D (3:56)

Thank you, Dave. Some settlements in will or trust disputes involve tax consequences that you want to achieve as part of the settlement, which is great and it's intentional. But what strikes fear in the heart of many of us in a settlement is that there may be unwanted or unintended negative tax consequences that are not anticipated. Especially in a family settlement situation, the IRS might be especially suspicious that the settlement is not a real dispute, but a sweetheart deal to get some benefit to the collective family. On the tax issues. There are really four primary tax exposures to consider in this setting. One is estate tax, for example. Especially if a party is the settlor of a trust, there may be 2036 or 2038 issues involving retained rights, retained benefits. There are also the risk of gift tax issues. In pretty much every settlement, the parties are giving something up. The question is whether a party is giving up something that the IRS could deem to be a gift to another party. This can occur not only from entering into an agreement and approving the settlement, but also declining to object to a settlement or resolution. For example, if a petition is filed with the court to approve the settlement, there can be income tax issues. This is particularly relevant if there is a sale or exchange involved in the settlement that could be viewed as a realization event, possibly causing tax on capital gains. Finally, there are considerations of generation skipping tax. This is particularly relevant in a case of a settlement involving a generation skipping tax exempt trust and can involve blowing that GST exempt status and or incurring a GST tax. I note that at Christmas time the IRS gave us a little gift, A CCA number 2023-52018 in that CCA which is a Chief Counsel advice which gives guidance to the field and essentially shows the IRS's litigation posture on a position on a matter in that cca. The IRS reversed its position in a prior private letter ruling issued in 2016. In a similar fact pattern in the CCA, a Grantor Trust was modified by judicial modification to give the trustee a discretionary power to reimburse the grantor for any income taxes the grantor paid as a result of the inclusion of the trust's income in the grantor's taxable income. Now this was the grant of a discretionary power to the trustee, so no guarantees to the grantor. All of the beneficiaries consented to the modification. The IRS took the position that the beneficiaries made a gift to the settlor of their interest in income and principal because the settlor benefited. How that gift would be valued is a different and interesting question that was not addressed. And however right or wrong the CCA may indicate that the IRS is waking up to these settlement tax issues. And so we need to be aware and on guard. And I will just comment that a settlement can just be a settlement, but a settlement might also be a trust modification, a reformation, change of citus, and so forth. These types of agreements can also qualify broadly as a settlement agreement. Of course, no settlement agreement will hold up if not all the parties are on board. Virtual representation is in particular a challenge and on that topic I turn this over to Phil Corbo.

E (7:22)

Thank you Margaret. The purpose of the settlement is to bind all parties. The first step is to identify all parties with an interest. These parties include fiduciaries, current beneficiaries, remainder beneficiaries, and contingent beneficiaries. Challenges arise when parties refuse to participate in, cannot be located, or suffer from a disability such as being a minor. In dealing with these challenges, it is important to engage in a deep dive of the law of the jurisdiction governing your matter. This includes court rules, case law, and statutes, including the Uniform Trust Code. In jurisdictions where it has been adopted. The key to binding parties who refuse to participate is making sure that they receive proper notice of the proceedings in accordance with the governing law. There are numerous cases dealing with non participating parties and you will find that the cases holding that the non participating parties are not bound by the settlement, whether in or out of court, are situations where the non participating parties were not given proper notice in accordance with the local law. Another key aspect in binding all necessary parties is focusing on virtual representation. Virtual representation is the ability for one individual to represent another either in court or non judicially where direct representation is not feasible. Examples of virtual representation include parents representing minor children, fiduciaries representing beneficiaries, and holders of powers of appointment representing permissible appointees of the power. Again, it is crucial to focus on local law, including the Uniform Trust Code where applicable. A key aspect for virtual representation to be effective is that there is no conflict of interest between the individual doing the representing and the person being represented. Another important factor in having an enforceable settlement agreement is binding parties not represented by counsel. Oftentimes, an interested party does not see the need or does not want to bear the expense of engaging an attorney. All parties to a settlement should be advised in writing of the right to obtain independent counsel. It is good practice to have your settlement agreements identify parties along with their counsel, and for parties who refuse to engage counsel, the agreement should state that they have been advised of their right and have expressly declined to do so. Finally, for settlements out of court, thoughtful consideration should be given to whether obtaining court approval is prudent. Generally, court orders approving settlement agreements have the force of a judgment in a litigated matter. Best practice is to have the court approve the settlement, which the court can then enforce.

A (9:58)

Thank you thank you David, Philip and Margaret for this interesting discussion on settling trust and estate disputes.

B (10:07)

Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit actec.org Please subscribe to this series and leave us a rating or a review.