A Proposal to Save Property for Heirs of Decedents of Modest Wealth

Nov 29, 2024 Sergio ParejaAdd a Comment

Sergio Pareja

Although my law practice prior to entering academia focused on representing the uber wealthy, my recent interests focus more on preserving wealth in families of limited means. Professor Danaya Wright has written a thought-provoking article dealing with this issue.

Part I of Professor Wright’s article compares the stories of two decedents from Florida, Arthur Paulson and Mary Artis. Arthur and Mary’s stories highlight systemic inequalities in the preservation and transfer of wealth for working-class families. Arthur faced significant wealth erosion due to personal setbacks and economic downturns, but he was able to overcome some of those obstacles during life by tapping into his home equity by refinancing his home. In contrast, Mary never tapped into her home equity during life and thus managed to preserve substantial illiquid wealth, but the full value of her accumulated savings did not pass on to her heirs because they did not probate the property after Mary’s death. The latter outcome is unfortunate, but often happens because probate is viewed by laypersons as a complex and expensive legal process. Reforms like the Uniform Real Property Transfer on Death Act (URPTODA) and Uniform Partition of Heirs Property Act (UPHPA) improve the situation, but they do not fix the problem.

Part II of the article discusses the issue of “heirs property.” From the moment a person dies until property is re-titled in the name of beneficiaries, the decedent’s real estate is in heirs property status. As Professor Wright explains, this means that the owner of record is deceased, and the new owner has not received title to the property. This creates a legal state of limbo. Land left in this status is particularly vulnerable to loss through legal actions like tax sales or physical damage from natural disasters in the absence of insurance.

Part III of the article addresses ten barriers that prevent heirs from clearing title to real property by probating an ancestor’s estate, thereby prolonging heirs property status. Professor Wright proposes solutions in each of the ten situations.

First, she discusses the prevalence of oral agreements regarding property inheritance, particularly homes inherited by families of modest means. Many families operate under oral understandings about who will inherit what property after a parent’s death. Professor Wright suggests that while legal statutes typically require written evidence for property agreements, equitable principles like constructive trusts might justify honoring oral agreements in court, especially when injustice would otherwise result.

Second, Professor Wright discusses adverse possession and its application in property law, contrasting it with the rights of heirs to inherit property through the probate system. In particular, she criticizes the disparity between adverse possession and intestacy laws: strangers can gain title relatively quickly, while heirs in possession face restrictions such as a presumption that they aren’t adversarial towards co-heirs unless they explicitly oust them. Professor Wright proposes reforms, such as allowing heirs in possession to claim title against other heirs after a certain period of time.

Third, Professor Wright discusses marketable title acts and laws governing stale uses and reversions, which are legal mechanisms designed to simplify property ownership and promote marketability of land titles. These laws automatically terminate certain future interests in real estate, such as remainders and reversions, after a specified period if they are not properly re-recorded or challenged in court. Professor Wright suggests applying similar principles to simplify ownership disputes involving heirs property. She suggests that an heir should be able to obtain title to the land without opening a formal probate proceeding, such as by signing an affidavit as proof of uninterrupted possession, tax payment, and maintenance for a set period of time. Co-heirs would then have a limited time to challenge this title.

Fourth, Professor Wright discusses the complex relationship between property taxes and ownership rights. She highlights how payment of property taxes can create a sense of entitlement to ownership among heirs in possession. In many states, payments of property taxes are crucial for maintaining ownership because any delinquency can result in a tax sale. Professor Wright suggests that the heir in possession should inherit a larger share of the real property (i.e., corresponding to the heir’s proportional contribution of property tax payments), thereby incentivizing tax payments and reducing the risk of property loss from foreclosure.

Fifth, Professor Wright discusses statutes of limitation that apply to the probating of wills. She explains that while many states have statutes requiring wills to be probated within a certain timeframe after a decedent’s death, those statutes often do not adequately account for special considerations that apply in heirs property cases. Professor Wright proposes a selective application of statutes of limitations that cuts off claims only for will beneficiaries who have neglected responsibility for maintaining the property rather than penalizing those actively involved in the financial and physical upkeep of the home.

Sixth, Professor Wright focuses on the complexities and issues surrounding homestead protections. Certain states offer homestead protections that include property tax discounts and safeguards against forced sales and unsecured liens. However, these protections can be lost if heirs fail to promptly inform tax authorities of changes in property ownership. This oversight can lead to higher property taxes and penalties when the property is eventually probated. Professor Wright suggests simplifying the process of preserving and claiming homestead protections for heirs in possession who are paying taxes but have not yet probated the property.

Seventh, Professor Wright considers the issue of transmissible remainders, and, in particular, cases in which fractional ownership of real property has descended through the unprobated estates of multiple decedents (sometimes involving multiple generations and families). To simplify the untangling of titles in such cases, Professor Wright suggests that heirship should be determined at the time of distribution rather than at the time of the decedent’s death.

Eighth, Professor Wright focuses on the form of title that heirs must take under intestacy and the potential benefits of adopting joint tenancy as a default rule instead of tenancy in common. Under current laws in all states, when property passes by intestacy, heirs take title as tenants in common. Professor Wright argues that defaulting to joint tenancy could prevent further fractionation of inherited property because, upon the death of a joint tenant, their share automatically passes to the surviving joint tenant(s).

Ninth, Professor Wright emphasizes the need for reforms that streamline the notice process by using modern technology and administrative practices that help settle property titles efficiently while respecting the rights of all heirs involved. Her proposal aims to simplify the process for heirs to assert their rights without the necessity of hiring legal representation. This could include filing a claim directly with a property appraiser’s office or similar administrative body.

Tenth, Professor Wright questions the necessity of judicial supervision in probate administration and suggests streamlining the process by authorizing a simpler affidavit of heirship option. Most states have a summary administration process for small-value estates. However, many states exclude estates with real property from this simplified process. Professor Wright argues that states should consider expanding simplified procedures to include estates with real property.

Professor Wright concludes by advocating for reforms that enhance access to legal services, simplify probate procedures, and provide educational tools to empower heirs, all with the ultimate goal of facilitating the transfer of generational wealth more efficiently and equitably. She also proposes excellent model legislation that states could adopt to facilitate the orderly probate of real property for those estates in which the real property is the only asset requiring probate. Professor Wright has written an excellent, thought-provoking article.

Practical Considerations for State Taxation of Wealth

Nov 13, 2024 Kent D. SchenkelAdd a Comment

Kent D. Schenkel

Polls show that a majority of Americans believe that inequality is increasing, and that taxes should be raised on the very wealthy. But income tax rates on high earners remain historically low, and estate planning techniques that minimize the reach of federal transfer taxes proliferate. What about state-level taxation? Conventional wisdom holds that progressive state tax regimes backfire by triggering wealth flight to low-tax jurisdictions, leading many states to stick with regressive sales and property taxes. But the consequences of progressive state tax policy are misunderstood, and states have many options, write Brian Galle, David Gamage and Darien Shanske, in their comprehensive, informative and practical article, Money Moves: Taxing the Wealthy at the State Level.

The tax theory of “fiscal federalism” holds that only the federal government should impose progressive taxes to fund government benefits. Fiscal federalists argue that if individual states undertook to create progressive tax regimes, the wealthy would just relocate to other states, creating “horizontal externalities.” Therefore, the federal government has put in place its more progressive income tax, which enables it to return tax revenues to the states in the form of grants or other types of revenue sharing.

But according to Galle, et al., there is no empirical support for the view that progressive state-level taxation triggers migration to tax-friendly states. In fact, they write, it’s money that usually moves while taxpayers largely stay put. And anyway, fiscal systems should be “federalism neutral.” This occurs when “voters and businesses are indifferent to whether policies are funded at the national level or instead by state or local governments. That is, political players have no reason to think that they will pay more or pay less based on which government is imposing the tax.” But since the federal tax system is generally more progressive than that of the states, the wealthy favor tax policy devolving to states. It need not be this way.

What challenges do state lawmakers face when implementing progressive tax policy? The authors helpfully borrow the descriptive term “exploitive mobility” from Julie Roin. It refers to the jurisdictional flight of taxpayers or their money that allows them to “extract benefits from one jurisdiction while escaping the costs of providing those benefits.” Exploitive mobility violates the normative principle that “the jurisdiction in which wealth or income is accrued should have the priority claim of taxing that wealth or income.” The authors further break down exploitive mobility into “exploitive migration” (physical relocation of the taxpayer) and “exploitive money moves” (relocation of “money”).

Exploitive migration takes advantage of the well-known “realization rule,” which taxes the appreciation in the value of property only when the property is sold, and never before this “realization event.” So, a resident of State X, which has an income tax, acquires property and allows it to appreciate while living in state X, and enjoying the state’s benefits. The resident then moves to State Y, which has no income tax, and sells the property there (or dies holding it), escaping the costs imposed by State X.

To combat this technique, the authors advocate taxing the owner on the property’s periodic appreciation. The recommended approach, called a “mark-to-market” tax, requires the property owner to pay a tax on the value of any appreciation in the property that occurred during the tax period. A common criticism of a mark-to-market tax is that it is difficult to measure the value of many types of property in the absence of an arm’s-length sale. Ever practical, the authors have a proposal to deal with this problem. The taxpayer can give the taxing authorities an IOU rather than a cash payment. The IOU comes due when the asset is sold (or, presumably, when the taxpayer dies), and interest on the tax debt is due at the asset’s appreciation rate. The debt is secured by “notional equity,” a proportional non-voting share in the asset. As an added feature, the taxpayer can be required to consent to the state having jurisdiction to collect the tax liability in the future.

The authors also suggest a state-level wealth tax. Here again, they pay heed to the normative principle of assigning taxing authority to the jurisdiction where wealth accumulated. They point out that since wealth taxes are “backward-looking” (wealth is built up over a period of time and taxed periodically), residency for purpose of the tax should be “phased both in and out, symmetrically, over a period of multiple years. So, their wealth tax proposal includes something called “phased residency rules.” For example, a bill in the California legislature uses a four-year phase-in and phase-out period. New residents only have one-fourth of their wealth taxed in the first year, then half in the second year, then three-fourths, and then all. A migrant out would be taxed on three-fourths of their wealth in the year after their move, then one-half, and then one-fourth, with nothing thereafter. The authors also suggest that the phasing rules could be a default fallback to “equitable apportionment” rules, that would give the taxpayer or the government room to argue for lesser or greater apportionment than the default rules provide.

When the tax base is value, volatility can be a problem. To deal with this, the authors propose that while all gains should be treated as realized in every year, a percentage of them should be unrecognized. This spreads out fluctuating gains over time. They also propose making partial non-recognition elective. Taxpayers choosing to defer recognition would be required “to agree that they would continue to report and make payments on the unrecognized balance,” regardless of whether they remain in the state or migrate out. States that implement both wealth and mark-to-market reforms could also make the wealth tax payments creditable and refundable against the mark-to-market reforms.

What about exploitive money moves? As mentioned, taxpayers can, through a number of techniques, take advantage of low tax jurisdictions without physically relocating to those jurisdictions. Instead, they can move their “money” to these jurisdictions, which is often just the movement of records and paper. Although this problem seems less tractable, the authors have a number of ideas to combat it, but here I will mention just a few.

Money can be moved to trusts. Trusts are problematic because, as the authors note, they “replicate all the estate planning strategies offered by gifts, but with greater flexibility, and the benefit of generous IRS rulings that often allow for even better estate and gift tax results.” The Supreme Court, in a 2019 case called Kaestner, held that a state’s attempt to tax a trust based only on the fact that a discretionary trust beneficiary resides in the state violated due process. According to Kaestner, the beneficiary must have “some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset.” This case confirmed the presence of a large loophole through which taxpayers can slip, avoiding state taxation of wealth that sustains a currently discretionary trust beneficiary who benefits from state services. The settlor need only ensure that the trustee resides in a low or zero-income tax jurisdiction. The beneficiary can even borrow against the trust assets while avoiding state income taxes in the state of residency.

The authors point out that Kaestner seemed to approve of California’s “throw-back tax.” This tax applies “when a beneficiary ‘vests,’ or becomes entitled to, the trust assets.” Importantly, the tax includes an assessment “for any prior years when the beneficiary lived in California.” A loophole to this tax, however, is that the trust beneficiary must live in the jurisdiction in the year when the trust interest vests. “If the trust beneficiary moves to Nevada, vests, then moves back to California, there is no throwback.” Of course, from that point forward it would seem that the beneficiary could be taxed in California on the income generated by the vested trust interest.

They also present ideas for taxing “’nonqualified’ deferred compensation plans” that are not subject to the contribution limitations and nondiscrimination rules of “qualified plans,” and grant highly compensated employees “unlimited” deferral of taxes. They maintain that states can subject taxpayers to wealth taxes on amounts set aside under these plans. The phased residency scheme discussed above should also work here.

In this review, I have attempted to highlight just some of the suggestions in the authors’ box of “anti-avoidance tools,” that would serve to increase the progressivity of state taxes. They have clearly been working on these ideas for some time, and have even helped design legislation, pending in some states, using some of the techniques highlighted here. Given that constituents are calling for a response to increasing inequality by way of more progressive tax policy, their ideas are timely and constructive, and recommended reading for tax scholars and policymakers alike.

Unexpected Twists in the Modification of Charitable Trusts

Oct 25, 2024 Sarah WaldeckAdd a Comment

Sarah Waldeck

In Confusing Cy Près, Christopher J. Ryan, Jr. examines judicial decision-making in cases involving proposed modifications to charitable trusts. Two doctrines permit modification: equitable deviation and cy près. Ryan uses a comprehensive data set—over 1,300 cases between the years of 1820 and 2019—to explore when courts are likely to apply the doctrines and, critically, when courts confuse them. His research reveals that courts routinely use equitable deviation when they should use cy près and, tantalizingly, suggests that the Uniform Trust Code is at least partially responsible. Ryan’s empirical work also sheds light on when courts are most likely to modify charitable trusts.

Doctrinally, equitable deviation and cy près are straightforward. Equitable deviation allows a court to modify the administrative terms of a trust—what Ryan describes as “the little details of how [the trust] is run and controlled.” (P. 30.) Cy près allows a court to modify “the dispositive and material terms of the trust (i.e., the purpose of the trust, the charitable cause the trust addresses, and the delivery of the trust assets to the intended beneficiaries).” (P. 30.) Both doctrines require a change in circumstances that negatively affects the trust. For equitable deviation, the change in circumstances must impair the functioning of the trust in a way that threatens the trust’s very purpose. For cy près, the change in circumstances must make the trust’s specific purpose impracticable, impossible, or illegal, and the settlor must have manifested a charitable intent that is more general than the specific purpose that has become unsustainable.

Ryan’s central empirical inquiry is whether, from a doctrinal perspective, courts are correctly applying the doctrine—that is, whether courts are using equitable deviation to modify administrative terms and cy près to modify dispositive terms. (P. 51.) Modifying dispositive terms is much more significant than modifying administrative terms. When a court modifies the administrative terms of a trust (like, for example, the list of permitted investments), the modification furthers the trust’s purpose as articulated by the settlor. But dispositive terms are usually directly relevant to a trust’s raison d’être, so any modification supplants the trust’s specific purpose and replaces it with something new, thereby threatening dead hand control. Ryan’s concern is that if courts apply equitable deviation to dispositive trust provisions, they will change a trust’s purpose without grappling with the question at the heart of cy près: did the settlor have a charitable intent broader than the specific one articulated in the trust instrument, and, if so, can the trust be modified in a way that is consistent with that more general intent?

Ryan’s empirical results are discouraging to anyone who craves doctrinal consistency or is a stalwart for dead-head control. Ryan found that while courts tend not to make the mistake of applying cy près to administrative terms, they are far more likely to apply equitable deviation to dispositive provisions. (P. 69.) Moreover, with just a couple of exceptions, Ryan did not find reliable indicators of whether a court would confine its use of equitable deviation to administrative terms. Instead, Ryan found “no rhyme or reason to a court’s correct employment of the equitable deviation doctrine in any of the cases involving reversionary or gift over interest trusts; private purpose trusts; public purpose trusts; educational purpose trusts, medical purpose trusts; art, library, and museum trusts or religious purpose trusts.” (P. 69.) Ryan argues that this empirical finding “suggests considerable judicial confusion” about how and when the doctrine of equitable deviation ought to be used. (P. 69.)

Ryan deftly discusses how all three Restatements of Trusts contribute to this confusion by at times appearing to conflate equitable deviation and cy près. But the most intriguing part of his paper lays the blame squarely on the Uniform Trust Code (UTC). Ryan’s empirical analysis shows that in jurisdictions that have adopted the UTC, “the court was nearly half as likely to correctly apply cy près or deviation when the facts merited it, and more than twice as likely to get the decision wrong.” (P. 80.) Section 412 of the UTC allows judges to apply equitable deviation to the dispositive terms of a private (i.e. not charitable) trust. Section 412 may influence how judges apply equitable deviation in cases involving charitable trusts, particularly since the UTC does not clarify how Section 412 is distinct from cy près. (P. 42.)

Ryan argues that certainty in the traditional distinctions between equitable deviation and cy près promotes charitable giving. He writes that judicial confusion “is dangerous when considering the economy of charitable trust-making overall. Inconsistent case law may depress charitable trust-making if not corrected. Worse still, it may cause feelings of distrust of and illegitimacy in the court systems for donors, trustees, and beneficiaries.” (P. 92.) If judges fail to consistently apply cy près to dispositive provisions in charitable trusts and instead use equitable deviation, settlors may worry that courts will interfere with a trust’s underlying purpose and thereby thwart the settlor’s charitable intent. (P. 93.) This concern could depress charitable giving.

Beyond analysis of confusion about the application of cy près and equitable deviation, Ryan’s analysis provides information that is useful to prospective litigants and their lawyers. He finds, for example, that the presence of a gift over clause is highly predictive that a court will deny an application for cy près or deviation (Pp. 62-63) and that courts are far more likely to grant applications when a trust has an educational purpose, a medical purpose, and most especially a broad public charitable purpose. (P. 74.) Ryan’s data also suggests “a modest preference for modifying trusts as the passage of time renders a trust ineffectual.” (P. 75.)

Ryan’s assertion that certainty promotes charitable giving underscores the value of the kind of careful empirical analysis evident in Confusing Cy Près. As I read Ryan’s work, I thought about the many reasons settlors establish charitable trusts—including benevolence, a desire to signal and maintain social status, tax planning, and so forth—and wondered whether settlors with optimism bias may simply fail to contemplate that their trusts will ever need modification. I hope that in future work, Ryan uses his formidable empirical talents to shed light on the extent to which certainty about dead hand control promotes charitable giving. In the meantime, Ryan has provided insight into how the doctrines of equitable deviation and cy près play out in judicial decisions across all jurisdictions.

New Money: No Problem, No Tax

Oct 10, 2024 Phyllis C. Taite1 comment

Phyllis C. Taite

Professor Miranda Fleischer contributes to the wealth tax discourse by analyzing a taxation theory proposed a century ago by philosopher Eugenio Rignano: an inheritance tax imposed on old, unearned wealth. This inheritance tax would facilitate the goals of a wealth tax, including combating wealth concentration and providing greater tax preferences for earned wealth. Following a brief historical overview of transfer taxes and proposed alternatives, Fleischer analyzes the pros and cons of a wealth tax, suggests key design structures for implementation, and concludes with policy justifications in support of such a tax. This article stands out because Professor Fleischer proposes a comprehensive structural design for the tax and addresses key policy questions that would make a Rignano tax politically feasible and administratively workable.

In the overview, Professor Fleischer describes key features of the current transfer tax system, including the imposition of the tax on the donor, higher lifetime exemptions, and reduced rates. The effect of increasing exemptions is that fewer estates are required to pay the tax and more wealth is transferred tax-free. Further, the current tax design creates other avenues for the transfer of tax-free wealth such as the annual exclusion, even while recipients pay no income tax on gift and estate transfers, irrespective of their size. Fleischer discusses alternative proposals for taxing wealth such as imposing an income tax on gifts and bequests (subjecting them to similar tax rules applicable to lottery winnings), imposing a carryover basis in place of a stepped-up basis for purposes of the capital gains tax, and various other models such as inheritance and accession taxes.

Next, Fleischer evaluates the pros and cons of imposing a wealth tax. She describes the “liberal egalitarian” position as favoring a wealth tax to promote equality of opportunity, which may require equalization of resources and suppression of dynastic wealth which tends to produce disparate allocations of economic and political power. She describes how supporters of this position posit that the economic and political power flowing from dynastic wealth leads to still greater wealth inequality and threatens our democracy. On the other hand, she explains how opponents of a wealth tax argue that the redistribution of resources through the tax code is unfair, that inefficiencies of such a tax would discourage savings and investment, and that government should refrain from intruding into the sphere of private wealth.

Professor Fleischer then describes the psychological aspect of taxation and the importance of considering public perceptions of fairness. She discusses how policymakers should be mindful of the public perspective and the difficulties of explaining away concerns that differ from their own goals and ideals when definitions of tax fairness are not universal. For example, she discusses economist Steven Sheffrin’s concept of “folk justice,” loosely described as a perception of tax fairness that emphasizes reaping the benefits of earned wealth, while the academic perspective may instead emphasize curbing inequalities. She also describes how some opponents of the estate tax used the idea of folk justice to gain support for an estate tax repeal while supporters of the estate tax do not seem to have addressed ideas of folk justice in their campaign. This was an interesting part of the paper as she incorporated different perspectives and value systems in addressing tax fairness while showing conflicting and contradictory viewpoints from survey data.

As Professor Fleischer explains, a Rignano tax would differ from the current transfer tax system because it would shift the tax burden from the donor estate to the recipient’s estate  by allowing tax-free transfers for bequests of earned wealth. Only previously inherited wealth would be taxed through an estate. For example, the first taxpayer’s earned wealth would  transfer tax-free to the second generation. When that inherited wealth passed from the second generation to the third, all the unearned wealth would be taxed at a 40% rate. Any earned wealth by the second generation person would still transfer tax-free.. The next beneficiary’s estate, making a third transfer, would be taxed at a 100% rate under the original version of the Rignano tax.

This method of taxation would allow the greatest tax preference for earned wealth by imposing the entire tax burden on subsequent transfers of inherited wealth. Fleischer argues this method of taxation could serve as a compromise between opponents of wealth taxes (who would likely support tax-free transfers of earned wealth) and the “liberal egalitarians” (who would likely support a substantially increased tax on unearned wealth to address economic inequality and wealth concentration). Because both sides gain a little of what they want, this middle ground might be politically feasible and gain public support. Fleischer adopts the model but proposes a 40% estate tax rate on transfers of unearned wealth. She then proposes a model design.

The tax structure must be designed to support these goals of protecting earned wealth and addressing inequalities. Professor Fleischer proposes the ideal structure for implementing a Rignano tax comprised of the following elements: “(1) the base; (2) rates; (3) valuation; (4) frequency; (5) tracing; (6) transfers in trust; and (7) transition rules.” Here, she explores whether the base should focus on receipts or transfers by considering the psychological aspects, equality of opportunity, impact on wealth concentration, and ability to pay. She also examines lifetime and annual exclusion amounts to consider the psychological need to provide for family members as well as tax enforcement considerations.

The question of frequency is especially important because estate planners could easily develop expedients to avoid taxation and thus undermine the whole system. Professor Fleischer recognizes the design would need countermeasures to address skip transfers and to capture taxes at the right intervals; therefore, she suggests rules that mirror the existing generation-skipping transfer tax system. The most difficult parts of the structure lie in the valuation and tracing. Without an accurate method to trace inherited property, valuation would be moot. She acknowledges the challenges with valuation because asset values do not remain static, especially if held for long time periods. She proposes a model that considers the beneficiary’s choice about property management, property value fluctuation, and rate of return. In doing so, she proposes an imputed risk-free rate-of-return model that considers the impact of risk and choice.

Closely related, and the most difficult part of administering a Rignano tax, is tracing. To accurately impose the tax on the second and third transfers, the property must be identifiable and traceable. Tracing would require accurate record-keeping and cooperation by taxpayers, but the tax commissioner should not rely solely on voluntary compliance. Professor Fleischer proposes a model that would incorporate the first-in-time rule, similar to the current lifetime exemption process for reporting taxable gifts. Further, like other tax elections, she proposes the estate tax return should have an election, like the existing spousal portability rule, for applying the first-generation exemption and using a will or other document that identifies the property included in the exemption.

This article offers a fascinating contribution to the wealth tax debate while suggesting a practical solution for reform. Professor Fleischer’s proposals provide sufficient details to guide political leaders to implement a Rignano-style tax and give the policy justifications to enrich the intellectual debate of the real issues at stake, raising revenue and addressing inequalities. This article is timely, as we are on the precipice of major tax changes in estate and gift taxes in the coming year.

“He’s Dead, Jim” or Not?

Sep 11, 2024 Gerry W. BeyerAdd a Comment

Gerry W. Beyer

How does one define death, and to what extent can we confidently say someone is dead enough? The answer to this question varies among our jurisdictions. Before initiating the administration of a deceased person’s estate, the primary question is whether the individual is deceased. Despite the existence of the Uniform Determination of Death Act, there are notable differences among states regarding the indicia of death, leading to the possibility of someone being declared legally dead in one state but considered alive in another state. The challenge of determining death is further complicated when considering how conflicting simultaneous death statutes may apply to potential beneficiaries. In this thought-provoking piece, Prof. Alyssa DiRusso delves into the intricacies of determining legal death by highlighting the challenges posed by advancements in medical technology and the inconsistencies in state laws. Prof. DiRusso proposes two possible solutions to create a clear and consistent standard for determining death: the domicile rule and the decedent situs rule.

Historically, the determination of death was straightforward, with doctors relying on physical signs like pulse, breath, and fixed pupils. However, history showed enough misjudgments to create a market for air tubes in coffins…just in case. Before the twelfth century, death was considered to be the “cessation of all vital functions and signs.” Medical advances challenged this, as respirators allowed cardiorespiratory activity even after irreversible brain damage. Further, organ transplantation complicated the definition as organ donors needed to be dead but not too dead to preserve organ function.

In 1968, the Harvard Medical School proposed accepting irreversible loss of brain function as an alternative to traditional cardiorespiratory cessation. While most states eventually recognized brain death, inconsistencies led the Uniform Law Commission to promulgate the 1978 Uniform Determination of Death Act (UDAA).

The UDAA provides that an individual who has sustained either (1) the irreversible cessation of cardiopulmonary activity or (2) the irreversible cessation of all brain activity is dead. Despite widespread adoption, states have modified UDDA’s language, resulting in non-uniform rules. For example, while most states incorporate irreversible cessation of circulatory and respiratory functions, Arizona and North Carolina exclude it. Moreover, the issue of how to handle brain death has become highly controversial, with varying approaches adopted across the United States. Different state laws complicate the matter in that doctors in some jurisdictions cannot determine brain death without family consent. Other state laws give substantial deference to religious beliefs, and personal or cultural objections which can all influence the determination of death.

Prof. DiRusso highlights the issues that may arise by recounting the tragic case of Jahi McMath. Following routine surgery in her home state of California, Jahi was pronounced brain dead. Jahi’s parents faced years of legal challenges as California adhered to its version of the UDAA, allowing a “reasonable brief period of accommodation” before withdrawing life support. Jahi’s parents, seeking more discretion, moved her to New Jersey, where laws permitted greater flexibility in medical decisions for individuals without brain function. This relocation created a five-year discrepancy in the declaration of death between California and New Jersey, leading to additional disputes with the IRS regarding income tax claims for a deceased dependent. While we lack clarity in determining death, our existing system enables a grim form of forum shopping.

DiRusso explores another layer of complexity: how simultaneous death statutes address conflicts of law and the resulting legal implications for inheritance and property distribution. Whether a beneficiary has survived the benefactor varies among states and can lead to confusing results. Further, this confusion is compounded if decedents specify a different survivorship standard in their estate planning documents, adding another dimension to a tricky situation.

The impact of these conflicts of law extends beyond the realm of determining death and property distribution. The confusion surrounding these issues affects not only those administering an estate but also a wider spectrum of entities, including creditors, life and health insurance companies, hospitals and health care providers, tax authorities, and others. Prof. DiRusso proposes two potential solutions to resolve these conflicts: the domicile rule and the decedent situs rule. She clearly explains the benefits and drawbacks of each and ultimately endorses the decedent situs rule.

First, the domicile rule proposes determining death based on the legal residence of the deceased individual. This approach provides familiarity as it is the standard law for other provisions relating to a decedent’s estate and, thus, more comfortable and harmonious for courts to apply. Additionally, this rule eliminates the possibility that interested parties will relocate bodies to alter the legal recognition of death. However, the domicile rule could prove administratively impractical, particularly in situations where a hospital is unaware of a patient’s domicile.

Second, the decedent situs rule suggests determining death based on the location of the body at the time of the determination. The main strength of this option lies in its administrative feasibility, as the physical location of the body arguably has the strongest relevance in establishing whether someone has died there. At the same time, the situs rule increases the risk that interested parties will move a person on the precipice of death to change the applicable state laws. Furthermore, this approach raises concerns about potentially infringing upon a state’s right to determine the death of its own citizens.

Prof. DiRusso prioritizes administrative feasibility as a critical factor in her analysis, which leads her to ultimately support the decedent situs rule. In her comprehensive examination, she recommends integrating this rule into key initiatives underway, including the revised Restatement of Conflict of Laws and the Uniform Law Commission’s Conflict of Laws in Trusts and Estates Act. As these drafts remain works in progress, she also offers recommendations for existing acts, including reforming the Uniform Determination of Death Act, the Uniform Probate Code, and the Uniform Simultaneous Death Act. Through these recommendations, she maps out a comprehensive path forward that ensures predictable and reasonable outcomes.

As rightly pointed out by Prof. DiRusso, the complexities arising from the ambiguity in end-of-life matters are good problems to have. The remarkable achievements in medicine, such as the successful transplant of a genetically modified pig heart enabling a patient to restart cardiac activity, are truly astounding. As medical advances create more uncertainty, Prof. DiRusso emphasizes the pressing need for clear conflict of law jurisprudence to establish the governing state law in determining death. I value the clarity in her analysis, the evaluation of the advantages and disadvantages of her proposals, and the thorough recommendations on implementing the decedent situs rule in upcoming legal revisions. Prof. DiRusso offers a valuable examination of this critical conflict of laws issue and the urgent need to confidently answer the question: Is he dead?

[Special thanks for the outstanding assistance of Julia Koert, J.D. Candidate May 2024, Texas Tech University School of Law, in preparing this review.]

The Wealth Planning Climate

Aug 2, 2024 Allison Anna TaitAdd a Comment

Allison Anna Tait

Climate change and environmental justice are topics that thread through and are pushing the boundaries of legal inquiry in multiple doctrinal areas. From reproductive justice to corporate investing, environmental concerns have emerged as both salient and pressing. One subject area still awaiting robust exploration of the relationship between environmental concerns and legal rules is inheritance law. This lack of energetic conversation about the environment and estate planning might be, on the one hand, surprising. Estate planning is all about the future and provisioning future generations. On the other hand, it is perhaps not a complete surprise since estate planning tends to focus on the preservation of private family wealth rather than the creation of extended public benefit.

Given the need for increased scholarly attention to this area, it is encouraging to see two short pieces about environmental justice and estate planning in the Fall 2023 volume of the ACTEC Law Journal dedicated to a critical analysis of inequality in the field. The first of the two articles is Trace Brooks’ article, Incorporating Social Justice and Environmental Sustainability into Estate Planning Through Conservation Easements. In the article, Brooks explores “the intersection of estate planning, private land conservation, social justice, and environmental sustainability,” and discusses ways in which conservation easements have been used both to entrench and erode inequality. Conservation easements, in which a landowner donates an easement to a conservation organization (think a land trust or even the government) in exchange for a tax deduction, have historically been a tool for wealth preservation and obtaining tax advantages. So, while these kinds of easements provide environmental benefit by restricting development and preserving the land, they have also comprised a mechanism for consolidating and increasing family wealth, particularly for white families and communities, and particularly for those who can afford homes and land in desirable geographies. The existence and effects of this trend in high-wealth locales have been compellingly documented and explored by sociologists like Justin Farrell in Billionaire Wilderness and Lisa Sun-Hee Park and David Pellow in The Slums of Aspen.

Brooks pays heed to the use of conservation easements in “perpetuating existing social and economic disparities and limiting public access to protected lands.” And he reminds us that conservation easements can exacerbate wealth inequality in a number of ways: by taking land out of public use, since there is no public access requirement for the donated land/easement; by potentially decreasing tax revenue through the grant of tax deductions; and by favoring families and individuals who “tend to be concentrated in rural and suburban areas” where land suitable for donation is more likely to be found.

Nevertheless, Brooks argues, estate planning “has emerged as a powerful tool for promoting both social justice and environmental sustainability.” In particular, conservation easements can “incorporat[e] social justice and environmental sustainability objectives into estate planning” when donors pick collaborative partners with care, selecting organizations that demonstrate commitment to the same sustainability and access goals, and when they draft conservation easements with precise and measurable goals in mind. Going forward, Brooks notes that “commonly suggested changes include greater public participation in easement formation and enforcement, creation of a national easement database, changing the tax incentive structure, and expanding the use of easements in urban areas.”

As a coda, Brooks adds that estate planners “play a pivotal role” in facilitating conservation easements that are meant to promote environmental justice and increase social equality. With this thought, he previews the central argument of Carla Spivack’s article, Estate Planning for the Apocalypse, which appears in the same volume. Spivack, speaking more pointedly to both the present devastation wrought by climate change and the future catastrophe that it threatens, prefaces her article by noting that “[n]one of us can any longer ignore the fact that …the present involves climate change [and] the future involves more or less devastating effects of climate change depending on what we do now.” Like Brooks, she also observes that estate planning has conventionally served wealthier families and that conventional inheritance practices have not only served the wealthy but have been a factor in creating and maintaining wealth inequality—as well as environmental injustice.

Accordingly, estate planning for the apocalypse requires not only recognizing that “the fate of the wealthy and the poor are intertwined in the climate crisis,” but also that estate planners will have work to do on both ends of the wealth spectrum in order to mitigate the worst harms of climate change. On the low-income end of the spectrum, Spivack recommends increasing the prevalence of planning to reduce high intestacy rates. High intestacy rates, which are particularly common in Black and Indigenous communities, render members of these communities “less likely to have secure title to their homes and to accomplish successful intergenerational wealth transfer.” This lack of secure title subsequently increases the potential harms of climate change because “[i]nsecure title can be disastrous in a time of weather catastrophe. Spivack notes that, because of clouded title, many low-income families cannot qualify for government recovery aid and loans after severe weather events like Katrina in New Orleans and Hurricanes Rita and Dolly in Texas. For these reasons, Spivack supports efforts on the part of ACTEC and other estate planning organizations “to bring property transfer services to underserved communities, including funding of state bar pro bono work and committees to work for reforms in the laws of probate and intestacy that currently disadvantage the poor.”

While access to estate planning must increase for low-income families and individuals, and especially in minority and minoritized communities, at the other end of the spectrum, estate planning for the rich must also change. The lifestyles of high-wealth families are responsible for generating an outsized share of environmental harms. Spivack reminds us that “the richest one percent will emit thirty times more carbon emissions than the rest of the globe by 2030” through the use of private jets and super-yachts, among other things. Moreover, the consequences of high-wealth investing – “investment emissions” – are substantial. One Oxfam report states: “the annual carbon footprint of the investments of just 125 of the world’s richest billionaires in our sample is equivalent to the carbon emissions of France, a nation of 67 million people.” Nonetheless, while ultra-rich families and individuals are the largest creators of environmental harms, those who suffer most from are low-income families who are vulnerable to the most severe and immediate effects of climate change.

To address these problems from the perspective of estate planning, Spivack proposes several things: a public statement from ACTEC about the need for climate conscious lawyering in estate planning, including guidelines about what such lawyering would look like, and establishing an ACTEC working group to develop a plan for “Climate Conscious Estate Planning.” Some concrete steps might include explaining the implications of different kinds of investments for reaching climate goals when drafting trust investment guidelines or publishing tips to help attorneys advise clients about the climate related consequences of their retirement plans and ways to reduce their carbon footprint.

That both of these articles turn our collective attention as scholars and estate planners to the conjoined questions of climate change and environmental justice is a welcome push in the right direction. Few things are more directly tied to environmental harm and injustice than the exercise of elite family privilege and management of elite family wealth, and few legal fields are more embedded in the work of shaping legacies and stewarding resources for future generations. The question then becomes, as these two authors point out, how personal legacy planning can productively combine with public environmental planning.

For another review of Estate Planning for the Apocalypse see Victoria J. Haneman, Climate Conscious Advocacy and Perpetual Burdens, JOTWELL (August 2, 2024).

Climate Conscious Advocacy and Perpetual Burdens

Aug 2, 2024 Victoria J. HanemanAdd a Comment

Victoria J. Haneman

A billionaire invests in human cryopreservation so that his head may be preserved in hopes of his entire person being revived later. His head, and his favorite dog, will be preserved at minus 320 degrees Fahrenheit in a cylindrical tank filled with liquid nitrogen in the hopes that the advanced medical technology of the future will allow for their reanimation. And no, the technology does not currently exist to reanimate a cryogenically preserved human or dog, but cryogenics companies are optimistic that it will be possible in the future.

As part of his revival plan, the billionaire consults with an estate planning attorney. He would like a perpetual trust to be established in the state of South Dakota, so that he and his dog need not be poor in the future. The perpetual trust can shelter a large chunk of money (often transfer tax-free) for centuries, in relative secrecy. Because of the climate crisis, our unfrozen billionaire may awaken to find himself in a world without Greenland or Antarctica. Important megacities will be gone, including New York City, London, Shanghai, Mumbai, and Bangkok, and so he needs to buy a new house. Or two.

Planning for immortality in a bleak apocalyptic future has become big business for an unknown number of billionaires who also appreciate the importance of maintaining status as a “have” (instead of a “have not”). This billionaire hypothetical (which may not actually be hypothetical—I will leave it to you to figure out) raises a myriad of rarely discussed ethical issues for both estate planners and legislators. Estate Planning Ethics for the Apocalypse, by Carla Spivack, published in 2023 in the ACTEC Journal, seeks to open this important conversation.

Spivack centers the issue of climate conscious lawyering (or a legal practice that takes into account the impact of the law and legal processes on the environment, usually with an eye towards sustainability for estate planners: “Worst case scenarios envision the collapse of society, a Hobbesian war of all against all. The Trusts and Estates Bar is uniquely positioned to intervene at both ends of the wealth spectrum to alleviate the worst outcomes of climate change that are intertwined with wealth inequality.” We exist in a time when this conversation is particularly relevant. A clean, healthy, and sustainable environment was acknowledged as a basic human right by UN Human Rights Council resolution 48/13 in October 2021, and recognized by the United Nations in July 2022. In March 2023, the American Bar Association partnered with many other bar associations at the Conference of the Parties to the U.N. Framework Convention on Climate Change to encourage climate conscious lawyering.

Climate conscious lawyering is truly about empathy, compassion, and prioritizing the needs of the larger community over the individual. It is about community mindfulness of wastefulness that may eventually lead to scarcity and hardship. And yet, there is an obvious tension for estate planners, with higher net worth clients largely focused on intergenerational asset protection and preservation. Strategic estate planning for wealthy clients in times of social and political turmoil, and climate catastrophe, with uncertainty as to what tomorrow will hold, is essentially a game of resource hoarding.

Attorneys must understand the risk associated with trust investments and the possibility of insurance to protect against downside exposure. By the same token, estate planners have been engaging with the foreseeability of climate catastrophe for some time. Prof. Spivack’s article takes this a step further, however, to ask whether it is time for lawyers to reconsider the ethics of dispensing advice that costs the environment and society too much. Does advice to engage in “lawful but awful” behavior matter in the context of climate conscious lawyering? For the wealthy but eccentric client who wants to establish a trust to protect their frozen head, construct oceangoing floating cities, build The Clock of the Long Now, clone a dinosaur, or manage the Repository for Germinal Choice, perhaps it is the job of the climate conscious lawyer to explain the way in which these projects either contribute to man-made climate destabilization or are the product of the same willful blindness that has landed us in our present position. Or perhaps it is not the role of the attorney to do so: “With respect to the super wealthy, does climate conscious lawyering require a harder conversation about personal consumption? Who’s going to tell Jeff Bezos he can’t have his rocket?”

Estate Planning Ethics for the Apocalypse will also hopefully spark a conversation about the role of perpetual trusts in our uncertain future. The powerful wealth transfer tool known as the perpetual or dynasty trust is designed to pass property down from one generation to the next, with the goal of operating indefinitely. The NFP 2020 Dynasty Trust Rankings rates twelve states as desirable perpetual trust jurisdictions—only possible because of a statutory Rule Against Perpetuities exceeding 110 years (in contrast with the common law’s limitation of unvested property rights to a life-in-being plus 21 years). Climate change raises important questions about perpetual restraints on, or accumulation of, property that have already been raised in the context of perpetual conservation easements. Just as conservation easements allow current generations to perpetually define land use in a way that burdens future generations, perpetual trusts are arguably a form of fiscal conservation that burdens both beneficiary and community. Climate change will require flexible and resilient systems to facilitate adaptive responses, and perpetual structures such as trusts and easements lock in one person’s preference under current conditions without accounting for inevitable change.

For another review of Estate Planning for the Apocalypse see Allison Tait, The Wealth Planning Climate, JOTWELL (August 2, 2024).

Cultural Lessons for Estate Planners

Jul 4, 2024 Goldburn MaynardAdd a Comment

Goldburn Maynard

Culture plays a major role in estate planning, whether we like it or not. Whereas the law of wills and trusts allows for vast testamentary freedom, millions of Americans, either because they want to avoid talking about death or because they do not have the resources to hire an estate planner, fail to avail themselves of these instruments. Some of the gaps have been filled by other nonprobate transfers like joint bank accounts and life insurance. A simple signature allows one to pass on assets at death using those forms of transfer. But outside of trusts, these nonprobate transfers do not cover all property and do not provide the flexibility of a will. The gap between what the testator wants and what society provides is particularly important if cultural norms prevent the individual from engaging in planning. In a recent article, Shui Sum Lau, a litigation attorney, considers how Asian cultural values can shape end-of-life and estate planning decisions.

According to Lau, Asian cultural values make Asian Americans the ethnic group most likely to support elderly relatives. For example, many Asian-Americans feel compelled to ensure the physical and mental wellbeing of their parents. Because elder care requires time and resources, we can assume that end-of-life planning would at least lower some of the decisionmaking burdens in these delicate circumstances. After all, deciding on life-saving care close to the end of a relative’s life can be extremely stressful for family members. Unfortunately, as Lau underscores, in many Asian cultures, discussions of death are taboo and often avoided, thus leaving children to make uncomfortable decisions on their incapacitated parents’ behalf because they refused to plan in advance.

This refusal to plan has the ironic result of leaving elderly Asian Americans and their families at the mercy of policies designed for the average American. These rules are not at all sensitive to the needs of specific cultures. The background intestacy rules are just as important as wills and trusts in our succession system because so many Americans die without an estate plan. Those background rules are designed to carry out the probable intent of the testator. They not only operate during intestacy but also influence the interpretation of testamentary dispositions because they can fill gaps brought about by ambiguities and imprecise language in wills and trusts. Thus, a refusal to plan is also an invitation for best guesses to be imported from society at large.

The background rules have always reflected cultural normative judgments, including who should take precedence in cases of intestacy, what percentage a spouse and children should receive from a deceased spouse’s or parent’s estate, and whether individuals should be disinherited in cases of ambiguity. It is often difficult to ascertain what the typical American would want in these cases. Traditionally, surveys and studies fill in some of these gaps. Yet these generalized results will always fall short, given the diversity of the nation. For example, some cultures might treat stepchildren the same as biological children while others do not. Thus, the decision of a jurisdiction in one direction or another will not track the wishes of substantial minorities of Americans. This can be a particular problem for Asian cultures that do not split inheritance evenly or that may even favor sons over daughters, preferences that do not correspond with the laws of U.S. states.

End-of-life and estate planning offer opportunities for ethnic minorities to die and dispose of property in ways that are culturally appropriate, but this is impossible if the culture is working against such planning. As such, there is potential for a closer alignment between what cultural minorities desire and what actually happens, but only if this task is approached in a careful manner. Lau suggests that communication and style matter, especially for older Asian Americans. Death might not be a topic that can be discussed forthrightly. Indirect ways of accessing such information are thus crucial. Overall, Lau highlights a greater need for cultural competency amongst attorneys and financial planners seeking to serve this community, while underscoring the need for further research around cultural influence in end-of-life and estate planning.

Revisiting the Law of Charitable Transfers

Jun 10, 2024 Adam HirschAdd a Comment

Adam Hirsch

As Justice Holmes observed, lawmaking consists in drawing lines.¹ But how many lines do we need? Regarding charitable transfers, more than we have—so contends Professor Eric Kades, in a recent article.

Kades begins by observing a fundamental point that we often take for granted: as a legal category, charitability is monolithic. A transfer either is or is not charitable. Hence, an income tax deduction is either available or unavailable, depending on whether the tax commissioner acknowledges an entity or purpose as charitable. Although the exact range of purposes accepted as charitable varies among American states, and is defined independently under federal law for tax purposes, the binary nature of the classification is universal.

Kades argues that this attribute, resulting in either a 100% tax deduction or no deduction, is oversimplified. The deduction should instead fall along a continuum, depending on whether the transfer is “more or less charitable.” (P. 288.) Yet, under current law, “someone donating, say, $10,000 to a local food bank receives no greater deduction than someone donating the same amount to the National Mustard Museum.” (P. 302.)

Kades proceeds to explore the public policy of the charitable deduction. He concludes that a number of alternative utilities flow from charitable transfers, justifying their encouragement: (1) they may furnish public goods from which citizens collectively benefit (such as clean air), but which individuals would not contract for, given opportunities for free-riding; (2) they may redistribute resources in a manner that enhances fairness; (3) they may foster pluralism by floating or testing controversial ideas or policies; and (4) they may provide public benefits more efficiently or creatively than could a government bureaucracy. These incommensurable utilities can be valued differently, and—to make matters more complicated—each of them on its own falls along a continuum. Different transfers may furnish varying amounts of the relevant benefit.

In theory, then, the only justification for the all-or-nothing charitable deduction is simplicity (with its attendant conveniences). But, in an elegant application of the central-limit theorem, Kades demonstrates that the distribution of public benefits flowing from charitable transfers is bound to fall along a normal (i.e., bell-shaped) curve. Accordingly, the error costs of an all-or-nothing rule are likely to be high.

Kades proposes a framework for implementing a graduated charitable deduction intended to diminish the costs of the all-or-nothing system “without imposing excessive administrative costs.” (P. 328.) Rather than assess the deduction percentage on a donation-by-donation basis—the ideal, but also most costly, solution—Kades suggests a tiered approach. The tax commissioner would assign different charitable entities to different deduction categories, possibly informed by evidence the entities submit in their applications for tax-exempt status.

In this connection, Kades notably takes aim at core religious services, which deliver neither public goods, nor fairness, nor bureaucratic efficiency. They do advance pluralism—but to serve this end, the deduction would have to disfavor large, established churches as opposed to novel, non-traditional ones. Kades concludes that, in the context of religious contributions, current law provides “a deduction in search of a theory.” (P. 317.) Or, we might say, this branch of the deduction stems from politics, not theory. Yet, Kades is unafraid to propose eliminating the deduction for religious services that provide no secondary benefits, such as poor relief. (P. 332.)

Kades appreciates the practical difficulties inherent even in a tiered tax deduction for charitable transfers. For such a system to operate effectively, the tax commissioner would have to sub-categorize entities, such as museums of broad interest to the public versus ones that attract few visitors. Still, the resulting structure would be “much less complicated than a number of current tax code provisions.” (P. 334.) Furthermore, Kades contends that the structure he proposes “is well within the regulatory capacity of the IRS and would not add any complexity to taxpayers’ preparation of their annual returns.” (P. 334.)

These points are debatable. Taxpayers bear costs apart from those associated with complexity (which do appear nominal here) when preparing their returns. They also face information costs, which will rise if taxpayers must investigate nonuniform deductions when contemplating choices between alternative charitable contributions.

In addition, Kades’s analysis is confined to the income tax deduction. He does not factor the estate tax deduction into his analysis. Testamentary philanthropy often takes the form of charitable trusts, and these can vary quite a bit in their exact terms and purposes. Pigeonholing them into discrete categories might prove a greater challenge for the tax commissioner, adding to administrative costs. Moreover, the information costs borne by taxpayers would balloon in this context. Presumably, testators would want to know a priori how much of an estate tax deduction a unique charitable trust would garner—a matter that might require research into precedents, once they accumulate, or perhaps a request for a private letter ruling.

Even limiting the problem to taxation could be viewed as too narrow. The charitable deduction is just one of a farrago of rules applicable to charitable transfers and trusts whereby lawmakers grant them favorable status—the immunity of charitable trusts from the rule against perpetuities and the related rule against perpetual purpose trusts, the waiver of charitable trusts from the definite-beneficiaries requirement, their exclusive eligibility for revision under the cy pres doctrine, the enforceability of promises to make charitable gifts, known as charitable subscriptions, despite the absence of consideration or detrimental reliance, and so on.

Should those rules as well become subject to refinement, depending on the utility of the charitable purpose at issue? Several of the non-tax rules themselves take a binary form and thus (barring radical reformulation) appear incapable of operating along a continuum. A charitable trust is either eligible for modification under the cy pres doctrine or it is not, a promise is either enforceable as a charitable subscription or it is not. But rules regarding trust duration are more flexible. Under current law, all charitable trusts can continue in perpetuity. A graduated law of charitability could permit charitable trusts to endure for varying lengths of time. Would that make sense as a matter of public policy under Kades’s framework? Food for thought—or perhaps for a follow-up article.

None of this is intended as criticism. The best scholarship inspires further thought and interest. Published in a relatively obscure journal, this superb article has escaped notice thus far. Commentators have yet to discuss, or even to cite, Kades’s piece or the ideas he has developed.

This work merits attention.

1. See Oliver Wendel Holmes, Jr., Law in Science and Science in Law, 12 Harv. L. Rev. 443, 456–57 (1899).

Towards Tax and Racial and Equal Justice

May 22, 2024 Michael YuAdd a Comment

Michael Yu

In their article, Professors Goldburn Maynard and David Gamage call for reform of the U.S. tax system, specifically identifying the phenomenon of “wage enslavement” and then arguing that it is a “central injustice of our tax system.” (P. 691.) Professors Maynard and Gamage argue that the problem of wage enslavement should be recognized as central to the pursuit of tax justice and to the “deeply connected” pursuit of racial justice, and they further contend that only by addressing wage enslavement “can we effectively promote a more just future of shared prosperity for all Americans.” (P. 692.)

What is “wage enslavement”? The term, as Professors Maynard and Gamage use it, refers to the means whereby the existing tax system (“‘by heavily taxing wage and salary incomes, and only lightly taxing the returns to owning wealth'”) inhibits historically disadvantaged groups from building wealth or from catching up with historically more privileged groups. Such inhibiting effects then trap many members of historically disadvantaged groups into a cycle of dependence on tax-disfavored wage and salary incomes because of the difficulty they encounter in earning enough wages to cover all living expenses and, further, in starting to build wealth. (Pp. 666-67.) The Professors clarify, “Of course, by calling this phenomenon “wage enslavement,” we do not mean to imply that this is an injustice at anywhere near the level of true, literal slavery.” (P. 667.)² 

Before fully addressing wage enslavement, Professors Maynard and Gamage discuss the racial wealth gap in the U.S. as well as how wealth differs from income and why it matters. As it is used in this article, the term “wealth” is defined as “an individual’s economic assets or net worth” and can be measured as an “individual’s assets minus his or her debts.” (P. 668.) “Income,” in contrast, refers to “the flow of dollars over a period of time.” (P. 669.) According to a 2019 Survey of Consumer Finances, the total racial wealth gap is $10.14 trillion—white families have median wealth of $188,200 and mean wealth of $983,400, and black families have median wealth of $24,100 and mean wealth of $142,500. (P. 671.) The income gap is “not as profound as the wealth gap” (P. 672), and the wealth gap has grown over the past three decades (P. 673.)

Professors Maynard and Gamage address certain “supposedly neutral factors that are sometimes offered to explain the size of the racial wealth gap.” (P. 674.) Space constraints preclude a full discussion of those factors, but suffice it to say that the Professors find that those factors (consumption patterns and savings, income, education, asset holdings, the birth lottery, and economic stratification) provide only “partial explanations” for the racial wealth gap. (Pp. 674-79.) Professors Maynard and Gamage contend that, instead, “historical (and some ongoing) discriminatory public policies and governmental practices are a primary cause of the current racial wealth gap.” (P. 674.) Again, space constraints prevent a full discussion of those policies and practices, but the Professors persuasively argue that (1) slavery, Jim Crow, and their legacies (such as the Freemen’s Bureau bills and the Homestead Acts) and (2) discriminatory policies and racial bias in the delivery of aid (including by the Federal Housing Administration and under the G.I. Bill) all played “at least a substantial role in creating and exacerbating the racial wealth gap.” (Pp. 681-84.)

Wage enslavement, as discussed above, is the Professors’ term for the phenomenon under the existing tax system in which wage and salary income is taxed heavily while capital is taxed less heavily, thereby making it difficult for those who are dependent upon wage and salary income (and who have little or no capital) to earn enough to begin saving and building wealth and capital. Professors Maynard and Gamage first address how the tax system favors historically advantaged groups (those with wealth and capital) through the step-up in basis rule at death (here, dear readers, is the trusts and estates angle to this jot). Unfortunately, historically disadvantaged groups (those with little or no wealth or capital) cannot engage in the strategy often called “buy, borrow, and die” (along with its variants), which involves (1) buying assets and holding them as they appreciate in value, (2) borrowing against the appreciated value of the asset (to pay for living expenses or to engage in further investing), and (3) dying with an estate plan that will, among other things, (a) sell assets to pay off prior borrowing and (b) take advantage of the step-up in basis rules. (Pp. 686-87.) Other tax benefits that are disproportionately less available to Black Americans and other members of historically disadvantaged groups include those benefits for owner-occupied housing, employer-provided health insurance plans, and tax-favored retirement savings and retirement plans. (P. 668.)

Professors Maynard and Gamage next discuss how the tax system holds back historically disadvantaged groups. Wage and salary income is taxed more heavily than returns from wealth and capital because, among other things, wages are subject to (1) the income tax, (2) Social Security tax (which, regarding the employer’s portion of the tax, most economists believe employers shift to employees through lower compensation), (3) Medicare tax, and (4) federal and state-level unemployment insurance payroll taxes. (Pp. 689-90.) The Professors point to studies finding that “Black Americans are disproportionately unable to obtain…employer-provided health insurance” and are, therefore, forced to pay for healthcare themselves, further reducing their income and inhibiting wealth creation. (P. 691.) Yet another concern about the tax system is that those more dependent on wage income tend to spend most of their money on goods, and studies have found that “sales taxes are quite regressive and serve to exacerbate racial wealth gaps.” (P. 690.)

Professors Maynard and Gamage conclude that “the United States tax and fiscal systems thus place substantial barriers on earning sufficient wage or salary income to start building wealth.” (P. 691.) These barriers are overcome by “some combination of educational attainment, home ownership, and tax-preferred retirement accounts” as well as by taking advantage of “familial or schooling-based social networks to obtain sufficiently lucrative career opportunities”—but these paths “for escaping wage enslavement are disproportionately much less available for many Black Americans and other members of historically disadvantaged groups,” effectively trapping them in “an ongoing cycle of dependence on tax-disfavored wage and salary income.” (P. 691.)

Professors Maynard and Gamage call for reform of the tax system to eliminate wage enslavement. They acknowledge that the scholarly literature documents numerous ways in which the tax code may serve to disadvantage Black Americans and other members of historically disadvantaged groups. (P. 686.) Their article builds upon prior scholarship by focusing on the phenomenon of wage enslavement and how it (along with the tax system) “obstructs Black Americans and other historically disadvantaged groups from building wealth and economic power and catching up to more advantaged groups.” (P. 686.) The authors raise more questions than they attempt to answer, but they plan to return to those questions, and to evaluate reform options, in future scholarship. (P. 692.) At the same time, they hope to inspire further work by other scholars. (P. 692.) I learned a lot from Professors Maynard and Gamage’s article and was persuaded by their conclusion that the wage-enslavement problem must be addressed in order to promote “a more just future of shared prosperity for all Americans.” (P. 692.)

1. Professor Adam Hirsch notes that the term originated as a trope used by Southerners in the 19th century to defend chattel slavery by comparison to the labor system in the North, citing Wilfred Carsel, The Slaveholders’ Indictment of Northern Wage Slavery, 6 J.S. Hist. 504 (1940).