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Sunday, April 22, 2018

Takeaway from Recent Decision on Florida Attorney Extraordinary Attorney Fees For Ordinary Administrative Work in an Estate [Florida]

In this case, the Personal Representative sought fees for serving as both PR and attorney for the estate - while not totally clear from the opinion, it appears the PR sought those fees using the presumptively correct fee Florida statutory fee schedule schedule.

The PR also engaged outside counsel to assist with some matters. It is the fees for that outside counsel that the court was principally concerned with. The court ended up substantially reducing the fees sought by the outside counsel either outright, or deferring the consideration of some of those fees until later since some of them were too premature for the court to rule on. Some of the conclusions of the court were:

a. Work by the office of the outside attorney to determine addresses of 53 interested persons for purposes of receiving formal notice regarding a determination of beneficiaries and pertaining to the sale of property and determination of homestead did not constitute “extraordinary” services entitling an attorney for compensation. Instead, such work was of the “ordinary” services character. The court did note that proceedings for determination of beneficiaries can be considered extraordinary in appropriate circumstances.

b. Work by outside attorneys to strike a late claim upon failure of a claimant to file an independent action were similarly not “extraordinary” services of the attorneys.

c. Review by outside attorneys of prepared estate income tax return was determined to be duplicative of the Personal Representative’s and CPA’s efforts.

d. Paralegal time of outside attorney’s office relating to preparing addresses and Fed Ex mailers, processing paperwork to the computer, scheduling hearings, coordinating phone conferences, and similar services were found to be administrative and secretarial in nature and not legal services.

e. In regard to the employment by the estate of multiple attorneys, the court noted: “While parties have the right to employ as many lawyers as they choose, the Court will not assess lawyer fees for or against any party for more than one lawyer for a matter in which no more than one lawyer is required. . .As such, duplicative time charges by multiple attorneys working on the case are generally non-compensable and the Court cannot award compensation for various extensive conferences between lawyers without any indication of how those conferences advanced the case. . .. Finally, “excessive time spent on simple ministerial tasks such as reviewing documents or filing notices of appearance” is normally not compensable. . . Nor are duplicative reviews and consultations by numerous attorneys.

It appears that most of the problems here would not be problems as to compensating the PR or the attorney for the estate under ordinary fee arrangements - instead, the delegation of ordinary administrative tasks to another attorney while the PR and estate attorney were charging for ordinary services was a problem.

Note, that this opinion was issued by the Circuit Court, and is not an appellate decision. Thus, its precedential value in other cases may be limited

RE: ESTATE OF GINGER ECKERT ROBERTS, 15th Judicial Circuit in and for Palm Beach County, Probate Division, Case No. 50-2016-CP-004272. January 4, 2018.

Sunday, April 15, 2018

IRS Provides Some Relief for Post-Divorce Grantor Trust Rule Issues

During happy days, one spouse (call him or her the “Donor Spouse”) sets up an irrevocable trust for the benefit of the other spouse (call him or her the “Donee Spouse”). Under Code §672(e)(1)(A), a grantor of a trust is treated as holding any power or interest in a trust that is held by an individual who was the spouse of the grantor at the time of the creation of such power or interest. This typically results in grantor trust status for the trust since the Donor Spouse is treated as having retained rights to income and principal in the trust - with the Donor Spouse being taxable on some or all of the trust income.

Fast forward, and the happy couple is not so happy. They divorce, but the trust lives on. Since the testing under Code §672(e)(1)(A) of the spousal relationship that gives rise to the grantor trust status looks to the time of the creation of the trust, not the status in any later tax year, the Donor Spouse continues to be taxable to the Donor Spouse after the divorce. This is typically an unexpected and unwanted surprise to the Donor Spouse.

Previously, Code §682 remedied this circumstance by providing the Donee Spouse would be taxable on the income. Even then, it was not a perfect solution, with some income potentially remaining taxable to the Donor Spouse, such as capital gains.

In the 2017 Tax Act, special rules allowing shift of alimony tax consequences to a payee spouse were repealed. As part of that repeal, Code §682 was removed from the Code. This presents at least two major issues.

First, what happens to trusts that were formed prior to the repeal of Code §682? Notice 2018-37 has answered this question. It indicates that regulations will be issued to provide that former Code §682 will continue to apply to those older trusts, so the Donee Spouses will remain taxable thereunder. However, this applies only to spouses divorced or legally separated under a divorce or separation instrument executed on or before December 31, 2018, unless that instrument is modified after that date and the modification provides that the changes made by the 2017 tax act apply to the modification.

The second major issue is what happens to trusts for spouses whose divorce or separation occurs after December 31, 2018? Without Code §682, Donor Spouses should remain taxable on those trusts under the grantor trust rules because Code §672(e)(1) continues to apply. Ramifications for persons setting up spousal trusts, either during the marriage or providing for them in prenuptial or postnuptial agreements, is to consider these issues and perhaps to come up with a way to terminate the grantor trust treatment to the Donor Spouse upon divorce if that is the desired arrangement. One way perhaps may be to terminate the trust upon divorce - as to who the assets will be payable can be worked out with regard to the other tax and planning consequences to such a termination or having such a termination provision in existence (e.g., provisions relating to the qualification for and termination of QTIP trust status). Another might be to trigger a mandatory reimbursement provision for the taxes to the Donor Spouse from the trust, or other Donee Spouse assets (again, subject to other applicable tax and planning considerations).

The Notice does request comments on whether guidance is needed regarding the continued application of the grantor trust provisions after divorce or separation. Perhaps Treasury is thinking about instituting its own regulatory relief to the application of the grantor trust rules after divorce or separation, but the Notice provides no indication that is on the table.

Notice 2018-37 (4/12/2018)

Sunday, April 08, 2018

IRS Guidance Issued on New Interest Stripping Rules

The Tax Cuts and Jobs Act substantially modified the interest stripping rules of Code §163(j). In a recent IRS notice, the IRS provided guidance on some of the provisions of the revised limitation and what new regulations will say. Here are some highlights:

a. The old provision allowed for the carryforward of disallowed interest expense to future years. The notice advises that any disallowed interest expense for the last tax year beginning before 1/1/2018 can be carried over (to be subject to the new provisions in the next year). Such a carryforward does not apply to an “excess limitation carryforward” from such prior year. A similar provision applies to such a carryover in regard to the Code §59A base erosion minimum tax.

b. The new rules allow interest to be deducted to the extent of the taxpayer’s business interest income, plus 30% of adjusted taxable income, plus floor plan financing interest. The notice indicates that any interest paid or accrued by a C corporation on its indebtedness will be business interest income for these purposes. This is based on the premise, noted in the legislative history, that a corporation does not earn investment interest or investment income. This treatment will not apply to S corporations, however. The regulations will also address C corporations that are partners in partnerships paying interest.

c. The notice provides that the new provision applies at the level of a consolidated group, and also that regulations when issued will address other consolidated group issues.

d. The notice provides that the IRS will be issuing regulations to the effect that a disallowance and carryforward of an interest expense deduction under Code §164(j) will not impact the reduction in earnings and profits of a payor C corporation.

e. The notice indicates regulations will be issued regarding the application of Code §163(j) in the partnership scenario.

Notice 2018-28, 2018-16 IRB