Last month’s leak of a draft U.S. Supreme Court opinion that would overturn the constitutional right to abortion in most circumstances has led to the Court dominating the news yet again and serves as a reminder of the far-reaching consequences of the Supreme Court’s decisions. Although the handful of decisions on hot-button issues released by the Court every June frequently dominate the headlines and the public’s conception of what the Court does, it is important to remember that the Supreme Court also hands down numerous “under-the-radar” decisions that have far-reaching impacts on all areas of the law, including estate planning and elder law. As the month of June begins and the Court prepares to wrap up another term, I thought now would be a good time to showcase five Supreme Court decisions that have impacted estate planning and elder law.
- Nichols v. Eaton (1875): Considered by some legal scholars to be the most important trusts and estates opinion ever produced by the Supreme Court, it could be argued that this decision laid the foundation for modern estate planning. Decided nearly 150 years ago, this case validates the use of “spendthrift clauses” in trusts. A spendthrift clause prohibits the beneficiary(ies) of a trust from transferring their interest(s) in the trust to a third party, either voluntarily or involuntarily. While this prevents, e.g., an impatient beneficiary from selling their income interest in a trust in exchange for a lump sum, far more consequentially, it also prevents potential creditors (including those with valid claims) from accessing a beneficiary’s interest in the trust. This means that, so long as a beneficiary’s interest stays in the trust, their creditors will not be able to access it or benefit from it. In the wake of this decision, spendthrift clauses have become ubiquitous in modern estate plans, to the point that it is rare to see a modern trust that doesn’t contain a spendthrift clause. It is the validity and enforceability of spendthrift clauses that makes the use of lifetime continuing trusts increasingly popular and common in modern estate plans.
- United States v. Windsor (2013): It is a happy coincidence that the Supreme Court’s tradition of releasing opinions on hot-button issues in June has meant that several monumental decisions affecting LGBTQ rights have been issued during Pride Month, giving members of the LGBTQ community added reason to celebrate each June. Among those decisions was United States v. Windsor, which struck down the Defense of Marriage Act nearly a decade ago. Signed into law in 1996, among other things the Act defined “marriage” as between one man and one woman for purposes of federal law, meaning that even if a same-sex couple was legally married under the laws of their state, that marriage was not recognized by the federal government. As a result, married same-sex couples were unable to, e.g., file joint income tax returns, apply for survivor’s Social Security benefits upon the death of a spouse, take advantage of the more favorable asset limits for married couples applying for Medicaid long-term care benefits, or take advantage of the unlimited marital deduction for federal gift and estate taxes. This frequently resulted in estate and long-term care planning for same-sex married couples being more complicated and costly while still not always achieving the same outcomes that were possible for opposite-sex married couples. Fortunately, the Windsor decision more or less leveled the playing field for same-sex married couples, and recent actions by lower federal courts have attempted to remedy some of the wrongs suffered by same-sex married couples while the Act was in effect.
- Clark v. Rameker (2014): This case deals with creditor protections for tax-qualified retirement assets (e.g., 401(k)s, IRAs, etc.). While federal law has long protected these assets from the reach of creditors in bankruptcy proceedings, this case dealt with whether this protection extends beyond the original contributor to the plan to also cover beneficiaries who inherited these assets. The Supreme Court ultimately held that the creditor protection only applies to the original contributor and their surviving spouse, and not to inherited beneficiaries, ultimately changing the calculus for estate planners in terms of whether to name a trust or an individual as the beneficiary of such assets. By naming a lifetime continuing trust with a valid spendthrift clause as the beneficiary of these assets as opposed to an individual, it is possible to maintain creditor protection for these assets.
- Sveen v. Melin (2018): While it is undoubtedly best practice to update beneficiary designations after a divorce, for a variety of reasons this doesn’t always happen. As a result, many states, including Massachusetts, have enacted “revocation-upon-divorce” laws, which automatically revoke the designation of an ex-spouse as the beneficiary of, e.g., a life insurance policy. In 2018, the Supreme Court was asked to decide whether the Constitution permitted these laws to apply retroactively to beneficiary designations made prior to their enactment. While the Court ultimately held that these laws can apply retroactively, the protracted litigation in this case nonetheless highlights the importance of making sure to update your estate plan, including beneficiary designations, in the wake of major life changes such as divorce.
- North Carolina v. Kimberley Rice Kaestner 1992 Family Trust (2019): In the modern era, it is more common than ever for families to wind up spread out across the country. Gone are the days where multiple generations of a family can be counted on to live in the same town or even the same state. This makes it more likely that a trust will be created in one state, have a trustee in a different state, and have beneficiaries in one or more additional states. With the only constants in life being death and taxes, it is not surprising that all of these states might want to impose taxes on this one trust. Fortunately, the Supreme Court has taken notice of this and begun to establish guidelines for when states are constitutionally permitted to tax a trust. In 2019, the Court held that the mere fact that a discretionary beneficiary of a trust (i.e., a beneficiary who had no right to demand or force distributions from the trust) lives in a state is not sufficient to give that state the authority to tax the trust. Although this decision was fairly fact-specific, it nonetheless has provided some guidance to estate planners on the tax consequences of trusts that touch multiple states.
With the exception of the Windsor case, which was hotly contested and decided on a 5-4 basis with three rather vociferous dissenting opinions, none of the Supreme Court cases mentioned here were particularly controversial or headline-grabbing. In fact, most dealt with fairly technical issues of interpretation. Nonetheless, they should all serve as reminders that even “boring” decisions by the Supreme Court can have a far-reaching impact on the law.
Francis R. Mulé is a senior associate attorney with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement, and elder law matters. He is an active member, and the current Chair-Elect, of the Massachusetts Bar Association’s Young Lawyers Division. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020.
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