In terrorem clauses—sometimes known as no contest or forfeiture clauses—seek to prevent contest of a will or trust instrument by removing the beneficiary who challenges the provisions of the applicable instrument. If the beneficiary is removed, more often than not, his or her descendants also lose any beneficial interest to which they would otherwise have been entitled.
Beneficiaries are motivated to challenge a will or trust instrument because they stand to gain economically if successful in the challenge. A successful challenge to the validity of a document will cause the decedent’s estate or trust to pass intestate or pursuant to an earlier document that was not contested (or was not contested successfully). In some instances, a beneficiary may challenge the validity of only a portion of a document. If the beneficiary is successful, only that provision is eliminated, and the remainder of the will or trust instrument continues in effect. This approach, where allowed under applicable state law, can be beneficial if, for example, there are large pre-residuary gifts to individuals and all or a portion of the remainder is to pass to the challenger. Under these circumstances, the challenger may have more to gain by challenging only the pre-residuary gifts. The pre-residuary gifts would be eliminated, the residue would become larger, and the challenger would receive more than he or she otherwise would have received without the challenge.
By using an in terrorem clause, testators and settlors seek to discourage beneficiaries from bringing these types of challenges. If, however, a testator or settlor has completely removed a child or other individual whom the testator or settlor believes would challenge the will or trust instrument, an in terrorem clause will not serve its purpose. In such a case, that child or other individual has nothing to lose by bringing a challenge. The use of in terrorem clauses is effective only when there is a sizeable enough gift to make the target beneficiary think twice about a challenge.
In terrorem clauses serve many purposes: (i) preventing costly litigation which would diminish the size of the affected estate or trust; (ii) preventing frivolous lawsuits which are a usurpation of court resources and time; and (iii) preventing private family information from being exposed to public view and scrutiny.
While preserving privacy is almost always a concern for estate planning clients, privacy carries special significance in the context of trust contests. Clients are attracted to revocable trusts because, when properly funded, a public probate proceeding can be avoided. As a result, the decedent is able to protect from broad disclosure details regarding his or her assets as well as the identity of the beneficiaries. This privacy screen is removed when family members and other beneficiaries litigate provisions of a trust instrument. Family life is then aired in the very public setting of the courtroom, which may reveal family secrets the decedent may have otherwise desired remain private.1 Consequently, a settlor may add privacy protection through the use of an in terrorem clause by discouraging beneficiaries from bringing these buried secrets into a public and unforgiving light.
On the other hand, the use and enforcement of in terrorem clauses present serious issues in connection with arriving at a just result regarding the disposition of property under a will or trust instrument. In many states, courts seek to balance a desire to honor the testator’s or settlor’s wishes against public policy. These courts are particularly concerned about preventing suits that would reveal to the court that a will or trust instrument was in truth and in fact executed outside the bounds of the law.2 In these states, courts will not enforce in terrorem clauses against beneficiaries who have a legitimate basis (probable cause) for challenging the validity of a will or trust instrument. The view in these states is that it is the court’s duty to ensure that wills and trust instruments comply with the law, and courts can do this only when interested parties are able without fear to raise issues of validity.
TYPES OF IN TERROREM CLAUSES
While the goal of all in terrorem clauses is to dissuade those who would challenge the will or trust instrument, there are different types of challenges that might be targeted by a given type of in terrorem clause.
To Discourage a Challenge Regarding Validity of a Document
Clauses relating to validity often encompass challenges to the document as a whole as well as challenges to specific provisions therein. The following is an example:
If any devisee or beneficiary under my will or under any trust established under my will shall in any way, directly or indirectly, initiate or participate in any contest, challenge, or attack to the validity of my will or any of its provisions, or object to or contest its admission to probate, or conspire with or give aid to any person doing or attempting any of the foregoing, then in each case all provisions for such beneficiary and his or her descendants herein shall be void and my estate shall be disposed of in the same manner provided herein as if such person had predeceased me leaving no descendants surviving me.3
A similar clause may also read:
Should any beneficiary hereunder, or anyone duly authorized to act for such beneficiary, institute or direct, or assist in the institution or prosecution of, any action or proceeding of any kind in any court, at any time, for the purpose of modifying, varying, setting aside or nullifying any provision hereof relating to my Louisiana estate on any ground whatsoever, all interest of such beneficiary, and the issue of such beneficiary, to my Louisiana estate shall cease, and the interest of such beneficiary, and such beneficiary’s issue, in and to my Louisiana estate shall be paid, assigned, transferred, conveyed, and delivered to, or for the benefit of, those persons would take such beneficiary’s interest in my Louisiana estate if such beneficiary died intestate, unmarried, and without issue on the date of the institution of the above described action or proceeding.4
These two clauses, while similar, may lead to significantly different outcomes in judicial interpretation. Assume for the purposes of comparison that the testator owns real property in Louisiana and Kentucky. Also assume that one of the testator’s children files a suit challenging the validity of a testamentary provision relating to the disposition of the Kentucky real estate. One can see how the two clauses may yield different results. The first clause is more general, addressing “any contest, challenge, or attack to the validity” of the will or any of its provisions. A challenge to a provision disposing of the Kentucky real estate falls within the scope of the first clause. The challenge, however, would fall outside the scope of the second clause because, by its express terms, the second clause relates only to the “Louisiana estate.”
To Discourage a Challenge to Acts or Omissions of Fiduciaries
Many clients are concerned that, while the beneficiaries may not disagree with the dispositive terms of the will or trust instrument, the beneficiaries may develop a confrontational attitude toward the fiduciaries chosen by the client. Consequently, such clients sometimes insert clauses similar to the ones outlined above but revise the language to state that, if any beneficiary should challenge or attack the actions of an executor or trustee, such beneficiary and his or her descendants shall forfeit their share of the estate or trust, as the case may be.
This type of in terrorem clause is sometimes said to be a variety of exculpation clauses and held to standards governing those clauses.5 Note, however, that an in terrorem clause of this type is fundamentally different from an exculpation clause in that, with an exculpation clause, there is no possibility that a beneficiary who challenges a fiduciary’s acts or omissions will be removed as a beneficiary if the court finds the challenge not to be justified.
Other Types
The exact language used in in terrorem clauses can vary depending on the needs and concerns of the client. Such language can be broad, as in the examples above, or they can be narrow. For example, the clause may be triggered only by actions contesting the “distribution percentages or [distribution] procedures.”6 As an example, a challenge to the appointment of a particular individual as executor is unlikely to trigger this type of clause. By contrast, a broader clause providing for forfeiture in the event there is a contest regarding the provisions of the will would almost surely be triggered by such a challenge. This is because a provision of the will appoints the executor.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Lawyer.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
We all know that ground leases, in which the tenant (Tenant or Ground Lessee) leases land for a very long term, present a special kind of challenge. The Tenant controls the improvements on the property during the lease term, but at the end of the term, ownership of the right to use the land and improvements reverts to the owner of the underlying fee interest in the ground (Landlord or Ground Lessor). The length of the term and the flexibility on the use and control of improvements can create a tension between the concept of fee ownership and a leasehold interest. There is a temptation to have the Tenant control all ownership rights, but, at the end of the term, the carriage turns back into a pumpkin and the Landlord and Tenant are left sorting out surrender issues and settling claims.
The Landlord usually seeks to generate income (in somewhat passive fashion), while still retaining the ownership of a parcel of real estate. This allows the Landlord to monetize the value of the land without giving up long-term control. For the Tenant, a ground lease may be the only way to develop an iconic or important parcel of real estate if: (i) the Tenant doesn’t have the financial means to actually purchase the land; or (ii) the owner is unwilling to transfer ownership.
Unlike the development of a multitenant shopping center, a Landlord is typically leasing a parcel of land under one ground lease to a single-tenant user (obviously there can be a ground lease under a multitenant development as well, but those ground leases are not the subject of this article). Indeed, for certain landlord-tenant parties, a single-tenant ground lease may be the better option.
This article will address the distinctive characteristics of, and issues present in, the typical single-tenant ground lease. These are issues that will likely arise, and should be thoroughly considered, when determining whether the relationship will work whether as a Tenant or Landlord.
LANDLORD ISSUES
With great benefits and limited detriments, a Landlord may be incentivized to stay “single” through use of a ground lease. Before marrying itself to a single-tenant user under a ground lease, however, the Landlord and legal counsel should consider the following issues.
Due Diligence
Typically, the ground lease will have many contingencies and will afford the Tenant a long period to investigate and confirm its ability to use and develop the premises as anticipated (Due Diligence Period). These conditions are often expressed as a “pre-tender” term or a “due diligence” term and perhaps also a “construction term” distinct from the typical “operating” term of the lease in which the Tenant operates at the premises and pays full rent. This is because under a ground lease many of the development obligations (and thus many of the development risks) are transferred to the Tenant. Some considerations will include soil conditions, hazardous material present upon the parcel, zoning, building code requirements, anticipated cost of construction, and the like.
In addition to conducting pre-construction investigations and obtaining entitlements, the Tenant may also need to meet requirements imposed by the Tenant’s lender, while juggling the satisfaction of multiple involved parties like the local planning board, county, state, and federal regulators, and the local building department. The Landlord will need to exercise patience as this all plays out. In consideration of the contingency period, the Tenant may have to pay non-refundable monies to the Landlord until the overall contingencies have been satisfied or waived. While the Tenant would rather not incur additional costs, without such an agreement the Landlord may be unwilling to allow a long Due Diligence Period during which other offers are missed. A prudent Landlord will reserve the right to terminate the lease if not met or satisfied.
Construction Period
A similar issue will arise with respect to rent concessions during the Tenant’s anticipated construction period. If rent commences prior to the completion of construction of improvements, the Tenant will often seek reduced rent during such period with the understanding that Landlord’s return will be generated once the building is operating. The Landlord’s response will hinge upon its economics and expectations. What are the Landlord’s carrying costs? Does the rent under the ground lease justify a longer period without rent or with reduced rent?
Landlord Termination Rights
While Tenant, alone, may have the right to terminate the lease during the Due Diligence Period, it is quite likely that the entitlement process will afford both parties the opportunity to reconsider the deal. It should be expected that site plan approval will be required, and the approval process will require planning board approval. If neither is received in a reasonable period, both Tenant and Landlord might want the right to terminate.
If the parcel was pre-approved, there will likely be a set of conditions that the municipality has imposed, such as building height, the maximum size of the building, the footprint where the building can be constructed, the parking area, and use. Those restrictions should be acknowledged upfront, and Tenant should have no right to terminate for a known restriction. If the parcel was not pre-approved, the parties should be prepared to engage in full site plan approval (and the ground lease will need to be specific on the process). The parties will need to work in concert to obtain site plan approval and the Landlord may want to the right to seek approvals on behalf of the Tenant to ensure its property is not tied up for a long period of time without a right to “save the deal.”
Expectations for Due Diligence and Safe Harbor
The Tenant should know what entitlements it needs for its project, and if the entitlements come up short of the Tenant’s expectations, the Tenant (and probably the Landlord) will have the right to terminate the lease. However, the Landlord would be well-served if the ground lease contained a floor plan and site plan with specifications and a range of acceptable parameters as a safe harbor. If site plan approval is granted within the set parameters and the approved site plan is not materially different from the site plan attached to the ground lease, then the Tenant does not have the right to terminate the lease. Of course, the Tenant may not be able, or willing, to commit to safe harbor plans at the time of signing. In this case, the Landlord may alternatively seek to refer to an existing project as its “safe harbor,” with language to the effect that if site plan approval is granted as will permit Tenant’s project to be substantially similar to the existing project, then the Tenant shall not have the right to terminate the lease on entitlement grounds.
Termination Rights
Of course, once the due diligence is completed, the parties may desire to terminate the lease. Timing of the Due Diligence Period and entitlement process will vary. In some instances, this can be accomplished in a matter of months; in other jurisdictions, a matter of years. From the Landlord’s perspective, if entitlements are dragging on and there is not a strong likelihood that the deal will progress (and thus produce revenue), the Landlord may wish to terminate the lease and move on to an alternative plan. Presumably, however, there will be some reluctance to move on as the “alternate” deal is likely to be less attractive than the deal the Landlord initially chose to sign. From the Tenant’s perspective, there may be external pressures (e.g., if Tenant is a publicly traded company and not meeting store opening objectives) or internal requirements to pursue other opportunities if entitlements are not achieved within a reasonable period of time.
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Real Estate Lawyer.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
Accountants’ Liability 2024 is taking place in Washington, D.C., on May 16-17, 2024, in person or via live webcast.
Accountants’ Liability 2024 offers the latest insights on the changing laws, principles, and attitudes shaping the field of accountants’ liability and networking with like-minded colleagues from across the country.
This year’s program features an outstanding line-up that will highlight changes in the law and trends in accountants’ liability through an informative mix of insights into new developments, trends for the coming year, compliance best practices, and strategies for cooperating with regulatory investigations. Hear from an unparalleled array of panelists, from noted practitioners, to general counsel from accounting firms, to regulators from the SEC and PCAOB – including keynote addresses from SEC Chief Accountant Paul Munter and PCAOB Board member George Botic.
Featured topics in this year’s program will include:
Accounting litigation trends
New and proposed accounting standards
Artificial intelligence in the accounting profession
Quality controls and other emerging regulatory issues
ESG/climate accounting
The role of gatekeepers in regulatory investigations
Beyond the Big Four
SEC perspectives
Responding to parallel investigations
PCAOB inspection program
Join us for the go-to annual conference that gives you key updates and insights on the changing laws, principles, and attitudes shaping the field of accountants’ liability, plus best practices to help you protect your firm and your clients.
Join us for our upcoming program, Accountants’ Liability 2024, either in person or via live webcast on May 16-17, 2024! To learn more about this program and to register for the in-person course or live webcast, click here.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
By now, lawyers with business and corporate clients should know that the Corporate Transparency Act (CTA) took effect on January 1, 2024. Non-exempt reporting companies formed on or after that date will need to file an initial beneficial ownership information (BOI) report within 90 calendar days after the date of formation.1 Non-exempt reporting companies existing prior to January 1, 2024 will have until January 1, 2025 to file their initial BOI reports. This deadline received little fanfare or attention in the media, however, and many lawyers (and law firms) have not yet adopted the procedures they need to prepare themselves and their clients for the sea change in practice that will follow the passage of this deadline.
THE REGULATIONS SO FAR
Congress adopted the CTA as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021.2 The CTA includes some of the most significant changes to the Bank Secrecy Act (BSA) and US anti-money laundering (AML) laws in recent years. Those changes, in turn, will result in extensive changes to US corporate governance.
The CTA requires companies that are formed or registered to do business in the US to file a BOI report with the Financial Crimes Enforcement Network of the US Treasury Department (FinCEN). FinCEN will assemble the BOI reports into a massive database of BOI data. FinCEN has published regulations (the Reporting Rule) that govern the data required in BOI reports and the timing of those reports.3
The law requires FinCEN to use that database to fight money laundering in cooperation with other US law enforcement agencies. Although the FinCEN database will not be publicly available, FinCEN will make the database accessible to US law enforcement agencies, US financial institutions, and some non-US law enforcement agencies pursuant a proposed regulation that would govern access.4
The form of BOI report that reporting companies are to submit to FinCEN was not included in the Reporting Rule and an earlier proposed form of BOI report drew extensive criticism from both industry and Congressional advocates. Consequently, in September 2023, FinCEN published a proposed form of BOI Report (Proposed BOI Report Template) in a notice that was open for comment until October 30, 2023.5 Importantly, the Proposed BOI Report Template will require every field to be completed. If an individual tries to file a BOI Report with any field left blank, FinCEN will reject the submission.
However, in its September 2023 announcement of the Proposed BOI Report Template, FinCEN stated that it would have “a potential alternative implementation” that it might adopt that “would have the same response fields that require the same information to be reported” [but would] provide “a mechanism for filers to temporarily indicate if they are unable to provide certain information for certain reasons.”6 FinCEN specified this “alternative implementation” would contain:
a drop-down option in the Beneficial Owner(s) section that would allow filers to specify one of a few reasons why they are temporarily unable to provide a piece of information about a beneficial owner … Forms whose filers select a dropdown option will be accepted into the filing system but will still be considered incomplete and non-compliant filings. Forms will only be considered complete and compliant once the missing information is subsequently added, the drop-down option is removed from each field, and the form is updated. FinCEN will be seeking feedback from database users, including filers and law enforcement on these options.7
At the present time, practitioners cannot know if FinCEN will implement these alternatives. Prudence suggests, therefore, that practitioners should plan (and advise their clients) as if the Report Template that took effect on January 1, 2024 remains in effect.
Separately, FinCEN extended the deadline for filing an initial BOI report for entities formed on or after January 1, 2024, and before January 1,2025, to 90 days instead of 30 (which was the deadline in the earlier version of the regulations).8
Practitioners will need to remain aware of the potential for changes in these requirements as time passes.
SUMMARY OF CTA REQUIREMENTS
The CTA, as implemented through the Reporting Rule, requires any domestic reporting company created on or after January 1, 2024 to file a report within 90 calendar days of the earlier of the date on which it receives actual notice that its creation has become effective. Alternatively, the domestic reporting company would have to file a report within 90 calendar days of the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created.9
Similarly, any entity that becomes a foreign reporting company on or after January 1, 2024 must file a report within 90 calendar days after the earlier of: (i) the date on which it receives actual notice that it has been registered to do business; or (ii) the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the foreign reporting company has been registered to do business.10
In contrast, both domestic reporting companies created before January 1, 2024 and foreign reporting companies that became foreign reporting companies before January 1, 2024 must file an initial report not later than January 1, 2025.11
Each reporting company that is not exempt must identify in its initial BOI report each of its “beneficial owners,” and provide five pieces of personally identifiable information about each of those beneficial owners.12 In addition, the initial BOI report must disclose the reporting company’s full legal name, any trade name or “doing business as” name, a complete current address, the state or jurisdictions of the reporting company’s formation, and the reporting company’s taxpayer identification number (TIN) including an Employer Identification Number (EIN) or, where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction, and the name of that jurisdiction.13
For each beneficial owner of the reporting company, the reporting company must disclose in its initial report each beneficial owner’s: (i) full legal name; (ii) date of birth; (iii) residential street address; (iv) a unique identifying number (which may be a non-expired US passport, a non-expired identification document, such as a driver’s license, issued by a state, local government, or Indian tribe, or a nonexpired passport issued by a foreign government if the individual does not possess any of the other document types listed); and (v) an image file of the document that provides the unique identifying number.14
In addition, for reporting companies that are formed (or registered to do business in the US) after January 1, 2024, the initial BOI report must also include these same five pieces of information for the reporting company’s “company applicant.” The Reporting Rule defines “company applicant” as: (i) with respect to a domestic reporting company, “the individual who directly files the document that creates the domestic reporting company”; and (ii) with respect to a foreign reporting company, the individual who directly files the document that first registers the foreign reporting company.”15
If there is more than one individual responsible for the filing of the document that forms the domestic reporting company (or that registers the foreign reporting company to do business in the US), the “company applicant” is the individual “who is primarily responsible.”16
After a reporting company files its first BOI report, the company must amend its report within 30 calendar days after there is any change to the information required in that report.17
Each reporting company that is not exempt must follow the CTA’s definition of “beneficial owner” to identify its beneficial owners. The Reporting Rule defines “beneficial owner” as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”18
An individual who would otherwise be included as a beneficial owner may be omitted if they fall into one of the following categories: (i) a minor child; (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an employee of a reporting company, acting solely as an employee (other than a senior employee); (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance; or (v) a creditor of a reporting company.19
The CTA exempts from the obligation to file a BOI report any reporting company that falls into any of 23 exemption categories.20 The exemption categories cover several classes of entity that are the subject of extensive regulation or that are otherwise required by law to disclose their ownership information to the government.
The CTA contains serious penalties for non-compliance. A reporting company that fails to file a BOI report (or a required amendment) when due is subject to a $500 per day fine, up to a maximum of $10,000. A willful failure to file a report when due or an intentional filing of inaccurate information is punishable as a felony by up to two years’ imprisonment. A willful violation in combination with other anti-money laundering violations can result in an amplified penalty of up to 10 years’ imprisonment.
CLICK HERE to read the full article. The prior version of this article appeared in the February 2024 edition of ALI CLE’s The Practical Lawyer.
To find our more about ALI CLE’s in-person courses or webcasts, or to check out on-demand CLE, click here.
Legal Issues in Museum Administration 2024 – the go-to annual conference for museum professionals and counsel – is taking place in Cleveland, OH, on May 1-3, 2024, in person or via live webcast.
Legal Issues in Museum Administration 2024 provides focused guidance on the institutional opportunities and legal issues facing museums today.
This year’s program conference will focus on how museums can best manage risks and identify opportunities in a rapidly changing landscape. As always, we will provide timely updates on ever-present legal issues, from key litigation to assessing developments in copyright and trademark, tax and employment law.
Join our panels for an exploration of these evolving issues and more:
Opportunities and challenges with AI and other new technologies
The impacts of climate deterioration and sustainability initiatives
Changing donor expectations
Financing pitfalls and how to manage them: Credit lines, collateral complications, audits, oversight committees, and more!
The risks and benefits of ADR and litigation, incl. subpoenas; demand letters; complaints; and litigation hold best practices
Music in museums: Music to your ears or a legal liability?
This year’s program also features two amazing receptions: the Rock & Roll Hall of Fame on Wednesday evening, and the Cleveland Museum of Art on Thursday evening.
Join us for the signature annual event for museum counsel and professionals and enhance your work in the coming year with new resources, business connections, and invaluable insights.
Join us for our upcoming program, Legal Issues in Museum Administration 2024, either in person or via live webcast on May 1-3, 2024! To learn more about this program and to register for the in-person course or live webcast, click here.
