Estate Planning When Clients Cross State Lines
April 6, 2005
William M. "Bill" Rich- Atlanta
The practice of law and estate planning in particular have changed greatly over the last four decades. Forty years ago, it was typical for estate planning lawyers to deal with issues that were confined to one state. There was less mobility in the population, and many clients lived in their home state most of their lives. They did not own property in other states or countries. This has changed. In 1990, the U. S. Census revealed that six million Americans relocated to another state each year. The most recent U. S. Census data available indicate that nearly eight million now move each year to a new state.
Today, clients will have lived in a number of states during their lifetimes. Some clients could have roots in a foreign country.
In the past, a primary concern was the reduction or elimination of estate taxes. While that concern is still prevalent, it is not always the case; consider the increase in the amount that can be sheltered from federal estate taxes – presently $1,500,000 and rising to $3,500,000. In the future, clients in need of estate planning services and the lawyers serving them may focus more on non-tax issues rather than tax planning.
Prominent among those non-tax issues are matters crossing state lines. Here a few common situations.
First, a client is domiciled in State A but has unimproved real estate in other states. He wants his estate plan to deal with those other properties.
Second, a lawyer has represented an in-state client for many years and the client seeks advice about relocating to another state.
Third, a client is domiciled in State A but has a residence in another state and is spending more time in that state and the lawyer suspects the client may be domiciled there. He seeks estate planning assistance.
Fourth, a lawyer has represented an in-state client for many years but the client actually has changed his domicile to another state and calls the lawyer about updating his estate plan.
Finally, a client from out of state contacts a lawyer and says that the lawyer has been highly recommended and asks for estate planning counsel and advice.
Ethical Issues. What, if anything, can the lawyer do for such clients? In deciding what to do for clients with contacts in other states, the lawyer can get guidance from the recently revised Model Rule 5.5 (reproduced at the end of this article), which deals with multi-jurisdictional practice and the unauthorized practice of law and which sets forth guidelines on what is the unauthorized practice of law by lawyers from other states and nations. In summary, the new Model Rule 5.5 has been liberalized to take into account situations where it may be appropriate for an out-of-state lawyer to temporarily practice in the state of adoption of the rule. This rule gives guidance but does not apply to activities of in-state lawyers in other states.
Substantive Issues Crossing State Lines
Assuming one gets past the ethical issues just mentioned, what are some of the substantive problems that cross state lines?
Domicile. What are we talking about when we use the term “domicile?” Domicile is one’s legal home. One can have two residences but only one domicile. How does one determine one’s domicile? The courts review the facts and circumstances to determine domicile. To change one’s domicile from one place to another, there must be physical presence plus intent to remain in the new place indefinitely.
Why is the determination of domicile important? The laws of the state of one’s domicile govern how one’s property is inherited and by whom, and those laws differ from state to state. Thus, a spouse’s share might be larger or smaller or eliminated depending on where a court determined a deceased spouse was domiciled. Another impact of the determination of domicile is the estate or inheritance tax imposed on an estate.
In one case, a decedent had two residences, one in New Jersey and one in Pennsylvania. He attempted to claim New Jersey as his domicile for tax reasons. However, when he died, both the New Jersey and the Pennsylvania courts determined that this decedent was domiciled in each state. The result was a double state estate tax, a very unfortunate result.
There are income and property tax implications as well. Assume that a married couple has two homes, one in one state in the husband’s name and one in Florida in the wife’s name. They want to know if they can split their domicile so that he would be domiciled in one state and she in Florida. Most property tax authorities frown on a couple’s claiming two homesteads. Also, the attempt to split domicile might subject the couple to intangible tax under Florida law. A more guarded approach to this issue would be for the couple to choose one state or the other collectively. Otherwise, the couple may subject themselves to the double taxation possibly mentioned above.
Will and Trust Issues. What will and trust issues cross state lines? An important question that must be addressed is whether the client in need of estate planning should use a will or a revocable trust as the instrument that sets forth his or her wishes with respect to the disposition of property at death.
Which instrument is used often depends on the probate laws of the states involved. In some states, the probate laws are quite onerous. The administration of estates involving probated wills must comply with the probate procedures of the state involved, and so estate planners often suggest the use of a revocable trust to circumvent the burdens of those laws. Normally, revocable trusts do not have to comply with the probate procedures, and thus the administration of assets in a revocable trust may be much less costly and less burdensome than the administration of assets in a probate estate.
Even if a client is domiciled in a state in which estate planners normally use a will instead of a revocable trust, if that same client owns a second home in a state with a burdensome probate procedure, that client would be well advised to use a revocable trust to dispose of at least the home in the second state. And when the client actually signs his or her revocable trust, a lawyer in the second state should be engaged to prepare a deed transferring title to the second home to the revocable trust.
In addition, if the client eventually decides to change his or her domicile from one state to another, the client would be well advised to have new instruments prepared including wills and/or revocable trusts, powers of attorneys and health care documents.
A second will and trust issue that should be considered is whether the will or trust should pick the law to govern the instrument. With respect to wills, if the will is silent, normally the law of one’s domicile at the time of signing a will will govern the validity and interpretation of the will with respect to movable property, while the law of the situs of real property will govern the will as to the real property. Should a client signing a will expressly choose what law should govern these questions? Many estate planners suggest doing so to avoid any questions about the matter.
For example, a clause might read: “All matters involving the validity and interpretation of this Will are to be governed by the law of State of Florida.” Similar questions apply to trusts, and a typical clause would read: “All matters involving the validity and interpretation of this Trust are to be governed by the law of California. All matters involving the administration of a trust are to be governed by the laws of the jurisdiction in which the trust has its principal place of administration.” Can one choose the law of a state to which the trust has no connection? Some experts have opined that you can, provided the law chosen does not affect the validity of the trust and the choice would not violate public policy of the state considering the issue.
Community Property Issues. An important estate planning issue that crosses state lines is the subject of community property. Community property laws are in effect in 10 states mostly in the West (also Louisiana and Wisconsin) and affect the rights of married couples. These laws treat husbands and wives as partners who are presumed to own equal, one-half interests in property acquired during marriage through their labors. One expert has suggested that community property is the biggest “blind spot” of estate planners outside the community property states. Another expert has stated that knowing whether a client has acquired community property is critical to financial planning in general and estate planning in particular and that ignorance of a client’s existing or to-be-acquired community property may result in the client’s being inadvertently deprived of his property and the client’s missing advantageous planning opportunities.
The general rule provided in the IRC is that only a decedent’s tax basis in property is stepped up at date of death. The surviving spouse’s basis is not stepped up. There is an exception to this rule for community property: Section 1014(b)(6) of the Code says that on the death of either spouse, the bases of all the community property are changed to the values on the estate tax valuation date.
Rev. Rul 87-98 (1877 C.B. 207) provides that if property held in a common law state is community property, it is community property for purposes of Section 1014(b)(6). Thus, if a client moves from a community property state, such as Arizona, to a non-community property state, such as Georgia, and owns an asset that was held as community property in Arizona, it is advisable to preserve the nature of the community property so that, on death of either spouse, there is a step-up in basis of all the community property. Conversely, if the property has fallen in value, it is advisable to sever the community property status, so that the surviving spouse’s higher basis would not be lost at the death of the other.
Therefore, the prudent estate planner should undertake to determine whether the couple has community property and whether the couple has ever signed a community property agreement. The estate planner should advise clients to segregate the community property asset so that its community property nature can be preserved. This might be effected by an inter-spousal agreement, by a revocable trust or by putting the community property into a special brokerage account identified as community property. What happens when a common law state couple moves to a community property law state? The separate property of the couple stays separate.
If the move is to California, its Quasi Community Property Law provision (giving a surviving spouse a forced share in the property of the decedent spouse) may apply. Otherwise, a couple moving to a community property state may wish to convert their property to community property. A couple moving to a community property law state needs to be careful about their separate property because, if one spouse sets up a separate property account and then adds to it earnings from labor, this comingling may cause a loss of separate property status. Statutes of community property law states often provide that property held jointly is deemed to be community property.
Georgia’s Ethic’s Rule 5.5 is typical of that which is adopted in most states. Florida goes one step further and makes it a felony for a non-Florida lawyer to practice in that state.
Rule 5.5: Unauthorized Practice Of Law; Multijurisdictional Practice Of Law
(a) A lawyer shall not practice law in a jurisdiction in violation of the
regulation of the legal profession in that jurisdiction, or assist another
in doing so.
(b) A Domestic Lawyer shall not:
(1) except as authorized by these Rules or other law, establish an office
or other systematic and continuous presence in this jurisdiction for the
practice of law; or
(2) hold out to the public or otherwise represent that the Domestic
Lawyer is admitted to practice law in this jurisdiction.
(c) A Domestic Lawyer, who is not disbarred or suspended from practice in
any jurisdiction, may provide legal services on a temporary basis in this
jurisdiction that:
(1) are undertaken in association with a lawyer who is admitted to practice in this jurisdiction and who actively participates in the matter;
(2) are in or reasonably related to a pending or potential proceeding before a tribunal in this or another jurisdiction, if the Domestic Lawyer, or a person the Domestic Lawyer is assisting, is authorized by law or order to appear in such proceeding or reasonably expects to be so authorized;
(3) are in or reasonably related to a pending or potential arbitration, mediation, or other alternative dispute resolution proceeding in this or another jurisdiction, if the services arise out of or are reasonably related to the Domestic Lawyer’s practice in a jurisdiction in which the Domestic Lawyer is admitted to practice and are not services for which the forum requires pro hac
vice admission; or
(4) are not within paragraphs (c)(2) or (c)(3) and arise out of or are
reasonably related to the Domestic Lawyer’s practice in a jurisdiction in
which the Domestic Lawyer is admitted to practice.
(d) A Domestic Lawyer, who is not disbarred or suspended from practice in
any jurisdiction, may provide legal services in this jurisdiction that:
(1) are provided to the Domestic Lawyer’s employer or its organizational affiliates and are not services for which the forum requires pro hac vice admission; or
(2) are services that the Domestic Lawyer is authorized to provide by
federal law or other law of this jurisdiction.
(e) A Foreign Lawyer shall not, except as authorized by this Rule or
other law, establish an office or other systematic and continuous presence
in this jurisdiction for the practice of law, or hold out to the public or
otherwise represent that the lawyer is admitted to practice law in this
jurisdiction. Such a Foreign Lawyer does not engage in the unauthorized
practice of law in this jurisdiction when on a temporary basis the Foreign
Lawyer performs services in this jurisdiction that:
(1) are undertaken in association with a lawyer who is admitted to
practice in this jurisdiction and who actively participates in the matter;
(2) are in or reasonably related to a pending or potential proceeding
before a tribunal held or to be held in a jurisdiction outside the United
States if the Foreign Lawyer, or a person the Foreign Lawyer is assisting,
is authorized by law or by order of the tribunal to appear in such
proceeding or reasonably expects to be so authorized;
(3) are in or reasonably related to a pending or potential arbitration,
mediation, or other alternative dispute resolution proceedings held or to be
held in this or another jurisdiction, if the services arise out of or are
reasonably related to the Foreign Lawyer’s practice in a jurisdiction in
which the Foreign Lawyer is admitted to practice;
(4) are not within paragraphs (2) or (3) and
(i) are performed for a client who resides or has an office in a
jurisdiction in which the Foreign Lawyer is authorized to practice to the
extent of that authorization; or
(ii) arise out of or are reasonably related to a matter that has a
substantial connection to a jurisdiction in which the lawyer is authorized
to practice to the extent of that authorization; or
(iii) are governed primarily by international law or the law of a
non-United States jurisdiction.
(f) For purposes of this grant of authority, the Foreign Lawyer must be a
member in good standing of a recognized legal profession in a foreign
jurisdiction, the members of which are admitted to practice as lawyers or
counselors at law or the equivalent and subject to effective regulation and
discipline by a duly constituted professional body or a public authority.
The maximum penalty for a violation of this rule is disbarment.
Comment
[1] A lawyer may practice law only in a jurisdiction in which the lawyer
is authorized to practice. A lawyer may be admitted to practice law in a
jurisdiction on a regular basis or may be authorized by court rule or order
or by law to practice for a limited purpose or on a restricted basis.
Paragraph (a) applies to unauthorized practice of law by a lawyer, whether
through the lawyer’s direct action or by the lawyer assisting another
person.
[2] The definition of the practice of law is established by law and varies from one jurisdiction to another. Whatever the definition, limiting the practice of law to members of the bar protects the public against rendition of legal services by unqualified persons. This Rule does not prohibit a lawyer from employing the services of paraprofessionals and delegating functions to them, so long as the lawyer supervises the delegated work and retains responsibility for their work. See Rule 5.3; Responsibilities Regarding Nonlawyer Assistants.
[3] A lawyer may provide professional advice and instruction to nonlawyers whose employment requires knowledge of the law; for example, claims adjusters, employees of financial or commercial institutions, social workers, accountants and persons employed in government agencies. Lawyers also may assist independent nonlawyers, such as paraprofessionals, who are authorized by the law of a jurisdiction to provide particular law-related services. In addition, a lawyer may counsel nonlawyers who wish to proceed pro se.
[4] Other than as authorized by law or this Rule, a Domestic Lawyer violates paragraph (b) and a Foreign Lawyer violates paragraph (e) if the Domestic or Foreign Lawyer establishes an office or other systematic and continuous presence in this jurisdiction for the practice of law. Presence may be systematic and continuous even if the Domestic or Foreign Lawyer is not physically present here. Such Domestic or Foreign Lawyer must not hold out to the public or otherwise represent that the Domestic or Foreign Lawyer is admitted to practice law in this jurisdiction. See also Rules 7.1(a) and 7.5(b).
[5] There are occasions in which a Domestic or Foreign Lawyer, who is not disbarred or suspended from practice in any jurisdiction, may provide legal services on a temporary basis in this jurisdiction under circumstances that do not create an unreasonable risk to the interests of their clients, the public or the courts. Paragraph (c) identifies four such circumstances for the Domestic Lawyer. Paragraph (e) identifies five such circumstances for the Foreign Lawyer. The fact that conduct is not so identified does not imply that the conduct is or is not authorized. With the exception of paragraphs (d)(1) and (d)(2), this Rule does not authorize a Domestic Lawyer to establish an office or other systematic and continuous presence in this jurisdiction without being admitted to practice generally here.
[6] There is no single test to determine whether a Foreign or Domestic Lawyer’s services are provided on a “temporary basis” in this jurisdiction, and may therefore be permissible under paragraph (c) or paragraph (e). Services may be “temporary” even though the Foreign or Domestic Lawyer provides services in this jurisdiction on a recurring basis, or for an extended period of time, as when the Domestic Lawyer is representing a client in a single lengthy negotiation or litigation.
[7] Paragraphs (c) and (d) apply to Domestic Lawyers. Paragraphs (e) and (f) apply to Foreign Lawyers. Paragraphs (c) and (e) contemplate that the Domestic or Foreign Lawyer is authorized to practice in the jurisdiction in which the Domestic or Foreign Lawyer is admitted and excludes a Domestic or Foreign Lawyer who while technically admitted is not authorized to practice, because, for example, the Domestic or Foreign Lawyer is on inactive status.
[8] Paragraph (c)(1) recognizes that the interests of clients and the public are protected if a Domestic Lawyer associates with a lawyer licensed to practice in this jurisdiction. Paragraph (e)(1) recognizes that the interests of clients and the public are protected if a Foreign Lawyer associates with a lawyer licensed to practice in this jurisdiction. For these paragraphs to apply, however, the lawyer admitted to practice in this jurisdiction must actively participate in and share responsibility for the representation of the client.
[9] Domestic Lawyers not admitted to practice generally in a jurisdiction may be authorized by law or order of a tribunal or an administrative agency to appear before the tribunal or agency. This authority may be granted pursuant to formal rules governing admission pro hac vice or pursuant to informal practice of the tribunal or agency. Under paragraph (c)(2), a Domestic Lawyer does not violate this Rule when the Domestic Lawyer appears before a tribunal or agency pursuant to such authority. To the extent that a court rule or other law of this jurisdiction requires a Domestic Lawyer to obtain admission pro hac vice before appearing before a tribunal or administrative agency, this Rule requires the Domestic Lawyer to obtain that authority.
[10] Paragraph (c)(2) also provides that a Domestic Lawyer rendering services in this jurisdiction on a temporary basis does not violate this Rule when the Domestic Lawyer engages in conduct in anticipation of a proceeding or hearing in a jurisdiction in which the Domestic Lawyer is authorized to practice law or in which the Domestic Lawyer reasonably expects to be admitted pro hac vice. Examples of such conduct include meetings with the client, interviews of potential witnesses, and the review of documents. Similarly, a Domestic Lawyer may engage in conduct temporarily in this jurisdiction in connection with pending litigation in another jurisdiction in which the Domestic Lawyer is or reasonably expects to be authorized to appear, including taking depositions in this jurisdiction.
[11] When a Domestic Lawyer has been or reasonably expects to be admitted to appear before a court or administrative agency, paragraph (c)(2) also permits conduct by lawyers who are associated with that lawyer in the matter, but who do not expect to appear before the court or administrative agency. For example, subordinate Domestic Lawyers may conduct research, review documents, and attend meetings with witnesses in support of the Domestic Lawyer responsible for the litigation.
[12] Paragraph (c)(3) permits a Domestic Lawyer, and Paragraph (e)(3) permits a Foreign Lawyer, to perform services on a temporary basis in this jurisdiction if those services are in or reasonably related to a pending or potential arbitration, mediation, or other alternative dispute resolution proceeding in this or another jurisdiction, if the services arise out of or are reasonably related to the Domestic or Foreign Lawyer’s practice in a jurisdiction in which the Domestic or Foreign Lawyer is admitted to practice. The Domestic Lawyer, however, must obtain admission pro hac vice in the case of a court-annexed arbitration or mediation or otherwise if court rules or law so require.
[13] Paragraph (c)(4) permits a Domestic Lawyer to provide certain legal services on a temporary basis in this jurisdiction that arise out of or are reasonably related to the Domestic Lawyer’s practice in a jurisdiction in which the Domestic Lawyer is admitted but are not within paragraphs (c)(2) or (c)(3). These services include both legal services and services that nonlawyers may perform but that are considered the practice of law when performed by lawyers. Paragraph (e)(4)(i) permits a Foreign Lawyer to provide certain legal services in this jurisdiction on behalf of a client who resides or has an office in the jurisdiction in which the Foreign Lawyer is authorized to practice. Paragraph (e)(4)(ii) permits a Foreign Lawyer to provide certain legal services on a temporary basis in this jurisdiction that arise out of or are reasonably related to a matter that has a substantial connection to the jurisdiction in which the Foreign Lawyer is authorized to practice. These services include both legal services and services that nonlawyers
may perform but that are considered the practice of law when performed by
lawyers.
[14] Paragraphs (c)(3) and (c)(4) require that the services arise out of
or be reasonably related to the Domestic Lawyer’s practice in a jurisdiction
in which the Domestic Lawyer is admitted. Paragraphs (e)(3) and (e)(4)(ii)
require that the services arise out of or be reasonably related to the
Foreign Lawyer’s practice in a jurisdiction in which the Foreign Lawyer is
admitted to practice. A variety of factors evidence such a relationship. The
Domestic or Foreign Lawyer’s client may have been previously represented by
the Domestic or Foreign Lawyer, or may be resident in or have substantial
contacts with the jurisdiction in which the Domestic or Foreign Lawyer is
admitted. The matter, although involving other jurisdictions, may have a
significant connection with that jurisdiction. In other cases, significant
aspects of the Domestic or Foreign Lawyer’s work might be conducted in that
jurisdiction or a significant aspect of the matter may involve the law of
that jurisdiction. The necessary relationship might arise when the client’s
activities or the legal issues involve multiple jurisdictions, such as when
the officers of a multinational corporation survey potential business sites
and seek the services of their Domestic or Foreign Lawyer in assessing the
relative merits of each. In addition, the services may draw on the Domestic
or Foreign Lawyer’s recognized expertise developed through the regular
practice of law on behalf of clients in matters involving a particular body
of federal, nationally-uniform, foreign, or international law.
[15] Paragraph (d) identifies two circumstances in which a Domestic
Lawyer, who is not disbarred or suspended from practice in any jurisdiction,
may establish an office or other systematic and continuous presence in this
jurisdiction for the practice of law as well as provide legal services on a
temporary basis. Except as provided in paragraphs (d)(1) and (d)(2), a
Domestic Lawyer who establishes an office or other systematic or continuous
presence in this jurisdiction must become admitted to practice law generally
in this jurisdiction.
[16] Paragraph (d)(1) applies to a Domestic Lawyer who is employed by a
client to provide legal services to the client or its organizational
affiliates, i.e., entities that control, are controlled by, or are under
common control with the employer. This paragraph does not authorize the
provision of personal legal services to the employer’s officers or
employees. The paragraph applies to in-house corporate lawyers, government
lawyers and others who are employed to render legal services to the
employer. The Domestic Lawyer’s ability to represent the employer outside
the jurisdiction in which the Domestic Lawyer is licensed generally serves
the interests of the employer and does not create an unreasonable risk to
the client and others because the employer is well situated to assess the
Domestic Lawyer’s qualifications and the quality of the Domestic Lawyer’s
work.
[17] If an employed Domestic Lawyer establishes an office or other
systematic presence in this jurisdiction for the purpose of rendering legal
services to the employer, the Domestic Lawyer may be subject to registration
or other requirements, including assessments for client protection funds and
mandatory continuing legal education.
[18] Paragraph (d)(2) recognizes that a Domestic Lawyer may provide legal services in a jurisdiction in which the Domestic Lawyer is not licensed when authorized to do so by federal or other law, which includes statute, court rule, executive regulation or judicial precedent. Paragraph (e)(4)(iii) recognizes that a Foreign Lawyer may provide legal services when the services provided are governed by international law or the law of a foreign jurisdiction.
[19] A Domestic or Foreign Lawyer who practices law in this jurisdiction
pursuant to paragraphs (c), (d) or (e) or otherwise is subject to the
disciplinary authority of this jurisdiction. See Rule 8.5(a).
[20] In some circumstances, a Domestic Lawyer who practices law in this
jurisdiction pursuant to paragraphs (c) or (d) may have to inform the client
that the Domestic Lawyer is not licensed to practice law in this
jurisdiction. For example, that may be required when the representation
occurs primarily in this jurisdiction and requires knowledge of the law of
this jurisdiction. See Rule 1.4.
[21] Paragraphs (c), (d) and (e) do not authorize communications
advertising legal services to prospective clients in this jurisdiction by
Domestic or Foreign Lawyers who are admitted to practice in other
jurisdictions. Whether and how Domestic or Foreign Lawyers may communicate
the availability of their services to prospective clients in this
jurisdiction is governed by Rules 7.1 to 7.5.
For more information, e-mail William Rich at
bill.rich@hklaw.com or call toll free, 1-888-688-8500.
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