“Millstein v. Millstein involved an attempt by a grantor of two irrevocable trusts in which he was treated as the grantor for federal income tax purposes to obtain ‘equitable reimbursement of income taxes’ from the two trusts as well as a ‘virtual representation’ finding of the relevant beneficiaries of the two trusts for the purpose of effectuating such reimbursement. In this Ohio appellate decision, the court of appeal affirmed the common pleas court’s dismissal of a petition for declaratory and equitable relief that the grantor filed on a motion to dismiss.

The result is absolutely correct on both counts and underscores the need to begin with the end in mind, from Steven Covey’s Seven Habits of Highly Effective People, in drafting powers that make an irrevocable trust a grantor trust for income tax purposes. It seems highly foreseeable that the person who is treated as the grantor of the trust might at some point in the future no longer be financially capable of paying the income tax on the trust’s

taxable income. It’s imperative to build in an escape hatch of some sort, or the grantor may later fairly ask why the trust scrivener didn’t address the need for an exit strategy at the very beginning.”

Paul Hood provides members with commentary on Millstein v. Millstein. Members who wish to learn more about this topic should consider watching his LISI webinar titled: “Snap, Crackle, Swap: The Substitution Power in Grantor Trusts.”

L. Paul Hood, Jr. received his J.D. from Louisiana State University Law Center in 1986 and Master of Laws in Taxation from Georgetown University Law Center in 1988. Paul is a frequent speaker, is widely quoted and his articles have appeared in a number of publications, including BNA Tax Management Memorandum, CCH Journal of Practical Estate Planning, Estate Planning, Valuation Strategies, Digest of Federal Tax Articles,

Loyola Law Review, Louisiana Bar Journal, Tax Ideas and Charitable Gift Planning News. Presently, He has spoken at programs sponsored by a number of law schools, including Duke, Georgetown, NYU, Tulane, Loyola (N.O.) and LSU, as well as many other professional organizations, including AICPA and NACVA. From 1996-2004, Paul served on the Louisiana Board of Tax Appeals, a three-member board that has jurisdiction over all Louisiana state tax matters. Paul is co-author with Steve Leimberg of The Tools & Techniques of Estate Planning, The Tools & Techniques of Trust Planning and Tools & Techniques of Charitable Planning, which are published by The National Underwriter.

Here is his commentary:

EXECUTIVE SUMMARY:

Millstein v. Millstein involved an attempt by a grantor of two irrevocable trusts in which he was treated as the grantor for federal income tax purposes to obtain “equitable reimbursement of income taxes” from the two trusts as well as a “virtual representation” finding of the relevant beneficiaries of the two trusts for the purpose of effectuating such reimbursement. In this Ohio appellate decision, the court of appeal affirmed the common pleas court’s dismissal of a petition for declaratory and equitable relief that the grantor filed on a motion to dismiss.

FACTS:

Norman settled two irrevocable trusts for the benefit of his children: the “Al- Jo” trust created on December 29, 1987, and the “Kevan Millstein” trust created May 2, 1988. He arranged both trusts to be grantor trusts as to him for income tax purposes, but he retained no beneficiary rights. And Norman began paying the income tax on the trusts’ substantial income and continued with nary a complaint for over 20 years.

In 2010, Norman requested that Kevan as trustee provide him reimbursement from the trusts for “substantial income taxes” that he owed due to the taxable income generated by the trusts. Kevan declined, but they reached an agreement whereby the assets of a third, unrelated trust were used to defray Norman’s personal income tax liabilities. In 2013, Kevan informed Norman that the third trust no longer had liquid assets.

Apparently, Kevan took steps with respect to the Kevan Millstein trust such that Norman would no longer be taxed on the income attributable to the investments of that trust beginning in 2014. However, no alteration was made to the “Al-Jo” trust. Therefore, Norman remained liable for future income taxes arising from the “Al-Jo” trust.

Norman alleged that, as a result of his tax obligations under the terms of these irrevocable trusts, he paid federal and state income taxes of

$5,225,837 for the “Kevan Millstein” trust in 2013 and $1,261,068 for the “Al-Jo” trust for the tax years 2013-2015.

In his petition, Norman sought “equitable reimbursement of income taxes” from the two trusts as well as a “virtual representation” finding of the relevant beneficiaries of the two trusts for the purpose of effectuating such reimbursements available to defray his income tax liabilities resulting from the trusts.

Norman did not attach the trust documents to his complaint. His son, Kevan, who was the trustee of both trusts, and the other trust beneficiaries named as defendants in Norman’s petition moved for dismissal of the petition pursuant to Ohio Civ . R. 12(b)(6), which is a motion to dismiss.

The defendants asserted that Norman lacked standing to request that the trusts make any payment to him because he retained no beneficial interest in either trust.

The defendants also asserted that there is no cognizable claim in Ohio for equitable reimbursement to a grantor for tax liability incurred under the terms of a trust that the grantor created. Furthermore, the defendants alleged that Norman’s claim was inequitable, and finally, that Norman’s petition was barred by collateral estoppel. On October 18, 2017, the trial court granted the motions to dismiss without opinion. Norman appealed.

At the outset, the appellate court made a de novo review of the trial court’s ruling. The appellate court held:

We find that the trial court correctly dismissed appellant’s petition for failure to state a claim upon which relief can be granted under Civ.R. 12(B)(6). Central to our conclusion is the fact that the relief sought by appellant is specifically addressed in the Ohio Trust Code and unavailable to him without the cooperation of a trustee or beneficiary. The Ohio Trust Code was enacted in 2006 and is applicable to all trusts created before, on, or after its effective date.

The appellate court also easily disposed of Norman’s claim for equitable relief, noting:

Even if we were to allow appellant to use equity to circumvent the clear intent of the legislature, it is well established that equity will not aid a volunteer.

COMMENT:

The result is absolutely correct on both counts and underscores the need to begin with the end in mind, from Steven Covey’s Seven Habits of Highly Effective People, in drafting powers that make an irrevocable trust a grantor trust for income tax purposes. It seems highly foreseeable that the person who is treated as the grantor of the trust might at some point in the future no longer be financially capable of paying the income tax on the trust’s taxable income. It’s imperative to build in an escape hatch of some sort, or the grantor may later fairly ask why the trust scrivener didn’t address the need for an exit strategy at the very beginning.

Query: Could Norman have done anything to cut off grantor trust status of either trust? Apparently not, because the trustee took some steps on one trust but not on the other. Did anyone else have authority to remove grantor trust status?

Ouch! Norman was hoist by his own petard. Getting bounced out of court on a motion to dismiss is as rare as hen’s teeth and even more so when the trial court granted the motions to dismiss without an opinion or reasons for judgment. Further salt in Norman’s wound is this line from the appellate court’s opinion: “[Norman] voluntarily created the situation that he now claims is inequitable.”

In my opinion, you really have to try to file a petition that is susceptible to a successful motion to dismiss because you usually can draft a petition that contains some theory on which recovery can be achieved as well as some fact that might be in dispute. Simply put, courts are loath to and rarely dismiss a plaintiff’s case on a motion to dismiss, which means that assuming everything in the petition is true, there’s still no case.