Article Summary: Estate Planning with Cognitively Impaired Clients

The following is a summary, with additional commentary and analysis, of the article Estate Planning and Cognitive Impairment: Capacity, Ethics, and Risk Management, which was authored by Stefan Dunkelgrun and published in the June 2025 edition of Estate Planning Journal (WG&L). I read the articles so you don't have to! Of course, if the topic is of interest or more information is needed, you should consult the full article.

Overview

Cognitive conditions like Alzheimer’s don’t automatically disqualify someone from estate planning. Instead, the ability to make legal decisions hinges on a client’s understanding at the time of signing documents. Attorneys play a critical role in assessing this capacity, ensuring client wishes are honored, and protecting against disputes or undue influence. By leveraging thorough documentation and tools like video evidence, lawyers can create robust estate plans while addressing ethical obligations. This summary, of Stefan Dunkelgrun’s article distills essential insights and offers practical strategies for practitioners, enriched with commentary on balancing client autonomy and legal safeguards.

Core Insights

• Decision-Making Ability: Capacity is evaluated based on a client’s grasp of their actions when signing documents, not a medical diagnosis. For instance, someone with cognitive decline may still understand their will’s implications during a lucid moment.

• Ethical Balancing Act: Lawyers must honor a client’s valid intentions while guarding against coercion or incapacity. If harm is likely, protective steps are warranted, per ABA guidelines.

• Undue Influence Risks: Disputes often arise when someone pressures a vulnerable client, skewing their decisions. Courts look for signs like unusual changes to prior plans or a beneficiary’s excessive involvement.

• Litigation Prevention: Detailed records, independent legal advice, and clear client intent help shield plans from challenges. In some states, the burden may fall on the will’s proponent to disprove coercion.

• Medical Collaboration: Doctors’ insights on a client’s mental state are valuable but don’t determine legal capacity. Lawyers must assess decision-making ability directly.

• Video Evidence: Recording a client’s intent can bolster a plan’s validity but requires careful execution to avoid misinterpretation.

• Proactive Tools: Documents like powers of attorney or health care directives can prevent the need for court-ordered guardianship, preserving client control.

Video Evidence: Benefits and Challenges

Recording a client’s estate planning process can be a powerful tool, but it demands precision to be effective.

• Benefits:

  • Demonstrates Clarity: A video showing a client explaining their choices can confirm their understanding, strengthening the case for capacity.

  • Authentic Voice: Capturing the client’s own words offers direct evidence of intent, minimizing reliance on others’ accounts.

  • Dispute Defense: Clear footage can refute claims of manipulation or confusion, reinforcing the plan’s legitimacy.

• Challenges:

  • Risk of Misinterpretation: If others are present or the client appears frail, viewers might suspect coercion, even if none occurred.

  • Technical Pitfalls: Poor audio or visuals can weaken the recording’s impact, making it less persuasive in court.

  • Over-Reliance: Videos alone aren’t enough; they must complement other records to form a complete defense.

  • Client Comfort: Some clients may feel uneasy about being filmed, which could affect their demeanor. Consent and privacy are critical.

  • Risk of Unexpected Behavior: There is a risk of unexpected statements or behaviors that might work against a finding of capacity in a dispute. Deleting the recording, editing it, or re-recording with a re-execution of the documents creates problems in and of itself.

Practical Strategies for Attorneys

1. Evaluate Capacity Actively: Engage clients during clear-headed moments, asking them to describe assets or relationships to confirm comprehension.

2. Build a Robust Record: Note client discussions, reasons for choices, and any refusal of external input to show independent decision-making.

3. Counter Coercion Claims: Verify clients act independently, limit beneficiary involvement, and document helpful actions by family as supportive, not controlling.

4. Optimize Video Use: Secure consent, film in a neutral setting with clear audio, and pair with written notes for a comprehensive file.

5. Leverage Medical Input Judiciously: Use doctors’ observations to inform, not dictate, capacity assessments, focusing on legal standards.

6. Promote Forward-Thinking Tools: Advocate for powers of attorney and health care proxies to reduce reliance on invasive guardianship.

Perspective

Beyond technical strategies, estate planning with cognitive challenges requires a human-centered approach. Attorneys must act as both legal guides and advocates for dignity, ensuring clients’ voices are heard even as their capacities fluctuate. This dual role—upholding legal rigor while fostering trust—sets estate planning apart in these cases. By anticipating disputes and documenting intent with care, lawyers not only protect assets but also preserve a client’s legacy and peace of mind for their families.

POOF: FLORIDA'S SALES TAX ON COMMERCIAL LEASES IS NOW HISTORY

In a bold move to boost Florida’s business climate, Governor Ron DeSantis signed House Bill 7031 on June 30, 2025, abolishing the state’s sales tax on commercial property leases, often called the Business Rent Tax (BRT). Effective October 1, 2025, this repeal ends a tax that has weighed on Florida businesses for over five decades. This post dives into the tax’s history, the repeal’s details, its impact on tenants and landlords, and actionable steps for navigating the change.

The Business Rent Tax: A Historical Overview

Since 1969, Florida has been the only U.S. state to impose a statewide sales tax on commercial real estate leases, codified under section 212.031 of the Florida Statutes. This tax applied to rents for office spaces, retail shops, warehouses, self-storage units, and other real property. It covered not just base rent but also additional charges like common area maintenance fees, property taxes, or insurance passed through to tenants, significantly increasing costs for businesses.

The tax’s roots go back to 1949, when Florida began taxing certain property rentals. By the late 1960s, it expanded to cover commercial spaces.. The BRT generated roughly $900 million annually for the state, but it made Florida less competitive, as no other state had a comparable tax. Over time, pressure from businesses led to gradual reductions. By June 1, 2024, the state rate had dropped to 2%, with county-level surtaxes (0.5% to 2%) bringing the total to 2.5%–4% in most areas. Despite these cuts, the tax remained a hurdle for businesses, especially those operating across state lines.

Repeal Details: Scope, Timing, and Legislation

House Bill 7031, enacted on June 30, 2025, eliminates section 212.031, Florida Statutes, removing the state’s 2% sales tax and local surtaxes on commercial leases starting October 1, 2025. This repeal erases the combined 2.5%–3.5% tax rate applied in most counties. For instance, a business paying $15,000 monthly in rent at a 3% tax rate will save $5,400 per year, unlocking funds for expansion or other priorities.

The tax exemption applies to rent for occupancy periods beginning on or after October 1, 2025. Prepayments for October or later made before this date are tax-free, but payments for earlier periods (e.g., overdue September rent paid in October) remain taxable. The repeal does not affect taxes on short-term residential rentals (six months or less), boat docks, parking lots, or aircraft hangars, which fall under other statutes.

Included in Florida’s $115.1 billion fiscal year 2026 budget, the repeal is expected to save businesses $2.5 billion annually, making it one of the state’s most significant tax cuts since the 2006 intangibles tax elimination. It reflects Florida’s push to reduce business costs while maintaining its low-tax reputation.

Impacts and Insights

• Boost for Businesses: Industry groups like the National Federation of Independent Businesses and real estate advocates estimate the repeal could generate $20 billion in economic activity and create tens of thousands of jobs over the next few years. Lower lease costs make Florida more attractive for startups, retailers, and corporations. Compare this to the imposition or threat of imposition of new or additional business taxes in other states.
• Level Playing Field: By removing a tax unique to Florida, the state aligns with competitors, simplifying lease negotiations for businesses operating in multiple states and reducing compliance complexities.
• Streamlined Operations: Landlords benefit from simplified billing, as they no longer need to collect or remit sales tax on leases after September 30, 2025, cutting administrative costs and risks of errors.

Challenges to address include:

• Transition Complexity: Businesses must adjust accounting systems to stop charging tax for post-September 30 occupancy. Past compliance remains subject to audits by the Florida Department of Revenue, requiring robust recordkeeping.
• Budget Considerations: The state’s loss of $900 million in annual revenue has sparked discussions about future fiscal strategies, though tourism-related taxes help offset the impact.

Practical Steps for Tenants, Landlords, and Advisors

To capitalize on the repeal and ensure compliance, stakeholders should act strategically:

• Tenants:
  • Check lease terms to confirm tax charges cease for October 2025 occupancy. Inform subtenants to avoid overbilling.
  • Keep records for pre-repeal periods, as audits may target historical tax filings for up to three years.
• Landlords and Property Managers:
  • Revise billing systems, lease software, and payment processes by October 1, 2025, to eliminate sales tax charges. A simple tenant notice can clarify the change.
  • Close sales tax accounts with the Florida Department of Revenue if no other taxable activities apply.
  • Add clauses in new leases to address potential future tax reinstatement, protecting against policy shifts.
• Tax Professionals:
  • Guide clients through the transition, ensuring accurate reporting for pre-repeal periods and clarity on occupancy-based tax rules.
  • Stay updated on Florida Department of Revenue guidance, expected before October 2025, for compliance details.
  • Support clients in audits for prior BRT payments, drawing on expertise from firms specializing in Florida tax disputes.

Moving Forward

The elimination of Florida’s Business Rent Tax is a pivotal step toward a more competitive business environment, easing financial and administrative burdens for tenants and landlords. By acting now to update systems, review contracts, and prepare for potential audits, businesses can fully harness this tax relief. The repeal strengthens Florida’s position as a top destination for commerce, promising long-term economic benefits.

Sources: Florida House Bill 7031, signed June 30, 2025; Greenberg Traurig, “Florida Legislature Repeals Sales Tax on Commercial Leases,” June 22, 2025; National Law Review, “Florida Ends Business Rent Tax Effective in October 2025,” June 16, 2025; RSM US, “Florida budget eliminates business rent tax,” July 1, 2025; Moffa Tax Law, “Florida to End Sales Tax on Commercial Rent,” June 17, 2025; Florida Realtors, “Florida Eliminates Burdensome Business Rent Tax,” June 30, 2025.

The TurboTax Defense: A New Chapter

 

The TurboTax Defense to federal tax penalties—where taxpayers cite reliance on tax software like TurboTax to avoid penalties—has historically been a tough sell. However, Huang v. United States (N.D. Cal. 5/28/2025) offers a fresh perspective, potentially strengthening this defense at least for late-filed international information returns like Form 3520. The TurboTax Defense: Origins

The TurboTax Defense argues that good-faith reliance on tax software constitutes reasonable cause for non-compliance, excusing penalties. In my 2012 post, I discussed Au v. Commissioner (T.C. Memo 2010-78), where the Tax Court rejected this defense. The court required evidence of a specific software error and diligent taxpayer effort to determine correct tax liability—neither of which the Aus provided. I wrote:

That case involved the TurboTax tax preparation software, and this defense is often referred to as the 'TurboTax Defense.' In the Au’s case, the Court found that the taxpayers did not provide evidence of a mistake in the software instructions, nor of a thorough effort by the taxpayers to determine their correct tax liability. This seemingly leaves the door open to the successful use of the TurboTax Defense if a taxpayer can actually prove up a mistake in tax preparation software or its instructions.

This suggested a narrow path for success, contingent on proving software error. Huang tests this path.

Huang v. United States: Case Summary

In Huang v. United States (No. 24-cv-06298-RS), pro se taxpayer Jiaxing Huang faced $91,238.75 in IRS penalties for late-filed Forms 3520 (2015 and 2016). Huang received large gifts from her non-resident foreign parents to relocate to the U.S. and buy a home. IRC § 6039F requires U.S. persons to report foreign gifts over a specific threshold via Form 3520. Huang, using TurboTax, claimed the software advised that only gift-givers, not recipients, needed to report. Relying on this, she filed the forms late in 2018 after learning of the filing requirement. The IRS assessed penalties, which Huang challenged, citing reasonable cause.

The government moved to dismiss, arguing Huang’s reliance didn’t establish reasonable cause. The court disagreed, finding her allegations plausible enough to survive dismissal and proceed to discovery. This ruling marks a shift from prior skepticism toward the TurboTax Defense.

Key Rulings in Huang

The court’s decision rests on several points:

1. Software as Professional Advice: Huang alleged TurboTax explicitly advised no reporting was needed for gift recipients. The court equated this to reliance on a “competent professional,” citing Olsen v. Commissioner (T.C. 2011), which recognized software reliance as potential reasonable cause.
2. Reasonable Cause Factors: Ignorance of the law alone isn’t enough, but combined with Huang’s inexperience and the complexity of Form 3520, it may support her claim. 
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4. Distinguishing Precedent: The government cited Spottiswood v. United States (N.D. Cal. 2018), where a similar defense failed. The court noted Spottiswood was decided at summary judgment, not dismissal, allowing Huang’s case to advance.

Evolution Since 2012

In 2012, I noted the TurboTax Defense’s slim chances, requiring proof of software error and taxpayer diligence. Huang lowers this bar at the dismissal stage, accepting plausible allegations of erroneous software advice as akin to professional guidance. This reflects growing judicial recognition of tax software’s role and the complexities of international reporting, contrasting with Au’s stricter stance.

Implications

• Stronger Defense: Taxpayers relying on software in good faith may avoid penalties, especially for complex forms. This benefits pro se filers or those without access to tax professionals.
• Discovery Hurdles: Huang must prove TurboTax’s incorrect advice and reasonable reliance in discovery, highlighting the need to document software interactions. It remains to be seen what additional evidence Huang will need to prevail, such as whether she will need to prove the correct input of gift amounts and the language of and the required specificity of the advice of the program.
• Software Accountability: If the defense gains traction, providers like Intuit may face pressure to improve guidance accuracy for niche areas.
• IRS Enforcement: The IRS’ aggressive penalty assessments for late international filings suggest taxpayers must verify requirements, even with software.

Related Cases

Huang aligns with Olsen (2011), supporting software reliance, but contrasts with Au (2010) and Spottiswood (2018), where defenses failed due to evidence or procedural issues.

Conclusion

Huang v. United States revitalizes the TurboTax Defense, moving it from a long shot to a viable argument, at least early in litigation. As I noted in 2012, proving software error could open the door to success. Huang steps through, leveraging alleged TurboTax misguidance to challenge penalties. While discovery will test her claims, the case underscores tax software’s growing influence and the need for careful documentation. Taxpayers and professionals should verify complex requirements and preserve evidence of software advice, as the TurboTax Defense reshapes reasonable cause in the digital era.

Sources:

• Huang v. United States, No. 3:24-cv-062998-RS (N.D. Cal. 5/28/2025)
• "TurboTax Defense Fail"
• Olsen v. Commissioner, 2011 WL 5885082 (T.C. 2011)

Section 7872 Defeats IRS Claim of Gift Involving Family Loan

 

In a recent U.S. Tax Court case, Estate of Barbara Galli, Deceased, Stephen R. Galli, Executor, et al. v. Commissioner of Internal Revenue, the court addressed a tax dispute involving a $2.3 million purported loan transfer between Barbara Galli and her son, Stephen, in 2013. The case, decided via summary judgment, centered on whether this transfer was a loan, a gift, or a partial gift. Since the IRS did not assert that the entire transaction was not a loan but instead was a part loan/part gift, the court found no gift at all because the loan documents provided for adequate interest under Section 7872.

FACTS: Barbara Galli, who passed away in Florida in 2016, transferred $2.3 million to her son, Stephen, in 2013. The transfer was documented as a loan with a 9-year term and an interest rate of 1.01%, matching the mid-term Applicable Federal Rate (AFR) at the time. The loan was unsecured, lacked standard commercial enforcement provisions, and required annual interest payments with the principal due at the end of the term. Stephen made interest payments in 2014, 2015, and 2016, and the unpaid loan was included in Barbara’s estate tax return, valued at $1.624 million. The premise of the IRS’ claim was that there was a question about whether Stephen had the financial wherewithal to repay the loan, and thus the principal amount should be discounted by appraisal taking into the ability to repay. The excess of the principal amount over the discounted value was asserted to be a taxable gift. Bolstering its argument, the IRS sought to apply the consistency doctrine, since Barbara’s estate reported a lower than face value amount as to the value of the note for estate tax purposes, taking into account similar considerations that warranted a reduced value for the note. The taxpayer moved for summary judgment on the gift issue citing Frazee v. Commissioner (1992), which held that §7872 provides comprehensive treatment for loans at or above the AFR for both income and gift tax purposes, displacing traditional fair market valuation methods for gift tax purposes. The court agreed, also acknowledging that the consistency doctrine did not apply due to the different rules that applied under §7872 versus estate tax valuation.

COMMENTS: There are several takeaways from this case. The first is that the court accepted the premise of the taxpayer’s argument that traditional valuation principles that value a promissory note for estate tax purposes, which include judgments relating to the likelihood of repayment, do not apply in determining whether a loan transaction constitutes a partial gift if there is loan and it is not considered a below-market loan under §7872. Secondly, if the IRS could have shown that there was no valid loan element at all, then §7872 would not apply and presumably the entire transfer would have been a taxable gift. Therefore, if factually there are substantial questions about whether loan treatment at all is proper, a gift can result. In this case, even though the note was unsecured, that the interest was timely paid was probably a useful fact in this regard. The decision can provide some comfort to taxpayers that there appears to be an all or nothing approach to the IRS being able to obtain gift treatment if there is adequate interest under §7872  but there may be some question as to ability to repay– assuming adequate interest either the transaction is entirely free of gift tax as a loan, or fully a gift if it can be shown that there was no bona fide loan at all. This case can be compared to Estate of Bolles v. Comm’r, 133 AFTR 2d 2024-1235 (9th Cir 2024), affirming TC Memo 2020-71, in which loans were entirely reclassified as gifts where there were no repayments and there was evidence of lack of ability of the borrower to repay the loans.

CITES: Estate of Barbara Galli v Comm’r, Docket Nos. 7003-20 and 7005-20 (March 5, 2025); Frazee v. Comm’r, 98 T.C. 554 (1992); Estate of Bolles v. Comm’r, 133 AFTR 2d 2024-1235 (9th Cir 2024), affirming TC Memo 2020-71; Code § 7872.