Around The Water Cooler this morning, we’re talking about inflation and Clinton vs. Trump on the estate tax:

  • Thompson Reuters has released its projected inflation-adjusted Estate, Gift, and Generation-Skipping Transfer (GST) Tax Exemptions:
    • Estate, Gift, and GST Tax Exemptions:  $5,490,000 (up from $5,450,000 in 2016)
    • Gift Tax Annual Exclusion:  $14,000 (the same as in 2016)
    • Special Use Valuation Reduction Limit:  $1,120,000 (up from $1,100,000 in 2016)
    • Amount of estate tax deferral on farm or closely-held business interests:  $1,490,000 (up from $1,480,000 in 2016).

Around The Water Cooler this morning, we’re discussing the ongoing Benson litigation, House and Senate Republicans respond to IRC Section 2704 Proposed Regulations, and tax appointment clauses through the lens of the Tom Clancy Estate.

Just when you thought the Benson litigation involving the New Orleans Saints and New Orleans Pelicans was over, it picks back up.  As Gal Kaufman explains, the matter is now heading back to court to wrestle over the swap powers in the trusts and the valuation of the nonvoting interests in the professional sports teams.

In response to the Proposed Regulations under IRC 2704 which would severely limit valuation discounts associated with family limited partnerships and limited liability companies, House and Senate Republicans called for Treasury Secretary Lew to not move forward with the proposed regulations and have introduced legislation which would quash the proposed regulations.

Jean Stewart takes us through the Tom Clancy Estate litigation which highlights the importance of tax apportionment provisions particularly in blended families.

This is the second installment of a series of posts that examine recent litigation against bank trustees in Mississippi.  To read the first, please see Regions Hit with $4M Judgment over Trust Mismanagement.


Thomas Longnecker was the long-time owner and president of The Amory Garment Company, a garment manufacturing business based in Amory, Mississippi.  At the time of Thomas’ death, the company was the oldest industry and the largest employer in Amory.  After Thomas’ death and in the wake of NAFTA, the company experienced large scale layoffs and was eventually sold for $20 million.

Thomas’ Last Will and Testament created a number of trusts for his wife, daughter, and grandchildren, and Thomas’ widow, Margaret, established a trust for their daughter and grandchildren and a partnership with their grandchildren.

As a result of its 60-year history with the Longnecker family, The Peoples Bank and Trust Company (now Renasant Bank) was appointed to serve as a trustee of the various trusts created by Thomas and Margaret.  One of the fundamental duties of a trustee is to prudently invest the assets of the trust.  Based on the testimony of the bank’s representative (its “30(b)(6) designee”), in the 1980’s Renasant saw the use of investment managers as a way to grow the bank.  The bank thought it could avoid the costs and contingent liabilities of a fiduciary by delegating its investment responsibility as a trustee to outside investment advisors.  At the same time, the bank thought it could split fees with the outside investment advisors and still recognize substantial income from its trust department.

Based on this philosophy, Renasant recommended to Lisa Donovan and her children (Thomas and Margaret’s daughter and grandchildren and the beneficiaries of the various trusts) that Oakwood Capital Management, an investment management firm based in Los Angeles, handle the investment of the trust assets.  Oakwood recommended its Concentrated Value Equity Strategy, and Renasant employees claimed that the Oakwood Strategy would be “very conservative” and “very safe.”  Renasant then entered into Investment Management Agreements which delegated its trust investment duties to Oakwood who would have full power “to supervise and direct the investments” of the various trusts.

A large portion of the trust assets were invested in Oakwood’s Concentrated Value Equity Strategy.  The majority of the assets in the Concentrated Value Equity Strategy were invested in Doral Financial Corporation, whose primary asset was Doral Bank, a bank based in Puerto Rico that originated and securitized mortgages.  After revelations surfaced that Doral Bank was engaged in accounting fraud (described by Renasant as “a massive Enron-style fraud”), the price of Doral Financial Corporation shares collapsed (from $49 per share to $15 per share) and the value of Oakwood’s Concentrated Value Equity Strategy plummeted.  As a result, the various trusts and related entities lost approximately $1.8M.  Doral Bank was later closed by government regulators and Doral Financial Corporation filed for Chapter 11 bankruptcy.

The trust beneficiaries filed suit against Renasant (and Oakwood) and claimed that Renasant breached its duty to prudently invest the trust assets, breached its duty to diversify the trust assets (55% of the stocks owned by the trusts were invested in one company, Doral Financial Corporation), and breached its duty to monitor Oakwood.

Since the litigation settled halfway through trial, there is no ruling on liability issues like lack of diversification, imprudent delegation and monitoring, and failure to prudently invest the assets of the trusts.  However, several facets of the litigation are worth highlighting:

  • As Trustee of the trusts established for the grandchildren of Thomas and Margaret Longnecker, Renasant made a number of distributions to the grandchildren.  Those distributions were subject to generation-skipping transfer taxes (“GSTT”).  However, as seen all too often with other trusts, Renasant never provided annual notices to the grandchildren that the distributions were subject to GSTT and failed to provide the annual IRS forms.  Renasant admitted as much in its publicly filed pleadings.  In fact, at that time, Renasant did not even know that the distributions were subject to GSTT, and one trust officer went so far as to testify that he did not remember addressing GSTT on any of the trusts administered by Renasant from 1999-2004.
  • The attorney for the beneficiaries adroitly subpoenaed the reports of all relevant examinations of Renasant Bank from both the FDIC and the Mississippi Department of Banking and Consumer Finance.  The Commissioner of the Mississippi Department of Banking and Consumer Finance resisted the subpoena by filing a Motion to Quash.  The FDIC, on the other hand, did comply with the Subpoena and although it took approximately two years, the FDIC did in fact produce the reports of all relevant examinations of Renasant Bank.
  • The Investment Management Agreements contained an arbitration clause.  The beneficiaries first filed a claim for arbitration against Oakwood and Renasant in Los Angeles.  The beneficiaries then filed suit against Oakwood and Renasant in the Chancery Court of Monroe County, Mississippi.  Renasant promptly filed a petition for injunctive relief.  The Chancery Court granted Renasant’s petition and ordered the beneficiaries to pursue claims against Renasant solely in the Chancery Court of Monroe County.  Likewise, Oakwood filed a Motion for an Order Compelling Arbitration.  After the Chancellor denied Oakwood’s Motion, Oakwood took an interlocutory appeal to the Mississippi Supreme Court which reversed the Chancellor’s ruling and entered a judgment compelling arbitration and staying litigation of all claims against Oakwood in Monroe County Chancery Court.  So, in essence, the beneficiaries were put in the unenviable and expensive position of having to maintain the arbitration claims against Oakwood in California while at the same time pursuing claims against Renasant in Monroe County Chancery Court.
  • Among other arguments, Renasant actually maintained that it “delegated investment advisory and management functions to Oakwood, and is therefore not responsible for any damages suffered in whole or in part by the [beneficiaries].”  Even if the delegation was prudent, Renasant had a continuing duty to monitor Oakwood.
  • Finally, in what might best be characterized as travelling “through the looking glass,” outside counsel who defended Renasant Bank in the matter was also a member of the bank’s Board of Directors.

Around The Water Cooler this morning, we’re discussing trustees gone wild, exculpatory clauses, and presidential politics.

  • It appears that the democratic ticket in this year’s general presidential election is not the only candidate who might have issues with a private foundation.  In Bloomberg BNA, staff reporter Colleen Murphy details alleged self-dealing at the Trump Foundation.
  • In Lexology, Luke Lantta at Bryan Cave details and provides commentary on In re Scott David Hurwich 1986 Irrevocable Trust, an Indiana case in which the state Court of Appeals limited the relief from liability provided by an exculpatory clause in the trust agreement.
  • Dawn Markowitz, legal editor at Trusts & Estates, provides an in depth analysis of a court opinion handed down this month in the Southern District of California which found personal liability for unpaid estate taxes.

Courthouse Columns with The Statue of Justice

This is the first in a series of posts that will examine recent litigation against bank trustees in Mississippi.

After five years of litigation, last week a Chancery Court in Mississippi found that Regions breached numerous fiduciary duties with respect to the administration of the Patricia Hall Sheppard Trust and ordered Regions to pay in excess of $4M.  (for full text of Court Orders, see Order and Opinion on liability and Order and Opinion on damages)


J. E. (“Buddy”) Sheppard, Sr. departed this life in 1997 leaving behind his wife, Patricia, and two children, Victoria and Bud. Buddy’s Last Will and Testament established a trust for the benefit of Patricia, and he appointed Deposit Guaranty National Bank, which through mergers and acquisitions became Regions, as the Trustee. The terms of the Last Will and Testament require that the Trustee distribute all of the net income, at least annually, to Patricia.  In addition, the Trustee may distribute trust principal only if one of three conditions were met: (1) the net income is insufficient to enable Patricia to maintain her standard of living, (2) an emergency arises, or (3) Patricia has any health care needs.  Upon Patricia’s death, 80% of the remaining trust property would be held in trust for the benefit of the children, Victoria and Bud.

The trust established for Patricia’s benefit was funded in 1998 with approximately $2.5M in liquid assets and 33 residential rental properties, which the court characterized as “the largest rental property portfolio in Mississippi.”  Regions served as trustee from 1998 to 2011 when Patricia removed the bank as trustee and brought suit against Regions.

While the Court found many breaches of fiduciary duty, two are particularly concerning; those concerning distributions of principal and management of the real estate.

Distributions of Principal

The regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.

During the time that Regions administered the trust, Patricia thought that she was receiving only distributions of income from the trust.  In fact, Regions began distributing principal from the very outset of the trust, in 1998.  In 2009, a trust officer informed Patricia that the trust principal had been severely eroded and that the liquid assets were worth less than a million dollars at the time.  In fact, in the 13 years that Regions administered the trust, the trustee distributed trust principal 765 times in a total amount of $3,617,250.  What makes matters worse is that while Regions was distributing trust principal, it was not even distributing all trust income, as mandated by the Last Will and Testament, in a number of years.

None of the distributions of trust principal were for emergency needs and only $10,898 were for health care related expenses.  Presumably, the other distributions were to enable Patricia to maintain her standard of living.  However, as the Court notes in its Opinion, “Regions never ascertained what [Patricia’s] standard of living consisted of”; that is, Regions never performed a needs analysis or determined what expenses Patricia had.  As the trust officer testified, the regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.  The investment officer assigned to the trust testified that “we’d make distributions whenever she asked.”  As the Court observed, Regions could never determine if the principal disbursements were maintaining Patricia’s standard of living because Regions never knew what her standard of living actually was.

Management of the Real Estate

The words reasonable and prudent are not synonymous with loosey-goosey.

Shortly after Regions began administering the trust, the bank delegated management of the real estate to Orville Hall, Mrs. Sheppard’s brother.  As such, Orville was responsible for collecting rent, making repairs, and documenting vacancy rates.  In delegating one of its functions as the trustee, Regions had a duty to exercise reasonable care in delegating management of the real estate and had a duty to review and monitor the agent’s actions.  Regions’ failure in this regard is alarming.  The Bank’s own in house trust real property manager testified that he:

  • Did not know if anyone at the Bank was checking to ensure all rental payments were accounted for;
  • Did not review Orville’s invoices;
  • Did not know if Orville’s invoices for services and repairs were reasonable;
  • Never monitored the net income of the rental property;

When asked if Regions’ management of the real property could be described as “loosey-goosey”, the Bank’s in house trust real property manager replied, “some of the procedures seemed to be a little on the lax side.”  The court found that “the words reasonable and prudent are not synonymous with loosey-goosey.”  Regions own expert witness testified that Regions did not have definitive rules, but testified that that was not necessarily a bad thing and that only the bottom line counts.  As the court noted, “that sentiment is not correct in the terms of the duties that a trustee has with its beneficiary.”

In 2010, Regions began an investigation into the trust to determine if someone within the trust department was stealing money.  The Bank’s internal investigator determined that Orville was reporting that rent was collected but that the rent was not accounted for in the bank’s records.  In his report, the Bank’s internal investigator determined that the real estate was not being handled properly and that there was a failure of institutional controls.  The investigator submitted his report to the Bank’s Human Resources department and assumed that Human Resources would meet with the trust department to discuss the report and make necessary changes within the trust department.  However, the Human Resources Department never forwarded the report to the trust department and the Bank’s own in house trust real property manager testified that he saw the report for the first time on the witness stand.  Not surprisingly, Orville, who in fact was not a licensed real estate broker, had little to no experience managing real estate, and spent most of his time in Tennessee while all of the real property was located in central Mississippi, disappeared while the Bank’s internal investigation was ongoing.


After entering its Order finding liability, the Court appointed two special masters to assess damages.  One of the special masters resigned, and the other special master amended his report a number of times before submitting a final report.  The Court adopted the special master’s final report and awarded damages in the amount of $3,363,026 plus prejudgment interest in the amount of 8%, for a total of over $4M.

Around the Water Cooler this morning, we look at decanting (of trusts, not wine), a fascinating story of business succession done well from Canada, the 100th anniversary of the estate tax and September interest rates.

Finally . . . September interest rates.  The current § 7520 rate for use with estate planning techniques such as GRAT’s, CRT’s, CLT’s, and QPRT’s is 1.4%. The applicable federal rate (“AFR”) for use with an intra-family loan having a duration of 3 – 9 years, a sale to a defective grantor trust,  or a self-canceling installment note (“SCIN”) is 1.22%.

The low § 7520 and applicable federal rates continue to present planning opportunities with GRAT’s, sales to defective grantor trusts, SCIN’s and intra-family loans with depressed assets that are expected to perform better in future years.

On August 2, 2016, the IRS issued proposed regulations which would eliminate a common estate tax planning technique for transfers of ownership interests in family-controlled entities, like family limited partnerships and family limited liability companies.  Holly Bastian and Lynn Pearle describe the proposed regulations and the impact on planning in Lexology.

Leah McElmoyl describes “The Top Five Responsibilities of a Trustee of a Special Needs Trust” in JDSupra.

In the Madison State Journal, Dan Caplinger writes about a common estate tax planning technique, the Irrevocable Life Insurance Trust.

The CPA Practice Advisor offers another look at the benefits of Irrevocable Life Insurance Trusts.

Forbes highlights the need for trust planning for minor children.

Shawn Gardner writes about Trust Protectors, an increasingly common tool in estate and trust planning, in the Yuma Sun.

In ThinkAdvisor, Adrienne Penta offers Top 5 Tips for Nonprofessional Trustees.

  • Wrapping up The Water Cooler this morning, two stories at the intersection of presidential politics and the world of exempt organizations:

As first reported by Richard Pollock of the Daily Caller, the IRS Commissioner has referred congressional charges against The Clinton Foundation to the IRS exempt organizations office for investigation; and

In Nonprofit Quarterly, Erin Bradrick offers her perspective on Donald Trump’s rhetoric calling for the repeal the Johnson amendment.


The Scream by Edvard Munch, 1893
The Scream by Edvard Munch, 1893.

A Testator cannot be allowed to hamper so fundamentally such a vital right to seek redress for grievances through due process of law.

In order to reduce the possibility of expensive and fractious litigation, many wills and trusts include “in terrorem” clauses.   Such clauses provide that anyone who contests the will or trust is disinherited, and they are intended to terrorize or frighten heirs who may be inclined to institute a will or trust contest.  An in terrorem clause may provide, for example:

If any beneficiary hereunder (including, but not limited to, any beneficiary of a trust created herein) shall contest the probate or validity of this Will or any provision thereof, or shall institute or join in (except as a party defendant) any proceeding to contest the validity of this Will or to prevent any provision thereof from being carried out in accordance with its terms (regardless of whether or not such proceedings are instituted in good faith and with probable cause), then all benefits provided for such beneficiary are revoked and such benefits shall pass to the residuary beneficiaries of this Will.”

A few states, like California and New York, enforce no contest clauses without limitation.  Other states, such as Florida, do not enforce no contest clauses.  In recent years, we have seen more and more states follow the approach of the Uniform Probate Code, which carves out a good faith and probable cause exception to in terrorem clauses.  Under this exception, if someone brings a will or trust contest in good faith and with probable cause, the in terrorem clause will not be enforced and the individual who instituted the contest will not be disinherited.


In Parker v. Benoist, 160 So.3d 198 (Miss. 2015), Mississippi joins the shift towards recognizing a good faith and probable cause exception to the enforcement of in terrorem clauses.  In 1998, B. D. Benoist executed a Will which, after providing for the lifetime needs of his spouse, left all of his property in equal shares to his two children, William and Bronwyn.  Shortly before he passed away, B. D. conveyed most of his real estate to William, and B. D. executed a new Will which left a significantly larger share of B. D.’s estate to William.  The 2010 Will contained the in terrorem clause quoted in the italicized language above.

After B. D. passed away, William admitted the 2010 Will to probate and shortly thereafter Bronwyn filed a will contest which alleged that William exercised undue influence over their father.  Specifically, Bronwyn alleged that William convinced B. D., who suffered from significant dementia, to give William most of his real property and to change his Will in a manner which would leave William a significantly larger share of B. D.’s estate.

At trial, the jury returned a verdict that, although there was evidence of a confidential relationship between William and B. D., there was no evidence that William exercised undue influence over B. D.  Applying the in terrorem clause in the Will, the Chancellor then ordered that Bronwyn would receive nothing under the Will and ordered her to pay all attorney fees and court costs associated with the Will contest.

Bronwyn appealed and in a case of first impression in Mississippi, the Mississippi Supreme Court reversed the Chancellor’s order which enforced the in terrorem clause.  In particularly strong language, the Court held that “[an in terrorem] provision is unconstitutional under Mississippi’s Constitution, void as against public policy, and fundamentally inequitable, and we join the large number of jurisdictions who permit a good faith and probable cause exception to [in terrorem] clauses in wills.”  There does seem to be some dissonance in the Court’s opinion, however, over the enforceability of an in terrorem clause:  while the Court held that an in terrorem provision is “unconstitutional” and “void against public policy,” in another part of the Court’s opinion, it held that “in Mississippi, in terrorem provisions in wills are enforceable unless a contest is brought in good faith and based on probable cause.”  Despite the strong language that in terrorem clauses are unconstitutional and void, it appears that the Court recognizes the validity and enforceability of in terrorem clauses but recognizes a good faith and probable cause exception.

In its opinion, the Court reasoned that “the logic for a good faith exception is simple: courts exist to determine the truth. . . .”  “A good faith and probable cause exception to the enforceability of forfeiture clauses in wills is in keeping with the guaranty of all citizens of this state to seek redress for their grievances through due process of law.”  “A Testator cannot be allowed to hamper so fundamentally such a vital right to seek redress for grievances through due process of law.”


It is clear that there is a shift in the states, as we’ve seen in Mississippi, towards carving out a good faith and probable cause exception to in terrorem clauses.  The act of filing a will or trust contest will not necessarily mean that the heirs who file suit will effectively be disinherited and take nothing.  This shift should certainly increase the number of will and trust contests since the disincentive in in terrorem clauses has been muted.  It will be interesting to see how courts interpret and apply the good faith and probable cause standards. 

Around The Water Cooler this morning, we’re diving into more statistics.  The IRS recently released its 2015 Data Book.  The following statistics are related to 2015 estate and trust income taxes and 2015 estate taxes.  There are a few tea leaves to read in the statistics; particularly the respective audit rates.

Estate and Trust Income Taxes:

Gross Collections from Estate and Trust Income Taxes:  approximately $33 Billion (a 14% increase over collections in 2014).  Gross collections from estate and trust income taxes represent 1% of total gross collections from all sources (a total of approximately $3 Trillion).

Number of Estate and Trust Income Tax Returns Filed:  3,202,706

Number of Estate and Trust Income Tax Returns Audited:  5,288 (0.17%).  The audit rate of estate and trust income tax returns is the lowest audit rate of all types of tax returns.

Estate Tax:

Gross Collections from Estate Taxes:  approximately $18 Billion.  Gross collections from estate taxes represent 0.5% of total gross collections from all sources.

Number of Estate Tax Returns Filed:  36,343

Number of Estate Tax Returns Audited:  2,770 (7.6%)

A whopping 31.6% of estate tax returns with a gross estate of greater than $10 Million were audited.  The audit rate of these estate tax returns is the second highest audit rate of all types of tax returns behind only income tax returns of corporations with total assets over $5 Billion.