Planning for the Risk of Trust Litigation with Trust Situs or Governing Law Selection - SPRING 2022 - American Bar Association
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VOL 36, NO 2
MAR/APR 2022
SPRING 2022
Planning for the Risk of Trust Litigation with
Trust Situs or Governing Law Selection
SPRING 2022
3 Planning for the Risk of Trust Litigation with Trust
Situs or Governing Law Selection
By: Timothy M. Ferges
6 CFTC and SEC Perspectives on Cryptocurrency and Editor
Digital Assets - Volume I: A Jurisdictional Overview Robert Steele (TE)
By: Stephen M. Humenik, Cheryl L. Isaac,
Keri E. Riemer and Christine Mikhael
Articles Editor for Real Property
Cheryl Kelly (RP)
11 Green Book Proposals Related to
Estate and Gift Tax
By: Samuel Olchyk and Allison R. Church Articles Editor for Trust and Estate
Ray Prather (TE)
13 Estate Administration: The Digital Assets Dilemma
By: Laura Walliss Assistant Real Property Editors
John Trott (RP)
15 Spotlight: Wealth Structuring and Katie Williams (RP)
Regulation in Canada Sarah Cline (RP)
By: Margaret R. O’Sullivan and Marly J. Peikes
Assistant Trust and Estate Editors
19 FinCEN Commences Rulemaking Process to Implement Keri Brown (TE)
AML Reporting Requirements for Real Estate Sector Brandon Ross (TE)
By: Betty Santangelo, Melissa Goldstein, Julian Wise
Anne Kelley Russell (TE)
and Hadas Jacobi
22 Directors and Officers Liability Insurance: Technology/Practice Editor
An Essential Coverage for the Real Estate and for Trust and Estate
Construction Industry Martin Shenkman (TE)
By: Craig M. Hirsch
25 Fracas in the French Quarter: Fifth Circuit Weighs in
on the Ongoing Controversy Over the Intersection of
Bankruptcy Code Sections 363(f) and 365(h)
By: David Farrell
28 Rethinking Force Majeure Clauses in Commercial
Leases in Response to COVID-19
By: Daniel Q. Orvin
The materials contained herein represent the opinions of the authors
and editors and should not be construed to be those of either the
30 Can We Save Time by Using a Negotiated Document American Bar Association or the Section of Real Property, Trust and
Estate Law unless adopted pursuant to the bylaws of the Association.
from Another Deal? Nothing contained herein is to be considered the rendering of legal
By: Joshua Stein or ethical advice for specific cases, and readers are responsible for
obtaining such advice from their own legal counsel. These materials
and any forms and agreements herein are intended for educational
and informational purposes only.
© 2022 American Bar Association. All rights reserved.
SPRING 2022 2 eReport
Planning for the Risk
a particular state would impose on the trust’s income, or other
matters.
of Trust Litigation In some cases, it could serve the grantor well to also consider
the possibility of litigation and how a dispute might play out
with Trust Situs before the courts of one jurisdiction versus another. This
can be particularly true where a grantor has specific concerns
or Governing Law
regarding a litigious beneficiary or family member.
As a general matter, the administration of a trust “is
Selection supervised by the courts of that state only in which the
administration of the trust is located.” Restatement (First) of
Conflict of Laws § 299. In the case of a testamentary trust, that
By: Timothy M. Ferges is presumed to be the state of the testator’s domicile upon her
death. Id at § 298, comment a; N.J.S.A. 3B:31-8(a). In re John-
When including trust situs and governing law provisions, ston, 127 NJ Eq. 576 (Prerog. 1940), affirmed 129 N.J.Eq. 104
estate planners often focus on tax and asset protection issues. (E. & A. 1941).
This article describes how these provisions affect trust litiga-
tion in ways that are rarely considered at the planning stage. A grantor of an inter vivos trust may specifically designate in
the trust instrument the principal place of the trust’s admin-
When litigation arises relating to administration of a trust, istration. Such designation will be respected by the court of
the procedural law of the forum state can have a profound designated jurisdiction so long as: “(1) a trustee maintains a
effect on the proceeding. Likewise, the substantive law that place of business located in or a trustee is a resident of the
would govern a trust’s administration may vary significantly designated jurisdiction; or (2) all or part of the administration
from state to state. As our society becomes more mobile, we occurs in the designated jurisdiction.” N.J.S.A. 3B:31-8(a). On
are no longer so committed to one particular jurisdiction the other hand, if the trust instrument does not designate the
when creating a trust. But in determining where a trust will site of administration, it is presumed to be New Jersey if the
be administered or in the selection of a trust’s situs or gov- trust is governed by the law of New Jersey. Id.
erning law, estate planners tend to limit their focus on issues
other than the potential for litigation -- such as the creditor Setting aside those jurisdictional issues, the substantive law
protection available in a particular jurisdiction, the taxes that governing a trust’s administration can vary from state to state.
SPRING 2022 3 eReport
Thus in addition to the state of jurisdiction, one must con- terrorem” (no contest) clause in the trust instrument. The
sider what state law will govern. Under New Jersey’s Trust enforceability of such a clause, however, may depend upon
Code, the meaning and effect of the trust terms are generally the applicable law. In New Jersey, an in terrorem clause is
determined by (a) the law of the jurisdiction designated in the unenforceable so long as the contestant had “probable cause”
trust instrument or (b) the law of the jurisdiction that has “the for instituting his or her challenge. N.J.S.A. 3B:3-47; N.J.S.A.
most significant relationship to the matter at issue.” N.J.S.A. 3B:3-33.1(b). In contrast, in terrorem clauses are generally
3B:31-7. enforced in New York, whether or not the contestant pos-
sessed probable cause to challenge the trust, subject to certain
That substantive law would govern a dispute or proceeding statutory exceptions. EPTL 3-3.5; Tumminello v. Bolton, 59
involving a trust’s administration even if it is not the law of A.D.3d 727 (NY 2d Dep’t 2009); Matter of Stralem, 181 Misc.2d
the forum state that maintains jurisdiction over the dispute. 715, 715 (NY Surr. Ct. Nassau Cty. 1999).
That may require consideration of law of more than one state
as “the procedural law of the forum state applies even when a In addition to trust contests, disputes may arise regarding
different state’s substantive law must govern.” N. Bergen Rex the construction of a trust, and the applicable procedural and
Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 569 (1999); In re substantive law may have an impact on such a dispute. New
May 1, 1992 Mark Family Trust, 2016 WL 4145851 (App. Div. Jersey, for example, takes a more liberal approach than some
2016). other states when it comes to the admission of evidence. A
New Jersey court may review extrinsic evidence (i.e., evi-
Thus, for example, if a trust, by its terms, were governed by dence outside the four corners of the instrument) to evaluate
the law of New York, but its principal place of administration the probable intent of the grantor. Fidelity Union Trust Co. v.
were in New Jersey, a New Jersey court might apply New York Robert, 36 N.J. 561, 573 (1962). This may be true even if the
law to construe its terms. In doing so, however, it would only instrument appears unambiguous on its face. Id. In other
consider evidence admissible under the procedural law of states, such as New York, extrinsic evidence can only be admit-
New Jersey. In other words if a grantor, or her trustee, has con- ted if doubt or ambiguity exists within the four corners of the
cerns about the prospect of litigation in the future, she may instrument. In re Chase Manhattan Bank, 6 N.Y.3d 456, 460
wish to consider both the forum of jurisdiction as well as the (2006). Thus if a grantor is concerned a litigant might seek to
governing substantive law. contradict the intent that she expressed in the instrument, she
may wish to consider whether she would want extrinsic evi-
For example, after a grantor’s death, a family member could dence admissible in such a dispute.
challenge the validity of a trust created and funded during
the grantor’s lifetime under the premise that it is the product Of course there are many other disputes that may arise in
of undue influence. Once the contestant establishes the exis- the administration of a trust. Perhaps it is more difficult to
tence of a confidential relationship between the grantor and remove a trustee under the law of one state versus another.
proponent of the instrument, under New Jersey law, the bur- Perhaps one jurisdiction applies more stringent rules than
den of proof is then shifted to the proponent to establish the another when evaluating the prudence of trust investments.
absence of undue influence. Pascale v. Pascale, 113 N.J. 20,
31 (1988). And the proponent’s burden of persuasion will be Other considerations may be warranted. The courts may oper-
high – she must meet her burden by clear and convincing evi- ate differently in one state versus another. Perhaps it is easier
dence. Id. Thus New Jersey law could have a profound impact for a plaintiff to pursue a particular claim in New Jersey ver-
on such litigation – the proponent of the instrument may sus in another jurisdiction, or vice versa. Perhaps a grantor,
face a more challenging position in New Jersey compared to concerned about potential litigation, may wish to select a
another state (albeit, there are other states that apply similar jurisdiction where it is procedurally more burdensome to pur-
mechanisms to adjudicate such disputes). sue a claim or where a claim cannot be resolved expediently.
On the other hand, if a trust is challenged under the premise Bearing all of this in mind, in some circumstances, it may be
that the grantor lacked the requisite mental capacity to exe- possible to move the situs of a trust after it is created. Per-
cute it, and the trust was revocable when it was created, the haps the trust instrument specifically empowers the trustee
proponent need only establish that the grantor maintained to move the situs (that authorization is often incorporated
a minimal level of mental capacity when it was signed (the in modern estate planning documents). But in the absence
same capacity required to sign a will). N.J.S.A. 3B:31-42; Gel- of such affirmative authority under the trust instrument,
lert v. Livingston, 5 N.J. 65, 73 (1950). Thus it may be more mechanisms exist under New Jersey law, allowing one to effec-
difficult in New Jersey than in other states for a litigant to tuate transfer of a trust’s principal place of administration.
challenge a revocable trust on capacity grounds. For example, under New Jersey’s Trust Code, a trustee can
potentially do so by providing notice to the “qualified benefi-
To deter litigation, a grantor may wish to include an “in ciaries” (as defined under N.J.S.A. 3B:31-2 and 3B:31-10) of a
SPRING 2022 4 eReport
proposed transfer within 60 days of initiating such transfer. N.J.S.A. 3B:31-8(d). Of course, in determining whether to create a trust that is sub- ject to jurisdiction or governing law of a particular state or in determining whether to move the trust situs or change its governing law, there are a host of non-litigation issues and risks that should be considered. For example, the law of some states allow for significant asset protection, even if the trust is self-settled, but the majority of states do not. Some states, such as New Jersey, have eliminated the rule against perpetu- ities, while others have not. Perhaps most significant to many, some states impose tax on a trust’s income, while others do not. In selecting a trust’s situs and governing law, estate planners often focus their attention exclusively on these non-litiga- tion issues. The possibility of litigation, however, can be an equally important consideration. Thus depending on the priorities of the grantor and the risks perceived, one should consider the substantive and procedural law that might gov- ern such a dispute and whether it makes sense to avoid or target the law of a particular jurisdiction. Reprinted with permission from the March 22, 2021, issue of the New Jersey Law Journal. Further duplication without permission is prohibited. All rights reserved. © 2021 ALM Media Properties, LLC. SPRING 2022 5 eReport
Securities and Exchange Commission (SEC) or the Commodi-
CFTC and SEC ties and Futures Trading Commission (CFTC) will be primarily
responsible to regulate the use of crypto and crypto-related
Perspectives on activities? SEC Chair Gary Gensler has stated that “[crypto]
products are subject to the securities laws and must work
Cryptocurrency and within our securities regime,” while then CFTC Commissioner
Quintenz expressed that “the SEC has no authority over pure
commodities or their trading venues, whether those commod-
Digital Assets - ities are wheat, gold, oil…or crypto assets.” In this article, we
provide a high-level overview of the SEC’s and CFTC’s current
Volume I: A jurisdiction over and treatment of crypto, and discuss recent
enforcement actions involving crypto and the potential signif-
Jurisdictional icance thereof to other market participants.
1. SEC Jurisdiction
Overview The SEC has the authority to govern “securities”4, which has
By: Stephen M. Humenik, Cheryl L. Isaac, been defined to include, among other things “investment con-
tracts.” Notably, “currency” is not a security. To the extent that
Keri E. Riemer and Christine Mikhael a form of a digital asset is determined to be a note, investment
contract or other type of security, it would be subject to SEC
Attorneys from K&L Gates LLP explore the question of Fed- oversight and applicable securities laws.
eral regulation of cryptocurrencies and digital assets in the
financial markets, and whether the Securities and Exchange Whether a digital asset is considered an investment contract
Commission or the Commodities and Futures Trading Com- depends on the test outlined by the U.S. Supreme Court
mission will take the lead. in SEC v. W.J. Howey. In this case, the Supreme Court found
that an “investment contract” exists where (i) there is the
I. Introduction investment of money; (ii) in a common enterprise; (iii) with
The rise of cryptocurrencies and digital assets in the financial a reasonable expectation of profits to be derived; (iv) from
markets, including the investment management industry, has the efforts of others. The Court emphasized that the deter-
given rise to a crucial question: which federal regulator - the mination of whether an investment contract exists lies in the
SPRING 2022 6 eReport
circumstances surrounding the contract and the manner in cryptocurrencies or others as “currencies” generally will not
which it is offered, sold, or resold. withstand regulatory scrutiny because they are goods ex-
changed in a market for uniform quality and value and thus
The Howey test was emphasized by then Chair Clayton in his fall both within the common definition of commodity and
February 2018 speech before the Senate Banking Committee the Commodity Exchange Act’s (CEA) definition of commod-
on digital assets.6 Later that year, then Director of the SEC’s ity.13 It is important to note that the “jurisdictional authority
Division of Corporate Finance William Hinman applied of CFTC to regulate virtual currencies as commodities does
the Howey7 test to crypto. Like the Court, he emphasized that not preclude other agencies from exercising their regulatory
for digital assets specifically, the SEC looks to the nature of power when virtual currencies function differently than
the transaction rather than the item being sold - and whether derivative commodities.”14
the Howey factors are present - to determine whether there
is an investment contract. He noted that digital assets that Even though the CFTC has determined that virtual currencies
are sold “as part of an investment; to non-users; by promot- are commodities, the CFTC’s jurisdiction over virtual currency
ers to develop the enterprise – can be, and, in that context, markets is limited to policing fraudulent and manipulative
most often is, a security – because it evidences an investment activities in interstate commerce. Beyond this type of enforce-
contract.”8 He further noted that networks on which a coin ment authority, the CFTC does not generally oversee virtual
is sufficiently decentralized, that is where the purchasers currency transactions or exchanges that do not involve mar-
no longer reasonably expect a person to carry out essential gin, leverage, or financing, and cannot, for example, require a
managerial efforts, do not represent investment contracts. spot crypto exchange to register with the CFTC. As a result of
the above, the CFTC is said to have “enforcement jurisdiction”
It is important to note that the SEC’s views on its ability to reg- over cryptocurrency and digital assets, but not “registration
ulate crypto have not changed in recent years. SEC Chair Gens- jurisdiction.” A spot cryptocurrency product is generally a
ler continues to urge legislators to grant the SEC more scope to product that results in actual delivery of the cryptocurrency
oversee crypto in an effort to enhance investor protection. He within a particular market’s spot delivery period. An example
has also stated, ““It doesn’t matter whether it’s a stock token, of a U.S.-based spot market is Coinbase.
a stable value token backed by securities, or any other virtual
product that provides synthetic exposure to underlying secu- Despite the CFTC’s lack of registration jurisdiction over spot
rities. These products are subject to the securities laws and markets, to the extent that a cryptocurrency product in a
must work within our securities regime…”9 spot market provides for margin or leverage and is offered to
retail customers, the product would generally be considered a
2. CFTC Jurisdiction futures contract subject to CFTC jurisdiction.15 Specifically, to
the extent that spot trading provides for margin and is offered
In contrast to the SEC, the CFTC has full regulatory authority to retail U.S. persons, it falls under the CFTC’s broader and
over derivatives transactions (including swaps, futures, and more onerous registration jurisdiction.16
options), and more limited authority to regulate fraud and
manipulation in commodities markets. The CFTC made its Additionally, there is further heightened regulatory scrutiny
first official statement on its jurisdiction over digital assets with regards to margined or leveraged products. Recently,
in 2015. Later, in 2016, the CFTC cemented its position in an CFTC acting Director of Enforcement Vincent McGonagle
enforcement action stating that, “bitcoin and other virtual stated, “In the digital asset space, we’ve brought several
currencies are encompassed in the definition [of commod- actions against entities where they’re offering digital assets,
ity] and properly defined as commodities, and are subject Bitcoin or others on a margin or finance basis…and those prod-
as a commodity to the applicable provisions of the [Com- ucts should be on an exchange.”17
modity Exchange] Act and [CFTC] Regulations.10 Then Chair
Heath Tarbert expanded upon this definition in October of CFTC Chair Rostin Behnam recently stated that, “I look
2019 stating that, “it is my view as Chairman of the CFTC forward to working with this [Senate Agriculture] Commit-
that Ether is a commodity.”11 Additionally, in a recent case tee to reexamine – and, if appropriate, expand – the CFTC’s
in the Southern District of New York, the court found that authority to ensure both the benefits and promise of the
“Bitcoin, Ether, Litecoin, and Tether tokens, along with other emerging digital asset market and the underlying technology
digital assets, are encompassed within the broad definition can be harnessed without undue harm to customers and
of “commodity” under Section 1a(9) of the [Commodity financial market stability.”18 Chair Behnam also stated during
Exchange] Act.”12 the confirmation hearing that the recent enforcement actions
were the “tip of the iceberg.” This means there are several
As a result, it is widely accepted that established and broadly other enforcement cases in the CFTC’s docket, which will
decentralized virtual currencies, like Bitcoin and Ether, are become public upon the filing of such enforcement cases.
“commodities” and not currencies. Efforts to categorize these
SPRING 2022 7 eReport
II. SEC and CFTC Enforcement Actions quences, including that all of its contracts are unenforceable.
1. SEC
First, the SEC determined that BIAs were sold as securities
i. Ripple Labs, Inc. (determined in accordance with the Howey test) because (i)
In 2020, the SEC initiated an enforcement action against BlockFi promised BIA investors a variable interest rate, which
Ripple Labs Inc. (Ripple), alleging that the sale of Ripple’s dig- was determined by BlockFi on a periodic basis, in exchange
ital token (XRP), worth a notional amount of approximately for crypto assets loaned by the investors, who could demand
US$1.3 billion, was an unregistered securities offering.19 The that BlockFi return their loaned assets at any time, (ii) inves-
SEC alleged that Ripple distributed billions of dollars’ worth tors in the BIAs had a reasonable expectation of obtaining
of XRP as employee compensation in lieu of cash in order a future profit from BlockFi’s efforts in managing the BIAs
to finance its business. Ripple provides block chain-based based on BlockFi’s statements about how it would generate
networks that facilitate low-cost payments between financial the yield to pay BIA investors interest, and (iii) investors
institutions. XRP is a digital asset that is used to represent the also had a reasonable expectation that BlockFi would use
transfer of value across networks. the invested crypto assets in BlockFi’s lending and principal
investing activity, and that investors would share profits in the
Specifically, the SEC claims that XRP is a security whose offer form of interest payments resulting from BlockFi’s efforts. As a
and sale can be made only pursuant to a statutory prospec- result, the SEC found BIAs to constitute investment contracts
tus and an effective registration statement, and that because under the Securities Act. By offering and selling the BIAs to
Ripple did not file a registration statement its investors have a the general public to obtain crypto assets for the general use
rescission right. The SEC alleged that XRP met the Howey test of its business and promote the BIAs as an investment, the
by claiming that “the principal reason for anyone to buy XRP SEC determined that BlockFi offered and sold securities, there-
was to speculate on it as an investment,” that Ripple reflected by acting as an issuer, without filing a registration statement
a common enterprise, and that investors reasonably expected or qualifying for an exemption from the registration require-
to profit from those efforts. It also claims that, because Ripple ments, in violation of the 1940 Act.
did not provide a registration statement, it made material
misstatements and omissions of information that is required Additionally, the SEC found that, for a period of almost two
of securities issuers when soliciting public investment. While years, BlockFi’s activities and holdings deemed it to be an “in-
the case is still ongoing, in January 2022, the judge presiding vestment company” under Section 3(a)(1)(C) of the 1940 Act.
over the case did grant Ripple’s request for privileged SEC This section generally defines an “investment company” as
documents, which reflect the SEC’s determination on its being any issuer that is engaged or proposes to engage in the
classification of XRP as a security. business of investing, reinvesting, owning, holding, or trading
in securities, and owns or proposes to acquire “investment se-
The final outcome of the Ripple case, whether it will result in curities” (as defined in Section 3(a)(2) of the 1940 Act) having
XRP’s classification as a security or not, will have significant a value of over 40% of the value of the issuer’s total assets on
implications for the SEC’s jurisdiction over digital assets. an unconsolidated basis. In the SEC’s view, the fact that Block-
Along with the BlockFi action, below, the Ripple determina- Fi lent crypto assets to institutional and corporate borrowers,
tion (when final) is expected to provide much-needed clarity lent U.S. dollars to retail investors, and obtained value by
to crypto market participants on when a digital asset would offering and selling BIAs into equities and futures, in addition
be considered a “security” and subject to much more onerous to its substantial holdings of investment securities (represent-
regulation by the SEC. We note, however, that the Ripple case ing more than 40% of the value of BlockFi’s total assets on an
is currently at the trial court level, and any decision by the unconsolidated basis) caused BlockFi to be an unregistered
court could be appealed and overturned, so it may be some investment company. As a result, the SEC alleged that BlockFi
time before we have a conclusive determination on XRP’s violated Section 7(a) of the 1940 Act by engaging in interstate
status. commerce while failing to register as an investment company
with the Commission.
ii. BlockFi Lending LLC
In February 2022, the SEC charged BlockFi Lending LLC (Block- BlockFi agreed to pay a US$50 million penalty to settle the
Fi) for failing to register the offers and sales of BlockFi Interest SEC charges and ceased its unregistered offers and sales of
Accounts (BIAs), under the Securities Act of 1933 (Securities BIAs. BlockFi further agreed to attempt to bring its business
Act).20 In addition, the SEC stated that BlockFi met the defini- within the provisions of the 1940 Act within 60 days. BlockFi’s
tion of “investment company” set forth in Section 3(a)(1)(C) of parent company recently announced that it intends to register
the Investment Company Act of 1940 (1940 Act), for at least under the Securities Act of 1933 the offer and sale of a new
a period of time, but failed to register with the SEC as it was lending product.21
required to do, because it issued securities and acquired secu-
rities. The failure of an investment company to register with Although Blockfi is the first case of its kind brought by the SEC
the SEC (absent an exemption or exclusion) has serious conse- with respect to a crypto lending platform, it may be a harbin-
SPRING 2022 8 eReport
ger of things to come, particularly as the SEC has expressed entered an order of final judgment against PaxForex for
eagerness to regulate the crypto market and recently almost violating CEA provisions regarding retail investors and for
doubled the size of the Division of Enforcement’s Crypto offering unregistered leveraged transactions in cryptocurren-
Assets and Cyber Unit. cies.26 Specifically, the order notes that the website format
solicited U.S. customers by providing customers with a drop
On 7 September 2021, Coinbase Chief Executive Officer (CEO) down menu with an option of selecting the United States as
Brian Armstrong announced that the company is under inves- the customer’s country of residence.27 The PaxForex website
tigation by the SEC due to its cryptocurrency lending practice. now states that the information on its website is not intended
Mr. Armstrong noted, that, “They [SEC] refuse to tell us why to be addressed to U.S. citizens.
they think it’s a security, and instead subpoena a bunch of
records from us (we comply), demand testimony from our Additionally, on 18 September 2021, the CFTC settled charges
employees (we comply), and then tell us they will be suing us against Payward Ventures, Inc. d/b/a Kraken (Kraken) for ille-
if we proceed to launch, with zero explanation as to why.” This gally offering margined retail commodity transactions (which
further demonstrates the point that the cryptocurrency and are presumptively treated as futures contracts unless certain
digital asset markets are under intense scrutiny from regula- mitigating factors exist) in digital assets, including Bitcoin,
tors.22 and for failing to register as a futures commission merchant
(FCM). Specifically, the CFTC alleged that Kraken offered mar-
Further, similar investigations and enforcement actions are gined digital assets to U.S. customers who were not eligible
known to be pending against Celsius Network LLC, Gemini contract participants, on an exchange that was not registered
Trust, and Voyager Digital with respect to similar interest as a derivatives contract market with the CFTC. In the pro-
bearing account offerings.23 As the SEC continues to enforce gram, Kraken supplied digital assets to customers when they
its jurisdiction over the digital asset market, we will continue purchased the assets using margin. Kraken then required
to keep you apprised of noteworthy enforcement and the customers to exit their positions and repay the assets
regulatory actions. received to trade on margin within 28 days. Customers could
not transfer assets away from Kraken until they satisfied their
2. CFTC repayment obligation, and Kraken could force liquidation if
The CFTC has initiated a number of enforcement actions relat- repayment was not made within 28 days. As a result, the CFTC
ed to crypto and has particularly been focused on exchanges ordered that Kraken pay a US$1.25 million civil monetary
that offer crypto derivatives to U.S. persons and are not regis- penalty and cease and desist from further CEA violations.28
tered with the CFTC. For instance, in October 2020, the CFTC
charged HDR Global Trading Limited, 100x Holding Limited, In addition, on 15 October 2021, the CFTC issued an order
ABS Global Trading Limited, Shine Effort Inc. Limited, and against iFinex Inc., BFXNA Inc., and BFXWW Inc. (d/b/a
HDR Global Services (Bermuda) Limited’s (BitMEX) owners Bitfinex) for violations of Sections 4(a) and 4(d) of the CEA.
with illegally operating a cryptocurrency derivatives trading Specifically, the CFTC alleges that Bitfinex offered spot and
platform and with anti-money laundering (AML) violations leveraged, margined, or financed trading in Bitcoin, Ether,
due to providing U.S. persons with crypto derivatives. Several and Tether to U.S. customers. The CFTC further alleges that
owners of BitMEX also were charged with related criminal of- the respondents transacted in retail commodity transactions
fenses. BitMEX replaced its leadership team after the charges without registering as an FCM. Perhaps most significantly, the
were announced, and its new CEO has recently stated that CFTC announced that the Tether stablecoin is a “commodi-
BitMEX plans to provide spot trading, brokerage, and custody ty,” reaffirming that it has enforcement jurisdiction over this
services. On 11 August 2021, the CFTC announced a consent type of cryptocurrency. The CFTC ordered that Bitfinex pay a
order in the BitMEX case. Under the consent order, BitMEX US$1.5 million civil monetary penalty and required Bitfinex
paid a US$100 million civil monetary penalty (US$50 million to implement further systems to prevent unlawful retail com-
to CFTC and US$50 million to the Financial Crimes Enforce- modity transactions.29
ment Network) and agreed to stop offering futures or other
related crypto commodity contracts in the United States until The CFTC has also initiated enforcement actions related to
it secures appropriate licensure from the CFTC. BitMEX also tokens. On 15 October 2021, the CFTC settled charges against
agreed to establish sufficient “know your customer” and AML Tether Limited, Tether Operations Limited, and Tether Inter-
procedures.24 national Limited (d/b/a Tether) for violating Section 6(c)(1) of
the CEA by making misrepresentations to customers regard-
Similarly, the CFTC had previously brought action against ing its U.S. dollar-denominated stablecoin Tether. Specifically,
Laino Group Limited (PaxForex), an international company the CFTC alleged that Tether made misrepresentations to U.S.
registered in Saint Vincent and Grenadines, which operated customers that Tether maintained sufficient fiat reserves to
PaxForex and alleged that its information technology infra- back every one of its stablecoins in circulation “one-to-one”
structure had been deployed to data centers in New York with the “equivalent amount of corresponding fiat currency”
and London.25 In June 2021, the Southern District of Texas held in reserves by Tether, and that Tether would undergo
SPRING 2022 9 eReport
routine, professional audits to demonstrate that it maintained To view all formatting for this article (eg, tables, footnotes), “100% reserves at all times.” The CFTC alleges that in actuality, please access the original here. Tether failed to maintain fiat currency reserves in accounts in Tether’s own name or in an account titled and held “in trust” Stephen M. Humenik, Cheryl L. Isaac, Keri E. for Tether to back every U.S. dollar tether token in circulation. Riemer and Christine Mikhael The CFTC has ordered that Tether pay a US$41 million fine.30 Finally, in February 2021 Coinbase reported that it was under investigation by the CFTC for alleged reckless false, mis- leading, or inaccurate reporting as well as wash trading by a former employee. On 19 March 2021, Coinbase agreed to a settlement order with the CFTC in which Coinbase did not admit or deny wrongdoing and agreed to pay US$6.5 million. The chart above summarizes certain CFTC enforcement actions. III. Conclusion Unlike the earliest days of Bitcoin trading, cryptocurrencies and digital assets have now caught the eye of federal regula- tors and are subject to a much greater level of regulatory scru- tiny. Both the CFTC and SEC are asserting their jurisdiction in this space, and in many cases, additional clarity is needed to understand whether a digital asset should be considered a commodity (subject to the CFTC’s enforcement authority), or a security (subject to the SEC’s jurisdiction). In addition, even with this clarity, a related question persists on wheth- er the SEC and CFTC collectively have sufficient regulatory authority in order to properly regulate crypto markets, or if congressional action is needed. As crypto regulation evolves, market participants will have much greater certainty, and in all likelihood a new regulatory regime involving both the SEC and CFTC. As the SEC and CFTC continue to enforce their jurisdiction over the digital asset market, we will continue to keep you apprised of all noteworthy enforcement actions and regulatory updates. SPRING 2022 10 eReport
Green Book #1. The Green Book incorporates the Build Back
Better Act that was passed by the House of
Representatives in 2021 in the baseline.
Proposals Related to Typically, the spending and revenue proposals reflect an
Estate and Gift Tax
administration’s fiscal priorities for the upcoming fiscal year.
But that is not necessarily the case this year. In light of the
ongoing discussions surrounding last year’s House-passed
By: Samuel Olchyk and Allison R. Church “Build Back Better” legislation, the Green Book states that the
administration’s proposed revenue proposals utilize a “baseline
Samuel Olchyk and Allison R. Church from Venable LLP that incorporates all revenue provisions of Title XIII of H.R.
highlight key estate and gift tax proposals from the Treasury 5376 (as passed by the House of Representatives on November
Department’s General Explanation of the Administration’s 19, 2021) [other than the SALT proposal].” In other words,
Fiscal Year 2023 Revenue Proposals – the 2023 Treasury Green this budget package assumes the enactment of the revenue
Book. provisions in the “Build Back Better Act”; the revenue proposals
in the Green Book are additional revenue proposals. Many of
On March 28, the Biden administration released its budget these proposals were described in last year’s Green Book (for
recommendations for fiscal year 2023 (which begins this fiscal year 2022) and were considered but not included in the
October 1). The budget calls for nearly $5.8 trillion in spending House-passed Build Back Better Act.
during the upcoming fiscal year, offset by $4.6 trillion in
#2. The Green Book would alter the taxation of
revenues. The revenue proposals are described in the Treasury
capital gains.
Department’s General Explanation of the Administration’s
Fiscal Year 2023 Revenue Proposals (commonly referred to as The proposals would treat death or the gift of appreciated
the Treasury “Green Book”), which accompanied the budget property as a realization event, resulting in capital gains
recommendations. tax being incurred immediately upon such an event. Each
individual would receive a $5 million lifetime exclusion.
A number of these items affect estate and gift tax-related issues. Additionally, the Green Book would tax capital gains for high-
Here are a few key items to note regarding these proposals. income earners (over $1 million) at ordinary income rates and
SPRING 2022 11 eReportwould impose a minimum 20% tax on total income (including Although it is unclear at this point which, if any, of these
unrealized capital gains) for taxpayers with wealth over $100 proposals will be enacted, we continue to recommend that
million. clients engage in planning to make use of their expanded estate,
gift, and GST tax exemptions before it is too late. Please contact
#3. The Green Book would limit the duration of GST us if you would like to discuss the Green Book proposals, gifting
exemption. strategies, or your estate plan in general.
Under current law, allocating sufficient generation-skipping
transfer (GST) tax exemption to a trust makes the trust Venable LLP - Samuel Olchyk and Allison R. Church
perpetually GST-exempt. These proposals would limit the
duration of GST exemption for trusts based on the generation
of the beneficiaries of the trust, generally allowing GST-exempt
distributions only to beneficiaries who are no more than two
generations below the transferor and those beneficiaries who
were alive at the creation of the trust. Pre-enactment trusts
would not be grandfathered in under this new regime, but
rather would be treated as though they were created on the date
of enactment.
#4. The Green Book would alter the tax treatment
of grantor trusts.
Under current law, the creator of a grantor trust is treated as the
owner of the trust assets for income tax purposes, which means
that the grantor can engage in transactions with his or her
grantor trust without triggering a realization event and can pay
the income taxes of a grantor trust without making a taxable
gift. The Green Book proposals would dramatically change the
treatment of grantor trusts (other than revocable grantor trusts)
by treating transfers to and from such trusts that occur on or
after the date of enactment as recognition events. Furthermore,
the Green Book would treat the payment of income taxes on
behalf of a grantor trust as a gift (for trusts created on or after
the date of enactment).
#5. The Green Book targets grantor retained
annuity trusts (GRATs).
GRATs allow the excess of the actual rate of return on gifted
assets over the expected rate of return set out in the so-called
Section 7520 rate published monthly by the Treasury to pass
to beneficiaries with little or no taxable gift. The Green Book
proposals would cripple the efficiency of GRATs by requiring
the remainder interest (i.e., the taxable gift portion) in a GRAT
to have a minimum value of the greater of 25% of the value
of the assets contributed to the GRAT or $500,000; requiring
GRATs to have a minimum term of 10 years; and prohibiting
tax-free asset swaps with GRATs.
#6. The Green Book would require increased use of
electronic filing of certain tax returns.
Specifically, the Green Book would require electronic filing of
estate tax returns (Form 706) , gift tax returns (Form 709), and
trust income tax returns (Form 1041) for all related individuals,
estates, and trusts with assets or gross income of $400,000 or
more in any of the three preceding years.
SPRING 2022 12 eReportOne of the areas in which the lack of digital asset legislation
Estate causes the most practical difficulty, is in relation to accessing
online accounts after death. With no legal framework in the
Administration: UK requiring a deceased person’s PRs to be permitted access
to their digital assets, access is currently governed by the
The Digital Assets terms and conditions of the service provider of the relevant
digital asset.
Dilemma This is problematic for two reasons. First, these terms and
conditions were usually not written with the death of the
account-holder in mind and often do not provide adequately
By: Laura Walliss
(or at all) for the situation.
Laura Walliss provides an introduction to the laws in the Secondly, digital assets service providers are often based in
UK concerning the growing issues surrounding estate the United States, which has stringent privacy laws. In fear of
administration of digital assets. falling foul of these laws, service providers are often loathe to
allow access to anyone other than the original account-holder,
The rapid increase in the range and prevalence of digital with the vast majority prohibiting the customer sharing their
assets over the past few years is creating an ever-widening account password or assigning their rights under the contract.
gap between the technologies available to the public and the
lumbering legal systems struggling to catch up. This can cause real practical difficulties during an estate
administration. Section 1 of the Computer Misuse Act 1990
Legislation governing vital legal considerations relating to makes it an offence (amongst other things) to access an online
those assets – such as, ownership, access and succession – has account after someone’s death without authority.
yet to arrive.
In the case of online accounts, this authority must come from
In the void, personal representatives (PRs) and their legal the service provider and, for the reasons outlined above, this
advisers administering the estate of a deceased person are is not usually forthcoming.
left trying to navigate uncharted territory and fulfil their
traditional duties and responsibilities, without the necessary In some cases, the situation is improved where the deceased
legal framework in place to enable them to do so. has been able to engage with these issues during their lifetime.
SPRING 2022 13 eReportAlthough there is no legislation to assist, some of the bigger providers such as Google, Facebook and Apple have put in place their own measures to facilitate the situation post- death. However, these often do not go far enough and are not available at all when it comes to many of the smaller service providers. Where lifetime planning has not been able to satisfactorily deal with access issues post-death (or has not been undertaken at all), PRs are placed in a difficult position. Section 25 of the Administration of Estates Act 1925 places a duty on PRs to collect in all the assets of the deceased (including digital assets) and administer them according to law, but how can they do this when access to the account is forbidden? There is often no physical evidence that a deceased held certain digital assets and accessing a digital bank account or an email account may be essential to fully understanding what is in the estate at all, let alone then collecting in those assets. The choice for PRs then becomes an unpalatable one: break the law; fail to administer the whole estate properly (and thus open themselves up to potential claims from beneficiaries); or seek access to accounts by way of court order which would be disproportionately time-consuming and costly, given the digital assets held in most estates. This is an incredibly unsatisfactory situation, both for the PRs and those who advise them. There may, however, be some hope on the horizon. In January of this year, Ian Paisley MP introduced a private members’ bill, which aims to address the question of access to an individual’s digital assets after their death. The bill’s second reading is scheduled for 6 May. As currently drafted, the bill proposes that the default position would be that a deceased person’s next of kin would have automatic access to any digital platforms held on the deceased’s devices. While this proposal could be problematic without proper safeguards – in terms, for example, of protecting the deceased’s privacy after their death – it is nevertheless reassuring (and overdue) to see this issue receiving some parliamentary time and attention. Whether or not the bill will eventually become law, and in what form, remains to be seen, but everyone with digital assets, not to mention the lawyers trying to advise them, would be better served by a comprehensive set of legislation governing this area – sooner, rather than later. This article was first published on Legal Futures and can be read online here. SPRING 2022 14 eReport
Spotlight: Wealth TrustsIncome splitting
Trusts can be established inter vivos or by will. Inter vivos trusts
Structuring and are often used to split income with family members, where
the trust earns income and acts as a conduit to allocate
income, including taxable capital gains, among beneficiaries
Regulation in Canada who are subject to lower rates. Effective planning involves
careful attention to the possible application of the attribution
By: Margaret R. O’Sullivan and rules, which can attribute income back to a high-tax rate
taxpayer.
Marly J. Peikes
Trusts used in conjunction with an ‘estate freeze’
O’Sullivan Estate Lawyers firm in Toronto, Ontario, provide Trusts are also commonly used in conjunction with an estate
an overview of major estate planning techniques currently freeze to hold growth property for future generations, such
utilized in Canada, and discuss issues which are both very as common shares of a private company that are expected to
familiar and very different from what estate planners face in grow in value, and thereby defer taxation on any gains until
the United States. the future rather than until the death of the founder. This can
achieve significant tax savings. The use of a trust can allow for
Wealth structuring and regulation control of the timing of distribution of property, for selection
i. Common vehicles for wealth structuring of beneficiaries and for general wealth protection purposes.
Generally, a fully discretionary trust is used for such purposes.
Trusts and holding companies are perhaps two of the most
common vehicles used in wealth structuring. Trusts as will substitutes
Trusts are also increasingly used as will substitutes, in
particular ‘alter ego’ and ‘joint partner’ trusts that are
SPRING 2022 15 eReportspecifically defined under Canadian income tax legislation and applicable tax or court fees are then based on the value of
and allow persons aged 65 and over, provided certain the assets passing under the primary will, which is generally
conditions are met, to roll over capital property on a tax- expected to be a more modest asset value base.
deferred basis, as opposed to triggering capital gains. Alter
ego and joint partner trusts are often used to provide for Holding companies
succession to property on the death of the spouse or spouses Holding companies are a common feature of Canadian estate
as a substitute to a will. They may offer benefits such as: planning. They are often used to hold investment assets,
including US securities and certain other US situs assets
1. avoiding expensive court fees, probate taxes and the to protect against exposure to US estate tax, to defer tax on
protracted court probate process; active business income where shares of an active business are
held by the holding company, to split income, including in
2. more privacy than a will; conjunction with use of a family trust, and for asset protection
and retirement planning.
3. ensuring capital succession to property on death; and
Potential tax advantages of holding companies
4. protection against estate litigation, including will The utility of an investment holding company to earn
challenges and other claims arising on death. investment income at a lower tax rate than if earned
personally will depend on changing tax rates, which
Trusts may also offer an effective and sophisticated vehicle historically have at certain times offered tax advantages and at
to manage assets on incapacity as a primary alternative to a other times have been neutral and less advantageous.
power of attorney.
Holding companies are also used in conjunction with probate
Use of testamentary trusts for income splitting and other fee and estate tax minimisation strategies as outlined above.
benefits Private company shares can pass under a secondary will,
Testamentary trusts (trusts created under a will) have been which typically may not need to be probated, thereby saving
used to provide for income splitting after the testator’s fees and tax, which can be significant where the shares
death. Certain estates and testamentary trusts are taxed at have a high value. There is potential for double taxation on
the graduated rates applicable to individuals, whereas trusts death where assets are held in a holding company, because a
established during lifetime are subject to the top marginal tax deceased person will be subject to personal taxation on the
rates applicable to individuals. Prior to 2016, testamentary deemed disposition of the shares of the holding company
trusts allowed for income splitting between the trust and giving rise to possible taxable capital gains, and also the same
one or more beneficiaries, which resulted in significant tax gains may be reflected in the holding company’s underlying
savings. However, commencing in 2016, testamentary trusts assets, on which tax will be paid at the corporate level on
with exceptions for graduated rate estates and for qualified sale of the assets or wind-up of the company. It is therefore
disability trusts are subject to the top tax rate applicable to necessary to implement proper post-mortem tax planning to
individuals and, consequently, the above tax benefits have avoid potential double taxation on death.
been eliminated, although it will still be possible to ‘sprinkle’
income among a group of beneficiaries of a discretionary ii Anti-money laundering regime and new transparency
testamentary trust if the trust terms permit. In addition, requirements
the use of a testamentary trust may provide for capital The Proceeds of Crime (Money Laundering) and Terrorist
succession planning and can safeguard against beneficiaries’ Financing Act came into effect in 2001. It introduced
matrimonial and creditor claims, among other benefits. requirements for a compliance regime, record-keeping,
client identification and reporting. Reporting entities must
Multiple wills used to minimise probate fees implement a compliance regime, keep certain records,
Multiple wills are increasingly used in certain provinces obtain certain client identification and report suspicious
to minimise estate administration tax and probate fees. transactions to an independent agency, the FINTRAC. Certain
For example, in Ontario, estate administration tax is other financial transactions, as well as terrorist property, must
approximately 1.5 per cent of the value of estate assets. Assets also be reported. All regulated entities starting 1 June 2021
are often segregated under two wills: a primary will and a will also be required to obtain and take reasonable steps to
secondary will. Assets that generally do not require a probated confirm the accuracy of beneficial ownership information
will to administer by way of proof of executors’ authority to they obtain, and not just in certain sectors. Reporting entities
third parties, such as financial institutions and purchasers include financial institutions, such as banks, trust companies,
of land property, are segregated under a secondary will. The loan companies, life insurance companies, brokers and
secondary will would typically include private company agents, securities dealers, accountants and accounting firms
shares, family loans, tangible personal property and beneficial carrying out certain transactions, real estate brokers, and
trust interests. Only the primary will is typically probated, certain others. The legislation imposes harsh financial and
SPRING 2022 16 eReportcriminal penalties, including imprisonment for failure to On the real estate front, British Columbia’s Land Owner
report. Reporting entities have to send large cash transaction Transparency Act together with the Land Owner Transparency
reports to the FINTRAC when they receive an amount of Regulation came into force on 30 November 2020, which
C$10,000 or more in cash in the course of a single transaction, created a new public registry for beneficial ownership of real
and financial entities, money service businesses and casinos estate in the province. Corporations, trustees and partners will
have to report incoming and outgoing international electronic be required to provide specified information on those who
funds transfers of C$10,000 or more in a single transaction. have a beneficial interest in land, a significant interest in a
corporation that owns land or own an interest in land through
In the past few years, initiatives to require company, trust a partnership, with certain restrictions. The stated intention
and real estate transparency have been prolific on the global of the registry is to prevent tax evasion, fraud and money
stage. In Canada, they form a backdrop to recent legislative laundering by ending anonymous or hidden ownership of
proposals and changes. In 2018, the federal government real estate. The new registry opened to the public on 30 April
introduced legislation that came into effect on 13 June 2021. It remains to be seen whether this initiative will head
2019, which amended the Canada Business Corporations east and roll out through other Canadian jurisdictions. In
Act to require that corporations collect and keep a register of Quebec, in February 2019, a regulation was published that
specified information regarding those who have significant aimed at identifying non-resident purchasers of residential
control over a corporation, including registered shareholders, property. There is speculation that this is the first step
beneficial owners of shares and persons who have direct towards a tax on non-residents, as currently exists in certain
or indirect influence, and as a result have control over the designated areas of British Columbia and Ontario. In Ontario,
corporation. The information is not to be publicly available, since May 2017, additional disclosure has been required in
but is to be available to directors, shareholders and creditors making a real estate transfer pursuant to the Land Transfer
of the corporation. In the 19 April 2021 federal budget, the Act, which includes disclosure of the beneficial ownership
government finally announced it would build and implement of the transferred property; however, this information is not
a publicly accessible corporate beneficial ownership registry publicly available.
by 2025 and has allocated C$2.1 million for such purpose.
This appears to be a modest amount given the complexity, With respect to trusts, as previously noted, new trust reporting
magnitude and importance of a public registry, in particular and disclosure rules came into effect on 1 January 2021. All
given criticism that Canada has been lax in its enforcement Canadian resident trusts with very limited exceptions will
of its money laundering rules, and that significant funds be required to file an annual T3 trust tax and information
are laundered in Canada as a result, including through shell return whether or not the trust earned income in any year.
corporations. The provision of this information erodes privacy in the use
of trusts and will provide substantial information to the
In December 2017, the Canadian finance ministers entered government that was previously not available to it.
into the agreement to strengthen beneficial ownership
transparency, which included a commitment on the part
of the provinces to make legislative changes to require
provincially incorporated corporations to maintain O’Sullivan Estate Lawyers - Margaret R O’Sullivan and Marly
information on beneficial owners. Some of the provinces J Peikes
have forged ahead with legislative changes that contain
similar requirements to those under the new federal
legislation, including Manitoba and Prince Edward Island.
British Columbia also implemented corporate legislation
on 1 October 2020, but it differs from the federal legislative
changes. Saskatchewan and Nova Scotia both have bills that
have been assented to but not yet proclaimed in force at
the date of writing. In the autumn of 2019, Quebec began
corporate transparency consultations, and in the 2020–2021
budget, the government introduced measures that would
require enterprises to obtain information on beneficial
owners for disclosure to the publicly accessible Registraire des
enterprises du Quebec, and to make it possible to do research
on an enterprise using the name and address of a natural
person. A bill has since been introduced in Quebec, which
passed second reading on 14 April 2021 and at the date of
writing is under study by the Quebec National Committee.
SPRING 2022 17 eReportYou can also read
