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Day Pitney Boston News, December 2011

Publisher: Day Pitney Newsletter
December 7, 2011

Supreme Court Hears Argument Addressing Tension Between First Amendment Rights of Religious Organizations and Anti-Discrimination Laws

Article by John P. McLafferty and Erika D. Cagney

On October 6, 2011, the Supreme Court heard oral argument in Hosanna-Tabor Evangelical Lutheran Church and School v. Equal Employment Opportunity Commission, one of the most important religious rights cases to reach the court in years. The question with which the court is grappling is whether the so-called ministerial exception—which has been applied by the courts to prevent certain employees from asserting discrimination and related claims against religious institution—is broad enough to bar claims by employees such as lay teachers whose jobs are largely, but not entirely, secular. Based on the constitutional requirements of the free exercise and establishment clauses of the First Amendment, the ministerial exception has been adopted by most state and federal courts. However, the definition of "minister" remains unsettled, and courts have struggled with how best to balance the societal desire to prevent workplace discrimination with the constitutionally protected rights of religious organizations to be free from excessive government interference.

In Hosanna-Tabor, parochial school teacher Cheryl Perich was hired in 2000 by a church-operated elementary school as a lay teacher. Shortly thereafter, Perich became a "called" teacher after completing certain religious studies and being elected a "commissioned minister" by the church congregation. After becoming a "called" teacher, Perich's duties remained substantially the same as when she was a lay teacher. In addition to teaching a number of secular subjects, Perich led students in prayer and at chapel services and taught religion class.

In 2004, Perich alleged that the school violated her rights under the Americans with Disabilities Act when it fired her for threatening to go to the Equal Employment Opportunity Commission (EEOC) after the school refused to allow her to return from a medical leave of absence. In response to the EEOC's lawsuit on Perich's behalf, the school contended that it terminated Perich for insubordination after she refused, allegedly in violation of Lutheran church doctrine, to address her grievances via internal procedures and instead threatened to take legal action. The district court granted summary judgment in favor of the school, holding that Perich was a ministerial employee and therefore her claims were barred by the ministerial exception.

The U.S. Court of Appeals for the Sixth Circuit subsequently reversed, finding that Perich's "primary duties" at the school were secular (she spent more than six hours of her seven-hour day teaching secular subjects, using secular textbooks, without incorporating religion into the secular material) and therefore she was not a ministerial employee, even though she held the title "commissioned minister" and participated in and led some religious activities throughout the day. Recognizing a split among the circuit courts of appeal on the scope of employees subject to the ministerial exception, the Supreme Court agreed to hear the case.
At oral argument, the court appeared disinclined to jettison the ministerial exception altogether, as the EEOC initially argued for in its brief. Through their questioning, the justices demonstrated a strong interest in upholding religious organizations' First Amendment rights to govern their organizations and appeared loath to become entangled in debates over how important various religious tenets were to each institution. Chief Justice Roberts and Justices Scalia, Kagan and Alito all expressed serious concern over the idea of a judge deciding for a church which religious tenets should be respected and which should not—for example, whether the Lutheran church's purported policy of requiring grievances to be handled internally was due more or less deference than the Catholic Church's policy of requiring priests to be male.

Because it is apparent that the ministerial exception will survive in some form, the real issue facing the justices is how to define the doctrine's parameters. At the extremes, the doctrine's application is clear—a court will not question a Catholic church's decision to terminate a priest but, typically, will adjudicate a janitor's discrimination claim against the same church. The difficult question is where the high court will land on employees and claims that are closer to the middle of the spectrum. On this thorny issue, the justices' comments provided no suggestion of consensus, with each justice (except Justice Thomas, who as usual asked no questions) expressing frustration with all attempts to define "ministerial employee." For example, if a ministerial employee is defined as one who performs important religious duties, how does a court determine whether those duties are, in fact, important, without interpreting church doctrine? Similarly, Chief Justice Roberts inquired whether courts could consider claims involving a religion that believed all of its members to be witnesses to the faith and thus "ministers." On these questions, the justices did not appear to be satisfied with many answers. In short, it is unclear whether the court will uphold the Sixth Circuit's categorical version of the "primary duties" test or adopt a more nuanced approach that upholds First Amendment rights while protecting society's interest in avoiding discriminatory and retaliatory employment practices.

A decision is expected by June 2012. It remains to be seen whether the Supreme Court will address all of the myriad issues raised by this case, but at the very least the court is expected to provide some guidance on this murky area of employment law.

Massachusetts Attorney General Proposing Legislation to Prohibit Public Charities From Compensating Directors

Article by Michelle C. Gardner and Jill A. Collins

Massachusetts charities are a highly diverse group of organizations and trusts, from youth sports leagues to family private foundations and from major universities to large health insurers. Currently, Massachusetts does not impose any limits on the compensation paid by a charity to its board of directors, although the Internal Revenue Service reviews director compensation for reasonableness. However, this past spring, the Massachusetts attorney general, Martha Coakley, proposed legislation to regulate the compensation payable to board members of Massachusetts public charities.

Proposed Prohibition Would Impact All Massachusetts Public Charities

In its current form, the proposed legislation would prohibit any Massachusetts public charity from compensating its board members, unless it first receives approval from the Office of the Attorney General's Public Charities Division. Approval would be granted only upon a "clear and convincing" showing that compensation is necessary to enable the public charity to attract and retain experienced and competent individuals to serve as independent officers, directors or trustees.

On its face, the proposal would prohibit all public charities organized in Massachusetts, such as Massachusetts nonprofit corporations and Massachusetts charitable trusts (including private foundations), from paying directors and trustees. In addition, charities organized elsewhere (such as Delaware nonprofit corporations) but which primarily conduct their business in Massachusetts would presumably be subject to the prohibition.

The legislation specifically contemplates that the Public Charities Division will issue regulations to further define the criteria by which it will grant approval of applications for compensation. At a hearing in September, the Office of the Attorney General stated that it sought to retain the flexibility to address the needs of unique organizations for which compensation may be appropriate. As proposed, the legislation would grant the attorney general the ability to rescind such approvals.

Current Status of Legislation

The legislation is presently before the Joint Judiciary Committee. It was filed by the attorney general earlier this year, an apparent result of an investigation launched by the Office of the Attorney General in 2009 into executive and director compensation at Massachusetts' four major charitable health insurers.

If passed, this legislation would not likely go into effect until six months after passage, to allow the attorney general to issue regulations and to give charities time to prepare for any changes. Although the attorney general requested fast-track consideration for this legislation, there has not been any additional activity reported on the bill since the last hearing on September 27, 2011.

Looking Ahead: More Uncertainty

While most Massachusetts public charities do not compensate their directors and trustees, the proposed legislation creates a prohibition against compensation for all charities, without providing any guideposts for the attorney general to follow in issuing regulations for "the exceptions." Given the legislation's presumption that board service is voluntary and charitable, it remains to be seen whether the attorney general expects to grant waivers routinely to those who request them or only in extreme cases. We will continue to monitor the developments of this legislation and any resulting regulations.

Top 8 Estate Tax Savings Techniques for the Current Increased Gift and GST Tax Exemptions and Low-Interest Rate Environment

Article by Dani N. Ruran 

If you live in Massachusetts or own Massachusetts real estate and the total value of your (and your spouse's) assets is at least $1 million (the Massachusetts estate tax exemption amount), you may want to utilize one or more of the estate tax savings techniques summarized below, in order to save estate taxes for your estate, your spouse's estate and even potentially for your children's future estates. Some of these techniques are particularly advantageous now, given the increased gift and generation-skipping transfer (GST) tax exemption amounts and the current low-interest rate environment.[1]


Please consult with your Day Pitney Individual Clients Department (ICD) attorney to determine how best to take advantage of these tax-saving techniques for your own financial circumstances.



1. Division of Assets Into Family Trust/Marital Trust. In general, to save estate taxes, married couples should have estate plans that utilize both spouses' federal and Massachusetts estate tax exemptions. Typically, this is achieved through revocable trusts that divide the property of the first spouse to die into a Family Trust (for the surviving spouse and children or other beneficiaries), holding up to $1 million, and a Marital Trust (for the surviving spouse only), holding the balance of the property of the first spouse to die. This utilizes the first spouse's exemptions while allowing any estate taxes to be deferred until the surviving spouse's death, when that spouse's exemptions will also be available to help reduce estate taxes. For this technique to work, the couple's property must be owned appropriately between them (in general, roughly half of the assets should be owned by each spouse), so each spouse has enough assets to fund his or her Family and Marital Trusts and thereby shelter his or her federal and Massachusetts estate tax exemptions, regardless of which spouse dies first.


2. Irrevocable Life Insurance Trusts. If the technique described above does not eliminate all projected estate taxes for a married couple—or for an unmarried individual—and there is a significant amount of life insurance, establishing an irrevocable trust to own the insurance policies will reduce estate taxes. This is the case because, in general, insurance proceeds from life insurance policies owned by properly structured irrevocable trusts escape estate taxation (as well as income taxation), but the transferor/insured should not be a beneficiary or trustee of the trust. Payments of annual insurance premiums are considered to be gifts by the creator of the trust to the trust beneficiaries, but typically these can be made to be gift tax-free by qualifying as gift tax "annual exclusion" amounts (see Point 3, below) by including limited withdrawal rights for trust beneficiaries.


3. Gifting/ In General. For additional estate tax savings, gifts may be made to children (and other beneficiaries), either outright or in trust, which will reduce the size of your future estate.


(a) "Annual Exclusion" Gifts. Gifts within the "annual exclusion" amount ($13,000 in 2011 and 2012) to any individual in any calendar year do not use up any of your federal gift or estate tax exemptions. Such gifts are particularly helpful to reduce estate taxes because the amount gifted, plus future appreciation, escapes federal and Massachusetts estate taxation entirely (unlike larger gifts—see Point 4, below). As noted above, gifts to properly structured trusts may also qualify as annual exclusion gifts, which is particularly useful for young beneficiaries.


(b) "Taxable" Gifts. If "annual exclusion" gifts will not reduce the size of the estate sufficiently, larger gifts may be made. Note, though, that a federal gift tax will be due if total lifetime "taxable gifts"—gifts other than annual exclusion gifts—exceed the gift tax exemption amount (currently $5 million) and that taxable gifts are added back to the estate when calculating the federal estate tax. Post-gift appreciation is not added back, though, which helps reduce estate taxes. (When calculating the Massachusetts estate tax, such excess gifts, but not appreciation, are added back only to determine whether the $1 million filing threshold is met but not to calculate the actual tax owed.)


4. Gifts and "Sales" to "Intentionally Defective Grantor Trusts" (IDGTs). Gifts of any size may be made to standard irrevocable trusts that hold all property for the benefit of any named beneficiaries or to other trusts such as GRATs, QPRTs and CLTs (see points 5-7, below). The federal gift tax exemption is best utilized by gifts to standard irrevocable trusts, because all post-gift appreciation escapes federal estate taxation and no portion of the gift is returned to the creator of the trust.


The trust can be structured so the trust pays any income taxes attributable to trust income, including capital gains, or so the trust's creator pays such taxes. If the trust's creator is responsible for the income taxes, the trust is referred to as an Intentionally Defective Grantor Trust, or IDGT. Advantages of this are that the trust is undiminished by income taxes and can accumulate or be used for the next generation "tax free" and the settlor in essence is able to make the functional equivalent of a gift tax-free addition to the trust each year while reducing the size of his or her own estate by the amount of income taxes paid.


Instead of making a gift to an IDGT (for example, if someone has already used all gift tax exemptions), one may transfer property as a "sale" to an IDGT in exchange for a promissory note issued to the settlor. This allows a transfer to be made to such a trust that has a zero value for gift tax purposes. The note can provide for interest to be paid at the low "Applicable Federal Rate" (AFR). (In November 2011, the "midterm" AFR rate—for loans of between three and nine year—is only 1.2 percent, while the "7520" rate applicable to GRATs (see Point 5, below) is 1.4 percent.) A low interest rate is desirable, because this allows more trust property to remain in the trust, appreciate and pass estate tax free to beneficiaries.


5.      Gifts to Grantor-Retained Annuity Trusts (GRATs). Gifts to GRATs enable the settlor to shift a portion of the future appreciation in the property to the next generation at reduced gift and estate tax costs. In this technique, the settlor transfers to the trust property that is likely to appreciate significantly in a relatively short period of time. As part of the arrangement, the settlor will receive back from the trust a calculated amount each year (annuity payments), for a period of years selected by the settlor (the term), based on the IRS-issued "Section 7520 rate" (1.4 percent for November 2011). Typically, the present value of all annuity payments is made to equal the value of the property transferred to the trust, so that no taxable gift is made and no gift tax exemption is used (a "zeroed out" or "Walton" GRAT).


If the actual growth rate exceeds the Section 7520 rate, property will remain at the end of the GRAT's term, which may then be held in trust for, or pass outright to, children and other descendants on a gift and estate tax-free basis.


6.      Gifts to Qualified Personal Residence Trusts (QPRTs). A QPRT is an irrevocable trust that is funded with a personal residence (either the principal residence or a vacation home) in which the settlor retains a right of use for a term of years (analogous to a GRAT). At the end of the designated term, the settlor's interest ends and others named in the trust become the beneficiaries. At that point, the trust can continue or terminate, whichever the settlor has specified. Continued use of the personal residence by the settlor after the designated term ends will generally only be allowed upon payment thereafter of fair-market-value rent by the settlor. So long as the settlor survives until the expiration of the term of years, the QPRT will not be taxed as part of the settlor's estate.


QPRTs are less advantageous in low-interest rate environments such as the current environment because the calculated taxable gift upon funding the trust will be relatively higher, but because real estate values are low now, this argues in favor of QPRTs. Additionally, QPRTs do not permit a step-up in basis for capital gains tax purposes at the settlor's death, so one must analyze whether estate tax savings will outweigh the capital gains tax increase caused by the QPRT.


7. Gifts to Charitable Lead Trusts (CLTs). A CLT allows members of one's family, or others, to receive the trust assets when the charitable "lead interest" ends. If the circumstances are favorable, a CLT allows one to leverage the use of the gift or estate tax exemption. The value of the remainder interest, for gift or estate tax purposes, may be significantly less than the initial value of the property, depending on the terms of the trust and the applicable interest rates. CLTs are more advantageous in low-interest rate environments (unlike Charitable Remainder Trusts, in which the placement of the charitable and noncharitable interests are reversed as compared to CLTs).


8. Allocating Generation-Skipping Transfer (GST) Tax Exemption to Gifts to Certain Trusts. Whether taking place at death or during life, all transfers to noncharitable beneficiaries that involve a distribution to a beneficiary, such as a grandchild, who is more than one generation younger than the donor or creator of a trust are potentially subject to an additional transfer tax known as the generation-skipping transfer tax. A substantial exemption from this tax—$5 million per transferor in 2011—is now available. One may "allocate" the available GST exemption to transfers made to an insurance trust or an IDGT, for example, which may be very advantageous from an estate and GST tax viewpoint.


[1] In 2011, the federal gift, estate and GST tax exemptions are all $5 million and will increase to $5.12 million in 2012. Unless Congress acts before then, in 2013 the gift and estate exemptions will drop to $1 million and the GST exemption will be $1.36 million (subject to inflation adjustment). The Massachusetts estate tax exemption is $1 million and is not scheduled to change. For assets above the exemption amounts, the federal estate tax rate is 35 percent and the Massachusetts estate tax rate is between 6.4 and 16 percent, depending on the value of the estate above $1 million.


An Interview With Barry Klickstein

Q: The vast majority of cases settle. When advising a client on whether to proceed to trial or resolve the matter out of court, what factors do you take into account?

A: I always advise a client to settle if at all possible. A settlement is always based on the client's evaluation of the actual merits of the case, whereas a jury verdict can and often does bear no reasonable relationship to the reality of the client's situation. Understandably, clients frequently are emotionally invested in a case and are reluctant to settle for what they believe to be less than the best possible outcome. However, in counseling my clients as to settlement, I typically ask them to consider whether they really want to leave such important decisions up to 12 random people, unwillingly drafted to serve on a jury, who have no prior knowledge of the facts or the law and no stake in the outcome. Upon reflection, most clients opt to settle.

Q: Can you tell us about an instance in which a client should have settled but didn't?

A: Back in the early 1980s, I represented a family of a 10-year-old boy who had been injured on an amusement park ride. Fortunately, the doctors were able to make him as good as new, except for three months of rehabilitation and a scar on his leg. This also meant, however, that the value of our case was limited to relatively modest medical expenses and the proverbial "pain and suffering," which by the standards of the day we valued at $35,000. The insurer thought the case was worthless and never made an offer to settle prior to trial, much to my chagrin.

On day one of the trial, I gave my opening statement and was encouraged to see two jurors in tears. The insurance adjuster promptly approached and offered me my full demand of $35,000. To my surprise, my clients refused. After a few good days of trial testimony, the offer had increased nearly threefold to $100,000. My clients refused every offer, despite my advice to accept, blinded by how well they thought the trial was going. After what I believed was an effective final argument, the offer rose yet again to an astonishing $150,000. This was nearly five times what I believed our case was actually worth. Yet again, my clients refused.

The next day: Defense verdict.

I frequently relay this story to my clients as a reminder that almost anything can happen at trial and that a good settlement, even if less than ideal, brings a level of certainty you just can't get at trial.

Q: Do you try a case differently depending on whether you are before a jury or a judge?

A: Yes. When you are before a judge, he or she will already have an understanding of the facts of your case and an appreciation of the legal issues involved. So your examinations can be more compact, and you do not need to spend as much time setting the stage and laying a foundation. And the techniques that might impress or sway a jury have little impact on a judge.

With a jury, however, you are starting at point zero. They know nothing about the facts or the law involved in your case. It is your job first to engage them in the case and then to provide them with a framework to consider the evidence and apply the law to make a finding favorable to your client.

Q: What do you believe are the two most important skills for a trial attorney?

A: Without a doubt, attention and flexibility are key. As important as it is to have a plan at the outset of the case running right through the trial, it is equally important to be attentive to everything that is occurring in the courtroom, so you can modify your plan when circumstances dictate. You must listen to the judge and take his cues. In a jury trial, you must make contact with each juror and look each in the eye; otherwise, you don't know if what you are doing is working. If a juror—or for that matter the judge—is nodding off or staring blankly at the ceiling or has closed down and put her hands across her chest, you know it's time to change strategy. But when you sense the jury and the judge are hanging on your every word, you know you are on the right path.