Freezing a Financial Account

Financial institutions are permitted to freeze a customer's account if they believe that the account is at risk of being misappropriated or they suspect unauthorized activity. The institution's policies and customer agreements will discuss this option; for example, Bank of America's Deposit Agreement and Disclosures states, "If at any time we believe that your account may be subject to irregular, unauthorized, fraudulent or illegal activity, we may, in our discretion, freeze some or all of the funds in the account and in other accounts you maintain with us, and/or delay transactions, without any liability to you, until such time as we are able to complete our investigation..."

Financial institutions need to balance various federal and state consumer protection laws designed to protect account holders from wrongfully being denied access to their funds with fraud-prevention laws imposing various reporting requirements and restrictions on permitting illegal activity. Both federal and state laws protect financial institutions from taking affirmative action with respect to an account under certain circumstances. For example, Utah's Financial Exploitation Prevention Act provides states, "If a qualified individual reasonably believes that executing a requested wire transfer will result in financial exploitation, the covered financial institution may (a) delay the wire transfer; and (b) contact [authorities]..." Utah Code 7-26-201(2).

These laws and policies often become relevant in the case of financial accounts owned by elderly or otherwise vulnerable adults, and various laws and policies specifically address such specific situations. See, for example, Utah Code 7-26-301(1). It is not uncommon for an elderly account holder to be in the early stages of dementia or otherwise compromised such that a question arises as to their capacity to properly manage their finances. Such situations can lead to competing claims to an account among family members. Again, quoting Bank of America's Deposit Agreement, "We are not required to make payment from an account to [any] person claiming an interest in any funds in the account [if]... there may be a bona fide dispute between the signers, beneficiaries, payees, or other persons concerning their rights to the account proceeds..."

One tool available to advocates for vulnerable adults is to put financial institutions on notice of a dispute over an account or exploitation of their client. This may be all the bank needs to freeze the account until a proper investigation, settlement agreement, or court order can be obtained.

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New Form 990 Upload Requirement for Utah Nonprofits

As I discussed in a previous post, the Utah legislature recently removed the requirement that charitable organizations register with the Division of Consumer Protection in order to legally solicit contributions. At that time, new administrative rules were to be drafted requiring certain charities "to upload their most recent Form 990 as part of the corporation's filing process."

Pursuant to new R152-22-7, charities must begin submitting a PDF of their IRS Form 990 on an annual basis "using the process established by the Division of Corporations and Commercial Code" at the time the charitable organization registers as either a domestic or foreign nonprofit corporation or submits its annual report to the Division of Corporations and Commercial Code.

The new online process established by the Division of Corporations for filing a renewal for a nonprofit corporation now asks whether the corporation is a "charitable organization" as defined in Utah Code 13-22-2 and, if the question is answered affirmatively, asks if an IRS Form 990 filing requirement exists. Unless the corporation is exempt from filing a Form 990, in order to complete the renewal with the Division of Corporations, a copy of the most recent Form 990 must be uploaded.

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Changing a Sex Designation on a Registered Birth Certificate

In a prior post from 2022, I discussed Utah Code 26-2-15, which has since been recodified to Utah Code 26B-8-119, pursuant to which a person may petition for a court order establishing the fact, time, and place of a birth for which no registered birth certificate is obtainable. In this manner, a birth certificate could be issued where one previously did not exist. At this time, nearby section 26-2-11 of the Utah Code provided a means for amending an existing birth certificate. Specifically, this statute provided instruction to the registrar that if a name change or sex change had been approved by a court, pursuant to an application form approved by the registrar, the registrar was required to "note the fact of the amendment on the otherwise unaltered original certificate."

Utah Code 26-2-11 was repealed and reenacted in 2023 to create "the procedure a court must follow to grant a petition to amend the sex designation of a birth certificate." Pursuant to this reenacted statute, a court may grant a sex designation change on a birth certificate if, among other things, the petitioner shows by clear and convincing evidence that he or she "has transitioned from the sex designation of the biological sex at birth to the sex sought in the petition [and has] outwardly expressed as the sex sought in the petition in a consistent and uniform manner for at least six months; and... suffers from clinically significant distress or impairment due to the current sex designation on the birth certificate."

Upon receiving such a court order, the petitioner is entitled to receive "a birth certificate that does not indicate which fields were amended..." Utah Code 26-2-11 was recodified in March of 2023 to Utah Code 26B-8-111. This statute was amended earlier this year to require a petitioner for a name or sex designation change to indicate whether they are registered with the Sex and Kidnap Offender Registry and allow the court to consider whether to grant the petition for any who are so registered.

Utah Code 26B, Chapter 8, Part 1 - Vital Statistics contains the law for issuing and modifying birth and death certificates. Section 111 is particularly helpful to individuals who have transitioned from their biological sex at birth as indicated on their original birth certificate.

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Donations of Closely-Held Business Interests

As I discussed in a prior post, a donation of closely-held stock to a charitable organization can be highly tax efficient because (1) the donor receives a deduction for the fair market value of the donated asset, (2) the donor avoids paying tax on the asset's built-in gain, and (3) the charity, being tax-exempt, also avoids paying tax on any gain from the sale of the asset. However, the IRS has historically and in recent years especially challenged the avoidance of tax on the built-in gain under what is known as the "assignment of income" doctrine.

Often, a donation of stock or interest in an LLC occurs shortly before the sale of the business. In these cases, the IRS argues that the donor's right to proceeds from the sale of the donated interests became "fixed" or “practically certain to occur" before the gift was actually made, meaning that the donor would be required to pay tax on the gain built into the interest transferred to the charity.

Whether the donor's right to the proceeds associated with the gifted interests is "fixed" is a facts-and-circumstances test. In Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34 (2023), the court looked at a donation that occurred shortly before a sale and considered factors including the status of the revisions of transaction documents at the time of the gift, the target company taking actions that presuppose the sale will close, any legal obligation to sell by the donee, and the status of the corporate formalities required to finalize the transaction.

The court in Hoensheid ruled against the taxpayer in a circumstance that was similar to many donation and sale transactions. There are indicators that the IRS is automatically pulling for audit any in-kind gift make within two weeks of the liquidity event, although legally there is still no bright-line rule on timing in an assignment-of-income case. Anyone contemplating a donation of a closely-held business interest before selling their business should obtain experienced legal counsel before undertaking such a transaction.

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Introduction to the Utah Advance Health Care Directive Act

Author's Note: I help maintain certain Thomson Reuters Practical Law resources for trusts and estates in Utah, including their Advance Health Care Directive (UT) resource. I recently helped update this resource as a result of Utah's S.B. 79 - Estate Planning Recodification, which, among other things, changed many Utah statutory references. This post draws upon this Thomson Reuters resource.

An important part of any person's estate plan is the designation of an agent to make health care decisions for the person if they cease to be able to make or communicate their own decisions. Similarly, it is important to provide instructions to govern medical treatment, including wishes for the withholding or withdrawal of life-sustaining care. Utah's Advance Health Care Directive Act provides a statutory form that accomplishes both of these objectives and which is found in Utah Code 75A-3-303.

The statutory form in Utah is optional but highly recommended because it is presumed to be valid if executed properly and is the form that third-party health care providers are generally familiar with. The statutory form consists of two parts: Part I - Health Care Power of Attorney, wherein a health care agent may (but is not required to be) designated, and Part II - Living Will, wherein the individual’s end-of-life treatment preferences are expressed.

In addition to providing for the naming of an agent, Part I sets forth the authority the agent should have. In a guardianship proceeding, the nomination of a guardian often is critical; accordingly, the person executing the health care directive should usually initial "yes" in Part I of the health care directive form to designate the same person named as agent to serve as their guardian. In my practice, this guardian nomination is typically the most important section of the health care directive form.

A person's wishes for end-of-life is often the most important section of the form for agents, successor agents, and family members. Persons executing a health care directive should express their wishes for end-of-life care on Part II of the form but also discuss these wishes with their agents and family and also include any additional language that may clarify their wishes. By executing an Advance Health Care Directive and carefully considering each of the sections of the form, individuals can significantly reduce the possibility for conflict and uncertainty when they reach the end stages of their lives.

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The Jointly-Owned "Convenience Account"

One common source of controversy in end-of-life planning and estate and trust administration is the existence of a financial account owned jointly by the decedent/contributor and another person who is not the sole heir of the decedent's estate. As I discussed in a previous post, the key features of most joint accounts is that any party to the account may unilaterally withdraw the funds in their entirety and the surviving joint account holder will automatically be entitled to retain the remaining amounts in the account upon the death of the other owner. The last will or trust agreement of the decedent would have no impact on this result.

After the death of the owner of the contributor of the funds, the other heirs of the estate may attempt to recoup funds that automatically passed by operation of law by the surviving joint owner. However, this is a difficult and expensive process because the funds will no longer be in the name of the contributor, and the law exonerates the bank if it pays out the funds to the surviving joint owner. In litigation to recover the funds from the surviving joint owner, the court will presume that all aspects of the joint account arrangement are valid and the other heirs will need to overcome this presumption by clear and convincing evidence.

Theories for overcoming the presumption that ownership passes to the surviving joint owner include fraud, mistake, incapacity, or other infirmity. Another theory for overcoming the survivorship presumption on a joint account is that the account was intended as a mere "convenience account," or an account established to assist with handling money and affairs but with no intent to pass ownership of the remaining funds.

Factors that could potentially suggest the existence of a convenience account include the decedent being the sole source of the funds and retaining possession of checkbooks, debit cards, etc.; the failure of the surviving joint owner to assert ownership during the lifetime of the contributor; or the acknowledgment of the non-contributor of the intent to use the funds to provide for the contributor's needs. However, factors that suggest that the account was not set up jointly solely for convenience, but rather with intent to pass ownership, include the account balance being far in excess of what the contributor needed, the contributor relinquishing possession of checkbook, or the non-contributor asserting ownership during lifetime. See McCullough v. Wasserback, 518 P.2d 691 (1974).

In order to avoid disputes, individuals should carefully consider all of the legal implications of creating a new joint account or adding a family member to an existing account as a joint owner. If the account is intended to be a mere convenience account, it should be documented as such along with the contributor's other estate planning documents.

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Old Expired Entities Can Now Be Reinstated in Utah

On March 13, 2024, Utah's governor signed S.B. 14 - Corporate Dissolution Amendments, which is effective beginning this month. Previously, a business entity that had been administratively dissolved for failing to file an annual report only had two years from dissolution in which to file for retroactive reinstatement. Under this new law, entities can apply for reinstatement "under the corporation's same corporate name at any time after the effective date of dissolution," if the corporate name is still available.

This new law is a significant improvement to Utah's corporate regime. Previously, "[t]he termination of the status of an entity as a corporation (for state law purposes) could possibly cause a change in the treatment of the entity for federal income tax purposes, unless the state law action can be treated as irrelevant or is subsequently reversed retroactively." Streng, "IRS Treatment of the State Law Dissolution (and Revitalization) of a Corporation", Real Estate Journal (BNA). In other words, there was at least a question of whether an inadvertent entity dissolution could create irreparable federal income tax problems in Utah simply because retroactive reinstatement after two years was unavailable.

Under the new law, a dissolved entity retains its corporate name for five years and can reinstate under that same name within that five-year timeframe. If the prior name is unavailable, it appears that the same entity can still retroactively reinstate, just under a new name. S.B. 14 will remove legal uncertainty created by inadvertent administrative dissolution of Utah entities.

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