2024 has been a busy year for developments relevant to trusts and estates (T&E) practice. Let’s review several important to our clients.

FinCEN Beneficial Owner Information Reports

This column previously discussed the requirement under the federal Corporate Transparency Act for certain entities to file “beneficial owner information reports” through the FinCEN website.¹ Note that (1) the Jan. 1, 2025 filing deadline for entities formed prior to Jan. 1, 2024 is fast approaching; (2) for entities formed on or after Jan. 1, 2024, filings must be completed within 90 days of the entity’s formation; and (3) all filings must be updated within 30 days of a change in the information reported or an error in the initial filing. Failure to file a timely report can result in civil and criminal fines and imprisonment.

Tennessee Legislation

Tennessee continues to revise its trust laws in order to attract trust business.²

Power to appoint trust advisors/protectors. The power to appoint a successor trustee now includes the power to appoint multiple successor trustees, trust protectors and trust advisors; the power to remove and replace a trustee now includes the power to appoint additional trustees, trust protectors and trust advisors to serve with an existing trustee; and the powers to appoint additional and successor trustees, trust protectors and trust advisors include the powers to direct or prevent certain actions of the trustees and to allocate various powers exclusively to one or more of the trustees, trust protectors and trust advisors.³

Virtual representation expanded in several ways.⁴ Tennessee continues to expand situations when the trustee and certain beneficiaries, without court involvement, may take steps affecting a trust if all necessary parties participate or are adequately represented. The 2024 legislation broadens the “virtual representation” provisions of Title 35, Chapter 15, Part 3, especially if a “disinterested trustee” is serving.⁵

Family general partnerships. For non-tax reasons family entities often adopt agreements that restrict an owner’s ability to withdraw from the entity or to transfer ownership to non-family members. Such marketability restrictions can reduce the value of an ownership interest for federal gift tax and estate tax purposes, but Internal Revenue Code (IRC) Section 2704(b) limits valuation discounts where owners are more restricted by the entity’s governing documents than by state law (an “applicable restriction”).⁶ To avoid that result for limited liability companies (LLCs), the Tennessee Revised Limited Liability Act defines an LLC owned at least 50% by owners of the same family as a “family LLC,” as to which (1) no member has the power or right to terminate the member’s membership interest or financial rights and (2) various events that otherwise would terminate an LLC member’s interest do not cause termination of the member’s LLC interest.⁷ Because the limitation is provided by statute, it is not an “applicable restriction” under 2704(b).

To avoid both Tennessee franchise and excise taxes and the requirement to file CTA/FinCEN “beneficial owner information reports,” some clients will choose to create general partnerships rather than LLCs. 2024 Tennessee statutory changes to the Tennessee Revised Uniform Partnership Act apply family LLC-type rules and benefits to any “family partnership” (similarly defined).⁸

Tennessee Cases

The following cases remind T&E practitioners of important rules.

Testator must sign before attesting witnesses. On its face a will might appear validly executed because it includes the decedent’s signature and the signatures of two witnesses. In the Semanek case, testimony showed that one witness first signed the document, then the decedent signed and then the other witness signed (all three being in the presence of each other).⁹

The Tennessee Court of Appeals noted that Tenn. Code Ann. Section 32-1-104 prescribes the manner in which a will is properly executed: the testator signifies to the attesting witnesses that the instrument is the testator’s will, in the presence of the attesting witnesses the testator signs the will, and in the testator’s presence the attesting witnesses sign the will.¹⁰ Although the statute does not specify an order of signing, the court, following prior case law, ruled that the witnesses must sign after the testator in order to attest that the testator signed the will, stating “[t]here is no will to witness until it has been signed by the testator.”¹¹ The lesson for practitioners: the testator always signs first and the witnesses always sign after the testator.

Strong presumption in favor of revocation of a lost will.  In the Rucker case, following the decedent’s death no original will could be found.¹² One of his daughters filed a petition to administer a copy of a lost will, which the trial court granted. The Court of Appeals reversed, concluding that the evidence did not overcome the strong presumption in favor of revocation of the lost will.

The court noted that the party seeking to establish a lost will bears a “heavy burden of proof,” “there is a strong presumption that [the will] was destroyed or revoked by the testator,” “the person seeking to set it up labors under a severe handicap,” a “petitioner seeking to show that a lost will was not revoked by the testator must do so by presenting ‘the clearest and most stringent evidence’ or ‘clear, cogent and convincing proof’ ” that it is “ ‘highly probable’ that the . . .  will was not revoked by the Decedent,” all of this “due to the fear that a more elastic rule might bring about more fraud than it would prevent.”¹³

A lesson for practitioners is to advise clients to protect an original will. The lawyer or named executor could keep the original to safeguard against both loss and the presumption of revocation by destruction.

I question the modern wisdom of the presumption. Throughout 24 years of law practice I am aware of no one revoking a will by destruction, but I have encountered dozens of instances of a living person or a family member of a deceased person believing the person had a will but no one is able to locate the original. (In some cases, the person with the most economic incentive for the will not to be found was the first person at the house or safety deposit box where the will was believed to have been located.) In addition, it seems like an anachronism that I have to counsel clients to retain paper wills when most (all?) other documents in their lives exist digitally. I see no downside to reversing the presumption by a new statutory rule providing that a copy of a will may be probated absent clear and convincing evidence that the testator revoked the will, which easily could be demonstrated by a copy of a new will or other document revoking the will.¹⁴

U.S. Supreme Court:

Company-Owned Life Insurance to Fund Redemption Agreement is Included in Value of Decedent’s Company Stock

It is rare for the U.S. Supreme Court to take an estate tax case and also rare for the court to rule unanimously. In the Connelly case, both happened.¹⁵

Facts.¹⁶ Michael and Thomas Connelly were the sole shareholders of a small building supply corporation. The brothers entered into an agreement to ensure that the company would stay in the family if either brother died. Under the agreement, after a shareholder’s death the company was required to redeem (purchase) his shares at fair market value (FMV), determined by an outside appraisal. To ensure that the company would have enough money to redeem the shares, it obtained life insurance on each brother.

After Michael died, Michael’s son and Thomas agreed (with no outside appraisal, contrary to the agreement) that the value of Michael’s shares was $3 million, the company paid the same amount to Michael’s estate and Michael’s estate filed a federal tax return reporting that value. During the IRS audit, the estate obtained a valuation from an outside accounting firm stating that the company’s FMV excluded the insurance proceeds used to redeem Michael’s shares on the theory that the insurance proceeds were offset by the redemption obligation.¹⁷ The IRS insisted that the company’s redemption obligation did not offset the life insurance proceeds and assessed the company’s total value including the insurance. The estate paid the tax deficiency and sued the government for a refund. The District Court granted summary judgment to the government and the 8th Circuit affirmed.

Ruling. The Supreme Court held that the life insurance proceeds payable to the corporation were an asset that increased the corporation’s FMV and that the company’s contractual obligation to redeem Michael’s shares at FMV did not offset the value of life insurance proceeds committed to funding that redemption:

No hypothetical buyer purchasing Michael’s shares would have treated the company’s obligation to redeem Michael’s shares at [FMV] as a factor that reduced the value of those shares . . . A hypothetical buyer would treat the life insurance proceeds that would be used to redeem Michael’s shares as a net asset.¹⁸

The court did limit its holding: “We do not hold that a redemption obligation can never decrease a corporation’s value. A redemption obligation could, for instance, require a corporation to liquidate operating assets to pay for the shares, thereby decreasing its future earning capacity.”19

Note that under IRC Section 2703, a cross purchase or redemption agreement can set the value of a decedent’s interest for federal estate tax purposes if either (1) unrelated persons own more than 50% of the entity or (2) the agreement (a) is “a bona fide business arrangement,” (b) “is not a device to transfer such property to members of the decedent’s family for less than full and adequate consideration” and (c) has terms “comparable to similar arrangements entered into by persons in an arms’ length transaction.”²⁰

Better planning. With only two owners, owners can execute a cross-purchase agreement (each owner promising to buy the other’s interest if the other dies first) and each can purchase life insurance on the other. At one owner’s death, the survivor would receive and use insurance proceeds to pay the buyout obligation, the purchaser would receive an income tax basis in the purchased shares equal to the purchase price (unlike in a corporate redemption) and the deceased owner’s estate would have owned (in addition to the entity interest) only relatively low-value insurance on the living owner.

Where there are more than two owners, cross-purchase agreements and life insurance become complicated, with multiple obligations and the need for multiple life policies. Instead, a partnership, LLC or irrevocable trust could own an insurance policy on each owner, with the obligation to pay the proceeds to the surviving owners to fund their obligations to purchase.

Conclusion

Some think T&E practice is stagnant, but legislatures, courts and executive agencies keep us on our toes, increasing the value of practitioners who keep up. |||

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EDDY SMITH practices with Kennerly Montgomery in Knoxville. He focuses on planning, administration, and litigation related to trusts, estates, businesses and nonprofits. Smith is a fellow of The American College of Trust and Estate Counsel and served as chair of the TBA Estate Planning and Probate Section.

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NOTES

1. Eddy Smith, “Death and Taxes: Select Trusts and Estates Developments,” available at www.kmfpc.com/Content/Uploads/KMFpc/files/Publications/TEUpdate.202309.pdf. Information about filing is available at www.fincen.gov.
2. 2024 Tenn. Public Ch. No. 695.
3. Tenn. Code Ann. § 35-15-716.
4. See amendments to Tenn. Code Ann. §§ 35-15-103, 35-15-302 and 35-15-303.
5. Tenn. Code Ann. § 35-15-103(9). A “disinterested trustee” is “a trustee that is not a “related or subordinate party,” as defined in IRC § 672(c), with respect to the grantor or a qualified beneficiary. A related or subordinate party as to A is someone who (1) does not have a substantial beneficial interest in the trust that would be adversely affected by A’s interest and (2) who is (a) A’s spouse if living with A or (b) A’s father, mother, issue, brother or sister; A’s employee; a corporation or any employee of a corporation in which A’s holdings are significant as to voting control; or a subordinate employee of a corporation in which A is an executive.
6. 26 U.S. Code § 2704.
7. Tenn. Code Ann. §§ 48-249-102(10); 48-249-503(b)(2). Under Tenn. Code Ann. § 48-249-202(b)(1)(D), an LLC may provide in its articles of organization that the “family LLC” provisions do not apply.
8. Tenn. Code Ann. Title 61, Chapter 1.
9. In re Estate of Peggy Jean Semanek, No. M2023-01644-COA-R3-CV (Tenn. Ct. App. May 30, 2024).
10. Tenn. Code Ann. § 32-1-104. Alternatively, the testator may acknowledge her signature already made or direct someone else to sign her name.
11. Supra, note 9, at 4, quoting Simmons v. Leonard, 18 SW 280, 282 (Tenn. 1892); see also In re Estate of Chastain, 401 SW3d 612, 619 (Tenn. 2012).
12. In Re Estate of William Rucker, No. M2023-01120-COA-R3-CV (Tenn. Ct. App. July 2, 2024).
13. Id. at 4-5, quoting several precedents.
14. I plan to advocate for this statutory change, so please contact me (esmith@kmfpc.com or 865-546-7311) if you see an opposing argument.
15. Connelly v. United States, U.S., No. 23-146, 602 U.S. ____ (June 6, 2024), available at www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf.
16. This summary borrows heavily from the court syllabus and opinion.
17. The opinion says the company received proceeds of $3.5 million of life insurance on Michael but used only $3 million in the redemption of Michael’s shares. I see no analysis of the effect the additional $500,000 had on the values of the company and Michael’s shares.
18. Connelly, supra, note 15.
19. Id., footnote 2 (emphasis in original).
20. IRC section 2703(b).