specify any actions they need to take regarding such employee’s awards.
Tax Treatment of Equity Awards. Similar to other types of compensation as discussed above, there is no required income tax withholding for any equity award transactions that occur after the deceased’s death. Rather, any compensation income recognized for this transaction should be reported on a Form 1099-MISC issued to the employee’s beneficiary, estate, or heirs.
FICA and FUTA tax implications for equity awards upon an employee’s death are more complicated:
FICA and FUTA tax withholding applies (and should be reported on the employee’s final Form W-2) for any awards that were (1) vested before the deceased’s death (not awards that vest because of the deceased’s death), and (2) were exercised/settled before the end of the calendar year of the deceased’s death.
FICA and FUTA tax withholding does not apply, however, for (1) any awards (or any part of an award) for which vesting is accelerated upon the deceased’s death, no matter when exercised/settled, and (2) awards exercised or settled after the calendar year in which the deceased’s death occurs.
Employee Benefit Plans
Qualified Retirement Plans
401(k) and Other Types of Defined Contribution Retirement Plans. 401(k) plans are the most common employer-provided retirement benefit offered to employees. If an employee dies with an account balance in a 401(k) plan, the first issue is to determine if the deceased employee was vested in his plan benefit at the time of death, and if not, whether the plan provides for full vesting upon death while employed (which is almost always the case). Also check the plan terms to see if any employer contribution (matching, profit sharing, or other non-elective contribution) is due to the employee for the year of death. While some plans may require that an employee normally be employed on December 31 or have completed 1,000 hours of service during the year to receive an employer contribution, those requirements are often waived if the employee dies while employed. You will need to review the 401(k) plan document and the summary plan description to determine what rules should apply to the employee’s 401(k) plan account. You should always also work with the plan’s recordkeeper to review the deceased’s account information to determine that the proper vesting calculations are applied to the account.
If there is a vested account, and if the participant is married at the time of death, then the laws governing defined contribution retirement plans require that the participant’s spouse automatically be the beneficiary of the account, unless that spouse has waived his or her right to be the beneficiary. A spouse waives their right to be the beneficiary if the participant has properly completed a beneficiary designation form naming another person(s) as the beneficiary, the spouse has signed that form, and the spouse’s signature is witnessed by a notary public or plan representative. In such a case, the vested account belongs to the named beneficiary, not the spouse.
If the participant is unmarried and there is no beneficiary designation on file, then the plan’s terms will dictate who is treated as the beneficiary. Plans often list family members in a certain order, such as children, then parents, then brothers and sisters, and so on. Ultimately, a plan will almost always indicate that the last beneficiary, if there are no others, will be the employee’s estate.
Once you have determined who is the proper recipient of the plan account balance, notify the individual (or the executor, if it’s the estate) that they have the right to the benefit and give them a copy of the plan’s summary plan description, so they understand when and how they may apply for benefits to commence.
In general, 401(k) plans let a beneficiary keep the 401(k) account in the plan, roll the account over (including directly to avoid withholding) to another qualified employer plan or an individual retirement account (IRA), or receive a distribution as a lump sum. Some defined contribution plans also offer distributions as installment payments or an annuity. A spouse beneficiary has the same rollover options that the employee would have had – i.e., take a distribution or roll over the distribution to an IRA or an employer qualified plan in which the spouse participates. A non-spousal beneficiary can also elect a rollover, but only to an IRA. See below for a “Warning” about how payments made to an estate are not eligible for rollover.
Under Internal Revenue Code rules governing minimum required distributions, if the beneficiary does not begin to receive distributions over a period not to exceed their life expectancy by December 31 of the year after the participant’s death (or for a spouse beneficiary, by December 31 of the year in which the participant would have attained their minimum required distribution age), then the entire account generally must be paid to the beneficiary by December 31 of the year containing the 10th anniversary of the participant’s death. Different rules apply if there is no beneficiary, such as if the payment is owed to the estate; in that case, distribution must be completed within 5 calendar years after the year of the employee’s death. It is important to note that while a plan may not pay benefits later than these dates, the terms of the plan may require that the payments be made earlier, and there are other nuances under the minimum required distribution rules that may apply depending on the facts of the particular employee and beneficiary. You should check the terms of the plan and consult with your plan recordkeeper to determine when benefits must be paid to a beneficiary or to the employee’s estate.
Pension Plans. While pension plans are becoming less common as each year goes by, many employers still maintain them, even though the benefits under the plan have almost all been frozen at this point. The following discussion assumes that the employee has not commenced their pension benefit at the time of death; if they did, then whether any death benefit is payable depends on the form of payment selected by the employee at the time benefits commenced (e.g., a joint & survivor annuity, term certain annuity, etc.). Since most pension plans do not permit employees to begin their pension benefits while employed (in no small part because the law generally does not allow it), the rest of this section assumes that the employee had not started to receive their pension benefits at the time of death.
The first issue to consider is whether the deceased employee was vested in their plan benefit at the time of death, and if not, whether the plan provides for full vesting upon death. If the deceased has a vested benefit under the plan, then the law requires that the pension plan pay a death benefit to the participant’s spouse. This type of spousal death benefit is known as a “qualified preretirement survivor annuity” or “QPSA”. There are two circumstances when a QPSA may not be payable, even if the participant is married at the time of death: (i) often, a plan will require that the participant and spouse be married for the one-year period preceding death for the spouse to be entitled to the benefit, and (ii) although rare, a plan may have allowed the participant to waive the QPSA to avoid having a deduction applied to their benefit to “pay for” the QPSA protection. You will need to review the plan documents and coordinate with the plan’s recordkeeper to determine what result will apply in the circumstance and if a QPSA benefit is due to a spouse.
While in the typical pension plan situation, no death benefits are payable if the deceased is unmarried (or was not married for at least one year), that is not always the case. Some pension plans that describe their benefits as a hypothetical account balance or as a lump sum—such as cash balance or pension equity plans—may provide for the full lump sum benefit under the plan to be paid to the surviving spouse, to the beneficiary designated by the participant, or if none, then to the estate. If the participant named a beneficiary and was married at the time of death, then the beneficiary designation is void if the spouse had not consented to the beneficiary designation as mentioned under “401(k) and Other Types of Defined Contribution Plans”, above. If the beneficiary designation is void, then typically the spouse would have the right to any death benefit.
Payment to the spouse, beneficiary or estate will be made at the time, and in the form, described in the plan document. Once you have determined who is the proper recipient of the death benefit, notify the individual (or the executor, if it’s the estate) that they have the right to the benefit and give them a copy of the plan’s summary plan description, so they understand when and how they may apply for benefits to commence.
A WARNING ABOUT PLAN PAYMENTS TO ESTATES (INCLUDING SMALL ESTATE AFFIDAVITS)
Any distributions paid to the executor of an estate should be made payable to “[Name of Executor], as Executor of Estate of [Name of Employee]” or simply to “Estate of [Name of Employee]” (or a similar variation). Note that your plan recordkeeper may have alternate ways of designating the recipient when an estate is involved. Any distributions paid to the deceased’s heirs under a small estate affidavit should be divided among the named heirs and paid directly to each of them. While the IRS rules normally allow beneficiaries to elect to rollover a qualified plan death benefit to an IRA (to avoid withholding taxes on the distribution), neither an estate nor the heirs listed in a small estate affidavit can elect a rollover distribution. Therefore, you will need to work with your plan recordkeeper to ensure that if death benefits are paid directly to individuals via a small estate affidavit, then those benefits are not permitted to be rolled over into an IRA.
Welfare Plans
Life Insurance. As noted above, you will need a copy of the death certificate. Obviously, this is critical for administration of any life insurance benefit. The life insurance carrier (or third-party administrator, if self-funded) should be notified of the employee’s death and provided a copy of the death certificate. Check whether there is a beneficiary designation on file for the life insurance benefit and share the designation with the life insurance carrier to the extent the carrier does not already have this information. Also, consider confirming that the life insurance carrier properly processes the claim and pays the life insurance benefit to the beneficiary without issue. If the life insurance carrier denies a claim, you may be surprised by a lawsuit filed by an alleged beneficiary against the plan and the company claiming that the life insurance benefit was improperly denied or that the benefit was paid to the wrong individual. Although it may be the insurance carrier’s duty to pay any life insurance benefit, an employer can be roped into this type of litigation as the sponsor of the ERISA plan and potential liability could exist, for example, if the sponsor was found to have violated its fiduciary duties related to participant communications or enrollment issues regarding the life insurance benefit.
In addition, if the company sponsors optional dependent life insurance benefits, check to see if dependent life insurance was elected by the deceased employee and work with the dependent and carrier to explore whether the dependent wants to convert (or “port”) the policy into an individual policy.
Traditional Group Health Plans. For your traditional group health plans, such as medical, dental, and vision, you will want to tell the insurance carriers and/or third-party administrators about the employee’s death and determine when coverage will terminate for any enrolled dependents (e.g., on the date of death, on the last day of the month in which death occurred, or on the last day of the pay period in which death occurred).
If the company is subject to federal COBRA rules (generally, employers with at least 20 employees are subject to COBRA), you must notify the COBRA administrator of the employee’s death within 30 days from the date of death, and then the COBRA administrator has 14 days to send out the COBRA election packet to enrolled dependents. If you administer COBRA internally, then you have a total of 44 days to send out the COBRA election packet. Recall that the maximum COBRA coverage period is up to 36 months (instead of the standard 18 months) when the employee’s death is the qualifying event triggering the right for a dependent to enroll in COBRA coverage.
Because an employer may charge up to 102% of the full premium amount (both the employer and employee portions) for any individual who enrolls in COBRA coverage, the surviving spouse and dependents might wish to consider whether they have other, more reasonably priced, coverage available to them. For example, a dependent might be eligible for group health coverage through their own employer at a cheaper rate. The dependent should have a right to enroll in their own employer’s health plan, within 30 days of losing your plan’s coverage, under a HIPAA special enrollment right, but this special right to enroll mid-plan year is generally waived if COBRA is elected. Dependents might also consider enrollment in an individual health insurance policy offered through the government marketplace. In addition, you will need to review any employment agreements with the deceased employee to confirm if the company has agreed to pay for all or any part of an eligible dependent’s COBRA premiums in the event of the employee’s death.
If you are a small employer not subject to the federal COBRA rules, there still may be similar requirements under a state “mini COBRA” law of which you should be aware. You should not assume that the insurance carrier will administer your insurance policy’s mini COBRA provisions; often, insurance policies impose certain administrative obligations on the employer, such as notice obligations related to mini COBRA requirements.
DON’T FORGET ABOUT HIPAA RULES
When dealing with group health plans, don’t forget about HIPAA. The HIPAA privacy requirements still apply to protected health information (PHI) relating to a deceased individual for a period of 50 years. As a result, if you are dealing with the decedent’s PHI stemming from a group health plan, you should determine if HIPAA permits a disclosure without an authorization. For example, a plan sponsor can generally disclose individualized health plan information without an authorization for plan administration functions. If authorization is required, you must obtain an executed authorization from the personal representative of the decedent (generally, the executor). The personal representative can exercise all of the HIPAA rights of the decedent on behalf of the decedent.
Flexible Spending Accounts (FSAs). If the decedent was participating in a health FSA or dependent care FSA at the time of death, you should promptly determine when participation in the FSA ends according to the terms of the plan document. Often the plan document indicates that participation ends as of the date of death. However, the executor should still be allowed to file claims for reimbursements for qualifying expenses incurred during the plan year until the date of death. Recall that most FSA plans have a time limit for filing claims, known as a claims “run-out period”. The executor should be informed of the run-out period and provided enough time to submit claims on behalf of the decedent before the run-out period ends. Amounts not used to reimburse eligible expenses will be forfeited under the “use it-or-lose it” rule that applies to FSAs (unless COBRA is elected, as discussed below).
For a health FSA, COBRA coverage must be offered to eligible dependents under certain circumstances. Most health FSAs qualify for a limited COBRA obligation, which lets an employer only offer COBRA coverage to the decedent’s dependents when the decedent’s account is underspent (meaning that more money has been contributed to the FSA as of the date of death than has been reimbursed), and typically only for the rest of the plan year. Electing COBRA would allow the dependents to be reimbursed for their own medical expenses incurred after the participant’s death through the end of the plan year.
Health Savings Accounts (HSAs). If you sponsor a high deductible health plan (“HDHP”) and arrange (and pay for) a specific HSA custodian to set up individual accounts for your employees (which often includes allowing employee contributions via payroll deductions), consider what to do with the decedent’s individual HSA. Even though most HSAs are not subject to ERISA and an employer generally has limited responsibilities with HSAs relative to other benefit plans, it is still a good idea to raise the issue for the surviving dependents to determine the impact of the individual’s death on that account. Unlike health FSAs, the HSA funds remain the property of the HSA account holder – HSAs do not have the use it-or-lose it feature.
When an HSA account holder dies, any remaining funds are transferred to the individual named as the HSA beneficiary. If there is no such designation, the terms of the HSA custodial agreement will control. If the surviving spouse is named the beneficiary, the account will be treated as the spouse’s HSA after the employee’s death. The spouse maintains the HSA in the spouse’s own name and continues to have access to HSA funds on a pre-tax basis. If someone other than the spouse is named as the beneficiary (e.g., an adult child), then the account stops receiving the tax-deferred benefits of an HSA and the fair market value of the account becomes taxable to the beneficiary. The taxable amount will be reduced by any distributions made after death to reimburse qualifying medical expenses incurred by the account holder prior to death. Claims can be submitted up to one year after death.
Nonqualified Deferred Compensation Plans
Like pension plans and 401(k) plans, the first issue to consider is whether the deceased was vested in their entire benefit or plan account at the time of death, and if not, whether the plan provides for full vesting upon death. If any part of the account balance or benefit is unvested, it should be forfeited in accordance with the terms of the plan. Assuming there is a vested balance, you will need to see if the plan permits beneficiary elections, and if so, whether the deceased designated a beneficiary. If there is a beneficiary designation, payment should be made to this person. If there is no beneficiary designation, then payment should be made according to the plan’s rules for payments upon death. Most plans will provide for payment to be made to the deceased’s estate absent a beneficiary designation. Payment to the beneficiary or the individual’s estate should be made at the time and in the form elected by the deceased and/or as provided in the plan document.
If you have a third-party administrator for the plan, then reach out to them as soon as possible to notify them of the employee’s death and direct any actions they need to take regarding the deceased’s account or benefit under the plan (such as forfeiting balances or starting payments).
Other Unique Issues to Consider
Public Company Disclosure Requirements for Executives
No Form 8-K Requirements. Generally, the termination of an executive officer of a publicly traded company triggers the need to file a current report on Form 8-K with the Securities and Exchange Commission (“SEC”). However, the SEC has issued guidance that provides that a company does not need to issue a current report on Form 8-K to report the death of one of its executive officers.
Form 4 Reporting. The death of an executive does not trigger a Form 4 filing, nor does any transaction with respect to the company’s stock that is initiated after the executive’s death (such as the exercise of an option by the executive’s beneficiary). However, if the deceased executive initiated a transaction before their death that had not yet been reported on a Form 4 or Form 5 (for example, if the deceased sold stock the day before his or her death), then there is a duty to timely report such transactions that occurred before the executive’s death. The deceased executive’s reports can be signed and filed with the SEC by the executor of the insider’s estate or by the issuer or an employee of the issuer. No matter who signs and executes the report, the deceased executive should be named as the reporting person in Box 1 of the report, and the person executing the report on the deceased employee’s behalf should sign the report in their own name, indicating the capacity in which they are signing.
Slayer Statutes
Most, if not all, states have so-called “slayer statutes”, which are statutes that essentially prohibit killers from profiting from their crimes. If you are dealing with a situation where a deceased’s beneficiary is also his or her killer, you may struggle with what to do – pay the beneficiary according to the terms of the plan, or follow the state law? For non-ERISA plans, you can follow state law. For ERISA plans, however, it is not as clear. While there have been various cases involving the right to benefits in light of “slayer statutes”, the U.S. Court of Appeals for the Seventh Circuit became the first circuit court to decide whether ERISA preempts a slayer statute in Laborers’ Pension Fund v. Miscevic. What was their conclusion? ERISA does not preempt a state’s slayer statute and, as a result, the statute prevented the killer from being the beneficiary of the decedent’s ERISA pension benefits. Outside of the Seventh Circuit, there is still some ambiguity. In a more recent case, the U.S. Court of Appeals for the Sixth Circuit elected not to opine on the application of ERISA preemption to a Tennessee “slayer statute,” but instead relied on federal common law to conclude that an individual who murdered a decedent could not collect life insurance proceeds as the beneficiary of the decedent’s life insurance policy. Given this ambiguity, one way to handle it is to put this exception directly in the ERISA plan document, so that, when the time comes, you can follow your plan’s beneficiary rules. But, absent this language, you should consult with legal counsel, or failing all other courses, ask a judge to decide who should be the beneficiary.
California Legislature Introduces Several Employment Law Bills for 2025
California lawmakers introduced numerous bills early in the 2025 legislative session that could affect California employment law in significant ways. Although it is too soon to predict which bills, if any, will advance, the proposed bills could substantially affect California employers.
Quick Hits
California legislators have proposed bills in the 2025 legislative session that address pay transparency, automated decision systems, workplace surveillance, paid family leave, and employee training.
The legislative session in California will end on September 12, 2025.
The governor will have until October 12, 2025, to sign or veto bills passed by the state legislature.
California legislators have introduced the following employment law-related bills this session:
SB 642 would require pay scales provided in job ads to be no more than 10 percent above or below the mean pay rate within the salary or hourly wage range. The bill revises language to make clear that employers cannot pay an employee less than they pay employees of “another” sex, rather than “the opposite” sex, for substantially similar work.
AB 1018 would regulate the development and deployment of automated decision systems to make employment-related decisions, including hiring, promotion, performance evaluation, discipline, termination, and setting pay and benefits. The bill applies to machine learning, statistical modeling, data analytics, and artificial intelligence. It would require that employers allow workers to opt out of the automated decision system.
AB 1331 would place limits on workplace surveillance, including devices used for video or audio recording, electronic work pace tracking, location monitoring, electromagnetic tracking, and photoelectronic tracking. The bill would prohibit employers from using surveillance tools during off-duty hours or in private, off-duty areas, such as bathrooms, locker rooms, changing areas, breakrooms, and lactation spaces. The bill also would prohibit employers from monitoring a worker’s residence or personal vehicle.
SB 590 would expand eligibility for benefits under the state’s paid family leave program to include individuals who take time off work to care for a seriously ill designated person, meaning any individual whose association with the employee is the equivalent of a family relationship. State law already permits paid leave to care for a seriously ill child, stepchild, foster child, spouse, parent, sibling, grandparent, or grandchild.
AB 1371 would permit employees to refuse to perform a task assigned by an employer if the assigned task would violate safety standards, or if the employee has a reasonable fear that the assigned task would result in injury or illness to the employee or others. The bill would prohibit employers from disciplining or retaliating against an employee for refusing to perform the assigned task.
AB 1234 would revise the process for the state labor commissioner to investigate and hear wage theft complaints. The bill would require the labor commissioner to set a hearing date and establish procedures for the hearing within ninety days after issuing a formal complaint. It would require the labor commissioner to issue an order, decision, or award within fifteen days of the hearing, known as a Berman hearing.
AB 1015 would authorize employers to satisfy the state’s workplace discrimination and harassment training requirements by demonstrating that the employee possesses a certificate of completion within the past two years.
SB 261 would establish a civil penalty for employers that fail to pay a court judgment awarded for nonpayment of work performed.
Next Steps
Most of these bills are in the committee review stages and have not yet passed either the California Senate or Assembly. To advance, the bills must pass both legislative bodies. The last day for the legislature to pass bills is September 12, 2025. The governor will have until October 12, 2025, to sign or veto bills passed by the legislature.
California employers may wish to stay abreast of legislative action on state bills related to pay transparency, workplace surveillance, paid family leave, automated decision systems, employee training, and other employment law topics.
2025 Updates to Washington’s Paid Sick Leave Law: What Employers Need to Know
Washington expanded the covered uses and definition of a family member under Washington’s paid sick leave law effective January 1, 2025.
Under Washington’s paid sick leave law employers must provide non-exempt employees with at least one hour of paid sick leave for every 40 hours the employee works. Leave accrual is not capped, which means there is no limit on the amount of paid sick leave hours an employee can accrue in one year. Employers are required to allow employees to carry over 40 unused hours each year.
Employees may use accrued paid sick leave for certain legally protected reasons, including: (1) the employee’s personal medical care; (2) to care for a family member with a mental or physical illness, injury, or health condition; (3) to care for a child when their school or place of care is closed by a public official for a health-related reason; (4) closure of the employee’s place of business for a health-related reason; or (5) for reasons under Washington’s Domestic Violence Leave Act.
The definition of who is considered an employee’s family member or child for purposes of using paid sick leave has been expanded as follows:
The definition of “family member” is revised to include any individual who regularly resides in the employee’s home and “who has a relationship with them that creates an expectation that they would take care of them during an illness.” Family member does not include an individual who resides in the same home with no expectation that the employee will care for the individual.
“Child” now also includes the spouse of the employee’s child.
“Grandchild” and “grandparent” will be defined to mean the employee’s grandchild or grandparent.
Navigating Divorce: Key Evidence Strategies for Family Law Cases
Getting Your Story to a Judge
Divorce and family law proceedings can be emotionally charged and legally complex, particularly when disputes arise over issues such as property division, child custody, spousal support, or allegations of misconduct. Litigants have been living their story for years, but a judge knows nothing about the situation and will be hearing two sides for the first time.
Evidence plays a crucial role in influencing the court’s decisions, and understanding the potential challenges surrounding evidence is key to effectively navigating these cases. Below are some of the primary evidence-related issues that arise in divorce cases, along with strategies to address them so that your judge can hear the important facts of your story.
Admissibility of Evidence
Courts typically have strict rules about what evidence is admissible. For instance, hearsay—statements made outside of court by people who are not parties to the divorce—is generally inadmissible unless it falls under an exception. In other words, you cannot say, “my best friend saw my spouse gambling large sums of money at the casino.” The friend who actually observed the spouse must testify as to what was seen. Documents must be authenticated so that a judge is satisfied that the information it contains is genuine.
Similarly, evidence must be relevant to the issues at hand. For example, information about a spouse’s personal habits may not be admissible unless it directly impacts child custody or marital finances. So, if the spouse has been engaged in an extramarital affair, this may not be relevant to the issue of whether the parent is capable of caring for a child.
Tips for Avoiding Admissibility Issues:
Ensure all evidence is directly related to the claims or defenses in your case. For every statement, position, and information you want to provide to support your position, make sure that your evidence is accurate and can be verified. Provide your attorney with the information as soon as possible so that there is time to get what may be needed.
For instance, if a spouse has taken large sums of money from an account, the attorney will need time to get certified copies of bank statements by way of subpoena. This can take time, particularly if the bank is out of state.
Work with your attorney to verify that the evidence complies with local rules of Evidence.
Digital Evidence
In today’s digital age, emails, text messages, social media posts, and even GPS data are commonly presented as evidence. However, authenticity and privacy concerns can complicate their use. Courts may require proof that digital evidence has not been tampered with or taken out of context.
There is something called “The Completeness Doctrine” which means that a single text may not suffice, and the entire thread is necessary. Moreover, a screen shot may not be enough, and an attorney can evaluate if there are other steps that should be taken to get the evidence to the judge. This often includes video evidence such as videos taken with a smart phone, or police body camera footage.
Tips for Avoiding Digital Evidence Issues that can Prevent Your Proofs from Being Admitted
Preserve original digital files with metadata intact.
Avoid accessing or presenting information obtained through illegal means, such as hacking into a spouse’s email account.
Be cautious about your own online activity during divorce proceedings.
Spoliation of Evidence
Spoliation refers to the destruction or alteration of evidence that is relevant to a legal case. In divorce cases, this might involve deleting incriminating text messages or destroying financial records. Courts take spoliation seriously and may impose sanctions, including drawing adverse inferences or awarding legal fees to the other party.
Tips for Avoiding Spoilation of Evidence Issues:
Avoid deleting, altering, or destroying any potential evidence, even if you believe it may harm your case. Give the evidence to your attorney and let them help you determine the best way to address the issue. The other side likely has the same information, and if relevant, will ask that it be considered.
If you suspect your spouse is engaging in spoliation, notify your attorney immediately and consider seeking a court order to preserve evidence.
Financial Evidence
Financial disputes are a central issue in many divorces, and accurate financial evidence is critical. Hidden assets, underreported income, or discrepancies in financial disclosures can lead to significant legal challenges. Common forms of financial evidence include tax returns, bank statements, credit card records, and property appraisals.
Tips for Avoiding Issues with Financial Evidence
Be thorough and honest in disclosing your financial situation.
When possible, obtain statements and records directly from financial institutions. They will most likely be accompanied by a certification of the accuracy and authenticity of the records, which is often admissible.
If you do not have tax returns, the IRS can provide a transcript of the entries on the returns, which can be helpful.
Use forensic accountants or financial experts to uncover hidden assets or evaluate complex financial arrangements when necessary.
Expert Testimony
In cases involving contested child custody, property valuation, or allegations of abuse, expert testimony can be crucial. Psychologists, appraisers, and other professionals can provide opinions that carry significant weight in court. However, opposing parties may challenge the qualifications or conclusions of your experts.
Tips for Avoiding Issues with Expert Testimony
Choose experts with strong credentials and experience in family law cases.
Ensure your expert’s testimony is backed by solid evidence and methodology.
Privileged Communications
Certain communications are protected by legal privilege and cannot be used as evidence. Examples include conversations with your attorney or therapist. However, privilege can be waived if confidentiality is breached, such as by discussing the communication in public or sharing it with a third party.
Tips for Avoiding Issues with Privileged Communications
Keep privileged communications confidential. It is tempting to speak to your closest confidants about your case, but this is dangerous if it is something that you do not want disclosed.
Avoid discussing legal strategies or sensitive topics in public or online forums. This is an excellent way to anger a judge.
Bias and Credibility Issues
The credibility of witnesses and evidence can significantly impact a case. A history of dishonesty or bias may lead the court to question the reliability of a person’s testimony or evidence.
Tips for Avoiding Bias and Credibility Issues
Present your case with honesty and transparency – the good, the bad, and the ugly. It will likely come out anyway, so make sure it is with your narrative.
Avoid exaggerating claims or presenting questionable evidence, as this can undermine your credibility.
Make sure that no witness who is testifying on your behalf has skeletons in their closet that could have a negative impact on your case.
Open and honest communication with your lawyer is key to being able to give the judge your story in the way you want it told.
The DOL’s New Guidance on the Interplay of the Federal FMLA and State-Paid Family Medical Leave Programs
On Jan. 14, 2025, the U.S. Department of Labor (DOL) issued Opinion Letter FMLA2025-01-A, clarifying the complex interaction between (1) the federal Family and Medical Leave Act (FMLA), (2) state-paid family and medical leave program (PFML) benefits and (3) employer-provided accrued vacation, paid time off, and/or paid sick time (employer-paid leave).
The takeaway for employers under the DOL opinion letter is that when an employee is on FMLA leave and is receiving state-paid PFML benefits, the employer cannot unilaterally require the employee to simultaneously use employer-paid leave.
PFML Background
Generally speaking, PFML benefits – funded through employee payroll withholdings employers remit to the state government – provide state-paid partial wage replacement to qualifying employees while on a covered leave of absence, such as personal medical leave, family medical leave, and child bonding leave.
In the absence of the federal government providing for or requiring paid leave under its own leave laws, a growing number of states have implemented PFML benefits in recent years, including California, Colorado, Connecticut, Delaware (effective Jan. 1, 2025), the District of Columbia, Maine (effective Jan. 1, 2025), Maryland, Massachusetts, Minnesota (effective Jan. 1, 2026), New Jersey, New York, Oregon, Rhode Island, and Washington. Other states have proposed similar legislation to implement PFML programs.
PFML benefits can be a valuable source of income for employees during an otherwise unpaid leave of absence but are often not the only source. Many employers choose or are required under state or local law to provide employer-paid leave for certain absences, some of which may include the same leaves that qualify for PFML benefits.
FMLA Background
The FMLA provides eligible employees with a leave of absence up to 12 weeks for certain purposes, including personal medical leave, family medical leave, and child bonding leave.
While FMLA leave itself is unpaid, employers can – with one important exception noted below – require employees to simultaneously use employer-paid leave during FMLA leave. Employers often prefer required simultaneous use, both to ensure that employees have a source of pay during an otherwise unpaid leave, and to minimize the total amount of time that an employee is anticipated to be away from work in the foreseeable future.
An exception to this rule is when an employee receives workers’ compensation benefits or disability plan benefits during FMLA leave, in which case the employer cannot unilaterally require the employee to simultaneously use employer-paid leave. Instead, in this scenario, simultaneous use of employer-paid leave is only permitted if the employer and employee consent to it.
New DOL Guidance on Integration with PFML Benefits
Borrowing from the logic of the simultaneous use exception described above, the DOL’s opinion letter clarifies that when an employee receives PFML benefits during FMLA leave, the employer cannot unilaterally require the employee’s simultaneous use of employer-paid leave, though employers and employees may consent to it.
While the DOL’s opinion letter is not binding law, courts generally grant deference to agency guidance like it.
Employer Considerations
Employers should review their (and/or their third-party leave administrators’) policies and practices and consider appropriate steps, if any, if employees are required to use employer-paid leave (e.g., vacation, paid time off, or paid sick time) during a period of FMLA leave when the employee also receives PFML benefits.
Given that the DOL opinion letter was issued in the final days of the Biden administration, the Trump administration may withdraw it, just like other recently withdrawn agency guidance across various sectors. However, even if the Trump administration does so, employers must still review FMLA-analogous state leave of absence laws to determine whether the same rule still applies, which is the case, for instance, in California and New York.
Splitting the Pie Fairly: Using Creativity to Achieve a Successful Business Divorce
Throwing the baby out with the bath water is a pithy expression that suggests exercising caution when business partners in private companies are seeking to achieve a business divorce. The majority owner and the departing minority partner in the business may both see this process as a “take no prisoners” type of battle. But adopting the view that a zero-sum outcome is the only possible result when a business divorce takes place — with just one clear winner and loser — is not just unnecessary, it can be destructive to the parties’ relationship and to the business. When parties instead consider creative strategies that are designed to optimize the result for both sides, they will ratchet down the emotional tensions involved, preserve their long-term relationship, and avoid doing serious damage to the company’s reputation and performance.
In this post, we consider a variety of approaches to business divorce that provide for a partner exit based on objectively reasonable terms, which will help preserve the company’s value and provide a structure that enhances the company’s longevity.
A Phased Buyout with Security Protections
A business divorce involving a full cash payment up front is rarely optimal for either the majority owner or the minority investor. The company will be reluctant to fund an immediate cash buyout from the business, because this sudden removal of the cash on hand will negatively impact the company’s ongoing operations. The departing minority partner will also likely be concerned that insisting on an all-cash buyout will result in an effort to apply deep discounts to the purchase price, i.e.,force a buyout of the minority interest “on the cheap.”
The reluctance of both parties to push for an immediate payment is why it is customary for business divorce buyouts to take place over an extended period. The parties will implement a valuation process using an objective third-party valuation firm to determine the enterprise value of the company; in some cases, both the company and the minority investor will retain business valuation experts to compare reports to achieve an objective resolution of the company value. Once the value has been agreed on, the parties will put in place a multi-year payment plan for the purchase of the investor’s interest. The investor will also want some form of security in the event of a default in payment, and this can be provided in a number of ways. Some examples include providing a pledged interest in some of the company’s assets or receivables, the majority owner providing a personal guaranty, or the unpaid purchase amount due could be subject to a security interest in a portion of the company’s stock.
Performance Based Buyouts
When business divorces do become contentious, the business partners are usually in conflict over the company’s value — typically when the majority owner has presented a buyout figure that the minority investor considers much too low. When this valuation dispute results in an impasse between the parties, the filing of a lawsuit may seem like the inevitable next step. But moving to the courthouse is not the only way to resolve this valuation conflict. .
One way to head off litigation over valuation is to provide for the minority investor to receive additional payments that increase the total purchase price paid for the investor’s interest based on the company’s future performance. The majority owner (or company) still acquires the full ownership interest of the minority investor at a closing, but the investor will also receive a (negotiated) percentage of the company’s future revenue for some period of time.
This is known as a revenue-sharing agreement – the purchase price involves payment to the investor of a fixed amount with additional payments that are based on the company’s future performance. The percentage of the revenue share does not have to be flat, i.e., it could be 15% of the revenues the first year, 10% in year two, and 5% in year three — all of these amounts are subject to negotiation. Further, the parties can also include a high-low arrangement that adds both a floor and a ceiling for the future payments. In this scenario, the investor is guaranteed to receive a total minimum amount based on future payments that are made regardless of the company’s actual revenue, which sets the floor for the total purchase price to be paid. If the investor negotiates to include a floor as a guaranteed minimum payment, however, the majority owner will then include a cap that will establish the maximum amount that the investor has the potential to receive based on the revenue share.
Dividing Assets, Markets or Clients Than Cash
One of the most creative approaches to achieving a business divorce is to structure the buyout based on the assets of the business rather than using cash alone to fund the purchase of the departing partner’s interest. This is an unusual option that will not work in many companies or where partners do not wish to continue operating any part of the business, but when the facts make it possible, this path may help to avoid conflicts and/or a legal battle between the partners.
In this type of business divorce, the parties will evaluate all the parts of the business and then divide certain company assets between them. There are no limits to the creativity involved in this process, and the partners can decide how to divide assets, including, but not limited to, the geographic regions or territories in which the company operates, the company’s different product lines, different groups of employees working at the company, or different customers the partners are working with in the business.
When the partners divide assets, they will both usually continue to work in the industry, and they will divvy up the company’s territories, product lines, customers and/or its employees in a manner that they determine is appropriate. This is obviously a more complicated scenario than a simple monetary buyout, but if the partners remain on good terms when they are conducting their business divorce, this type of asset division may be less contentious because each partner will receive the assets they need from the company to be successful as they move forward in the same or similar industry.
Conclusion
Business divorces often present emotional challenges for the partners, particularly when they have been in business together for years. But if the partners approach their separation in an effort to secure a win-win outcome, they can achieve a productive transition and avoid personal animosity that could negatively impact the business. These creative exits include a variety of potential structures such as phased buyouts based on future performance, asset-based divisions, and longer-term buyouts. These approaches share the common goals of preserving the value of the company and achieving a reasonable exit price that is acceptable to both partners.
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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.
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.
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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Working Mothers: Workplace Travel Requirements Do Not Automatically Amount to Indirect Discrimination
Ms Perkins (the Claimant) was employed as head of Enforcement Local Taxation in the Helmshore office of MH Ltd’s enforcement company (the Company). The Company restructured its enforcement services so that work in Darlington, Epping and Birmingham transferred to Helmshore.
As a consequence of this change, Ms Perkins was told that she would have to travel to these other offices, prompting her to raise a grievance against that requirement. The Company stated that such travel could be limited to one day per month, but if this was refused the options were (i) enforcement of the changes; (ii) fire and rehire under a new contract; or (iii) redundancy. Ms Perkins confirmed that if her employment were terminated, she would advance down the redundancy route.
Ultimately, Ms Perkins was dismissed by reason of redundancy. Ms Perkins claimed:
unfair dismissal – contending it was not a genuine redundancy; and
indirect sex discrimination – claiming the travel requirement placed women with childcare duties at a disadvantage.
The Employment Tribunal (ET)
The ET upheld both of Ms Perkins’s claims, accepting that:
unfair dismissal – the real reason for dismissal was Ms Perkins’s inability to meet the travel demands, not redundancy; and
indirect sex discrimination – the travel requirement created a disadvantage for women with childcare responsibilities, and it was not proportionate to require significant travel to achieve the legitimate aim of business efficacy and staff morale.
The Company appealed.
The Employment Appeal Tribunal (EAT)
On appeal, the Company was successful for the following reasons:
unfair dismissal – the ET allowed Ms Perkins to challenge redundancy as the reason for dismissal despite her earlier concession; and
indirect sex discrimination – the ET failed to sufficiently analyse whether the childcare disparity applied specifically to Grade 3 Managers and instead relied on the existence of a childcare disparity (that is, women are more likely to be primary carers). The EAT found that the travel requirement was proportionate to the Company’s business aims.
Implications for Flexible Working
This case highlights important considerations for employers regarding flexible working, such as:
Proportionality of Requirements. Employers should ensure that any workplace requirements, such as travel, are necessary and proportionate, especially when they may disadvantage certain groups.
Childcare Disparity. Tribunals may “judicially note” that women are more likely to face childcare challenges, but employers should assess how such disparities apply within their workforce.
Flexible Working Requests. Employers must engage in meaningful consultation before imposing rigid requirements.
Design-Code Laws: The Future of Children’s Privacy or White Noise?
In recent weeks, there has been significant buzz around the progression of legislation aimed at restricting minors’ use of social media. This trend has been ongoing for years but continues to face resistance. This is largely due to strong arguments that all-out bans on social media use not only infringe on a minor’s First Amendment rights but, in many cases, also create an environment that allows for the violation of that minor’s privacy.
Although companies subject to these laws must be wary of the potential ramifications and challenges if such legislation is enacted, these concerns should be integrated into product development rather than driving business decisions.
Design-Code Laws
A parallel trend emerging in children’s privacy is an influx in legislation aimed at mandating companies to proactively consider the best interest of minors as they design their websites (Design-Code Laws). These Design-Code Laws would require companies to implement and maintain controls to minimize harms that minors could face using their offerings.
At the federal level, although not exclusively a Design-Code Law, the Kids Online Safety Act (KOSA) included similar elements, and like those proposed bills, placed the responsibility on covered platforms to protect children from potential harms arising from their offerings. Specifically, KOSA introduced the concept of “duty of care,” wherein covered platforms would be required to act in the best interests of minors under 18 and protect them from online harms. Additionally, KOSA would require covered platforms to adhere to multiple design requirements, including enabling default safeguard settings for minors and providing parents with tools to manage and monitor their children’s online activity. Although the bill has seemed to slow as supporters try to account for prospective challenges in each subsequent draft of the law, the bill remains active and has received renewed support from members of the current administration.
At the state level, there is more activity around Design-Code Laws, with both California and Maryland enacting legislation. California’s law, which was enacted in 2022, has yet to go into effect and continues to face opposition largely centered around the law’s alleged violation of the First Amendment. Similarly, Maryland’s 2024 law is currently being challenged. Nonetheless, seven other states (Illinois, Nebraska, New Mexico, Michigan, Minnesota, South Carolina and Vermont) have introduced similar Design-Code Laws, each taking into consideration challenges that other states have faced and attempting to further tailor the language to withstand those challenges while still addressing the core issue of protecting minors online.
Why Does This Matter?
While opposition to laws banning social media use for minors has demonstrated success in the bright line rule restricting social media use, Design-Code Laws not only have stronger support, but they will also likely continue to evolve to withstand challenges over time. Although it’s unclear exactly where the Design-Code Laws will end up (which states will enact them, which will withstand challenges and what the core elements of the laws that withstand challenges will be), the following trends are clear:
There is a desire to regulate how companies collect data from or target their offerings to minors in order to protect this audience. The scope of the Design-Code Laws often does not stop at social media companies, rather, the law is intended to regulate those companies that provide an online offering that is likely to be accessed by children under the age of 18. Given the nature and accessibility of the web, many more companies will be within the scope of this law than the hotly contested laws banning social media use.
These laws bring the issue of conducting data privacy impact assessments (DPIAs) to the forefront. Already mandated by various state and international data protection laws, DPIA requirements compel companies to establish processes to proactively identify, assess and mitigate risks associated with processing personal information. Companies dealing with minor data in these jurisdictions will need to:
Create a DPIA process if they do not have one.
Build in additional time in their product development cycle to conduct a DPIA and address the findings.
Consider how to treat product roll-out in jurisdictions that do not have the same stringent requirements as those that have implemented Design-Code Laws.
As attention to children’s privacy continues to escalate, particularly on the state level, companies must continue to be vigilant and proactive in how they address these concerns. Although the enactment of these laws may seem far off with continued challenges, the emerging trends are clear. Proactively creating processes will mitigate the effects these laws may have on existing offerings and will also allow a company to slowly build out processes that are both effective and minimize the burden on the business.