Here, Peter died on December 8, 1997, and Marilyn filed her petition in Cook County on April 10, 2000, more than two years after the date of Peter's death. The trial court dismissed Marilyn's actions under these two sections as time-barred. The appellate court affirmed. Marilyn contends her claim is not barred because she timely filed a claim in California and that her California claim is entitled to full faith and credit by the Illinois courts; or in the alternative, that the limitations period should be tolled because of Jill's disability.
The appellate court rejected these arguments. The court concluded that section 18-12 of the Probate Act cannot be satisfied by the filing of an action in some other state. Failure to file the petition to modify the support order within two years of a decedent's death was an absolute bar, even if the executor had personal knowledge of the claim.
The appellate court also rejected the full faith and credit argument because it only applies to judgments rendered by another state court and does not apply to the timeliness of a claim.
Finally, the court also rejected Marilyn's argument that the statute of limitations was tolled because of Jill's disability. The court held that section 18-12 of the Probate Act is not a general statute of limitations subject to tolling, but instead is a non-claim statute with no exceptions or tolling for people with disabilities.
This case reminds us that if we represent a decedent's estate wherein the decedent has continuing obligations pursuant to a dissolution action, we should counsel our executor to give actual notice of the decedent's death to the potential claimant to start the limitations period. In any case, the general limitations statute will bar claims two years following the decedent's death in all cases, even if the support obligation runs to a disabled child. In this case, Marilyn could have filed a claim in the California probate proceedings while at the same time seeking a judgment in the Cook County Circuit Court to commute future support obligations to a lump sum, which would have full faith and credit implications in the California probate. Unfortunately, Marilyn waited too long.
Attorney General fails to terminate charitable trust
The case of Charles Foster Brown III, et al, as trustees of the Meyer Family Foundation v. Jim Ryan, Attorney General, 788 N.E.2d 1183 (2003 Ill. App. Lexis 477) (1st Dist., April 17, 2003), decided by the First District, shows the ingenuity of trustees of the Meyer Family Foundation to continue the foundation, albeit in different form, contrary to a 50-year termination provision in the document establishing the trust.
Louis Meyer established the Meyer Family Foundation on December 23, 1946, by a written trust agreement executed in Nebraska. The foundation was moved to Illinois and since 1969, was administered as a private foundation and a tax exempt organization under the Internal Revenue Code. The trust was originally funded with $1,000, but has now grown to more than $12 million.
In 1999, the trustees discovered that Article VII of the trust provided the trust should be entirely distributed and the trust terminated no later than December 23, 1996. The trust further provided that upon termination, any remaining corpus could be distributed directly to charities or indirectly to domestic corporations organized and operated exclusively for religious, charitable, scientific, literary or education activities, with no part of the net earnings to benefit any private shareholder or individual. The trust further provided that no part of the corpus could be distributed to any of the trustees or their successors in trust.
Upon discovery, the Meyer Family Foundation was to have terminated three years earlier. Some of the acting trustees formed a new charitable foundation with perpetual duration and proposed the distribution of the Meyer Family Foundation to the newly created foundation of which they were board members.
The Illinois Attorney General, under the Illinois Charitable Trust Act, objected. The Attorney General contended that (1) the distribution to a newly created foundation violates the unambiguous terms of the trust agreement; (2) the new foundation causes indeterminate and unnecessary costs that could be avoided by a direct distribution to charities; and (3) the trustees should not be permitted to extend their control over the assets through the new foundation because they have unclean hands. The trial court found in favor of the trustees and the Attorney General appealed.
The appellate court found the terms of the original trust unambiguous. It clearly allowed the distribution of the Meyer Family Foundation upon termination to another charitable corporation. The trust did prohibit distributions directly to the trustees, but the proposed transfer to the newly created charitable corporation is not considered a transfer directly to the board of directors. The appellate court further found no evidence that administrative fees had been or would be excessive in the new charitable corporation. Certainly, direct distributions to charity were an option, but not the only option. In effect, the Meyer Family Foundation found a way to perpetuate itself contrary to the 50-year duration imposed by the original settlor.
There was a dissenting opinion filed by Justice Greiman, who disagreed with the majority and believed the proposed transfer violated the clear intent of Mr. Meyer.
IRS wins big in Strangi II
The Tax Court gave the IRS everything it wanted in Strangi v. Commissioner (T.C. Memo. 2003-145) decided on May 20, 2003. This important case involves the application of section 2036 in the family limited partnership arena.
Some background is helpful. This case originally came before the Tax Court in 2000. It involves a Texas family limited partnership established by the decedent's son-in-law under a power of attorney only two month's before Strangi's death. Strangi transferred the bulk of his estate to the partnership in return for a 99 percent limited partnership interest and a minority interest in the corporate general partner. Following death, Strangi's estate took substantial discounts for his limited partnership interest. The IRS objected to the discounts and argued the partnership structure itself should be ignored based on Chapter 14 arguments. Shortly before trial, the IRS attempted to add another argument to defeat the discounts based on section 2036. The Tax Court ruled the IRS could not argue 2036 as it was raised too late. The Tax Court ruled in favor of the estate, allowing substantial discounts based on the structure of the family limited partnership. The IRS appealed to the Fifth Circuit.
The Fifth Circuit, in 293 F.3d 279, remanded the Strangi case back to the Tax Court, instructing the Tax Court to consider the 2036 argument of the IRS.
Section 2036(a)(1) provides for inclusion of previously transferred property if the decedent retained, by express or implied agreement, possession, enjoyment, or the right to income from the transferred property. The Tax Court found such an implied agreement. Critical factors relied on by the Tax Court included the fact that the decedent transferred almost all of his assets to the partnership and would therefore require frequent distributions from the partnership in order to live. In addition, Strangi contributed his personal residence in which he continued to reside. Because Strangi was the only limited partner holding a 99 percent interest, any partnership distribution was almost entirely payable to him based on this large percentage of retained ownership. The Tax Court concluded there was an implied family agreement that Strangi would retain the possession, enjoyment and income of the property transferred to the partnership.
The Tax Court went on to also find that section 2036(a)(2) also applied. Under this section, transferred property is brought back into the estate if the decedent retained the right, either alone or in conjunction with any person, to designate the persons who shall enjoy or possess the property or the income from the property transferred. The estate argued that because the corporate general partner controlled any partnership distributions and further, that since Strangi had a minority interest in that corporation, he could not legally control partnership distributions. Further, the estate argued the general partner had a fiduciary obligation to all partners and under the prior Supreme Court case of Byrum, these powers should not be considered in the section 2036 arena. The Tax Court held Byrum was not applicable because under these circumstances, no fiduciary obligations would have been enforced.
Finally, the estate argued section 2036 was not applicable because the decedent's transfer of assets in exchange for partnership interest was a bona fide sale in which full consideration was received. Section 2036 does not apply to bona fide sales. The Tax Court didn't buy this argument either. It held the decedent, acting through his son-in-law holding a power of attorney, was essentially on both sides of the transaction and the arrangement was merely a "recycling" of the decedent's assets from individual ownership to partnership ownership, and not in the nature of a true sale. Accordingly, the estate was not entitled to the exception for sales.
With this ruling, the underlying assets in the partnership without discount are included in the estate. A complete victory for the IRS.
This case has already generated much commentary. Certainly, under the right circumstances, section 2036 may not apply to a particular family-limited partnership, but it is now more difficult to counsel our clients that big discounts are possible simply by the formation of an FLP.
Taxpayer identification numbers can be obtained over the Internet
We have all encountered the frustrating delays in having employer identification numbers assigned for our estates and trusts. A more streamlined method is now available. The IRS announced in IR 2003-77, that new identification numbers can be obtained directly from the IRS Web site. The online process eliminates the need to send paperwork to the IRS and the number is issued online. Go to <www.irs.gov>. Click on "Businesses," then click on "Employer I.D. Numbers" under the title "Topics". It seems to work pretty well.
Are attorneys subject to Gramm-Leach-Bliley Act?
The FTC has determined that lawyers are subject to the privacy provisions of the Gramm-Leach-Bliley Act, which requires certain disclosures to new clients and annual disclosures to continuing clients. The American Bar Association filed a federal suit challenging this determination. In a memo issued on July 1, 2003, the President of the ABA reported that the federal district court hearing the ABA suit indicated it would be releasing its opinion in mid July, but that the court was concerned about the July 1 deadline for filing annual privacy notices. The FTC has issued a letter stating that it will not bring an enforcement action against any lawyer for failure to comply with the notice provisions prior to the court's forthcoming decision. We will keep you advised.
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