By Katie Watson Bingham
The 2021 session of the Arkansas General Assembly ended in April and several new laws were enacted regarding trust and estate matters. The following is a general review of each new law and what changes it might mean for you in the future.
Carmack’s Law - HB1449 (Act 423)
Additional Authority Granted. This act grants additional authority to a distributee under a small estate affidavit and permits a distributee under a small estate affidavit to open a bank account in the name of the estate. Previously, only a court-appointed personal representative of the estate could open a bank account in the name of the estate.
Uniform Limited Liability Company Act - SB601 (Act 1041)
New rules for LLCs. This act, which takes effect September 1, 2021, repeals the Small Business Entity Pass-Through Act (the “Former Act”) and replaces it with the Uniform Limited Liability Company Act (ULLCA). The ULLCA streamlines the LLC formation process and closes some of the gaps that exist in the Former Act.
Formation. The ULLCA simplifies the document filed with the Secretary of State (termed “Certificate of Organization”) by only requiring the name of the LLC, the address of the LLC’s principal office and the name and address of the LLC’s registered agent. The LLC is not considered formed until the Secretary of State accepts the Certificate of Organization.
Member-Managed Presumed. Unless the operating agreement for the LLC specifically states that the LLC is manager-managed, an LLC is deemed to be member-managed under the ULLCA.
Operating Agreements. A written operating agreement is not required under the ULLCA. Oral or other informal operating agreements are permitted. If there is no written operating agreement, the default governance provisions in the ULLCA will apply to the LLC.
Conduct. The ULLCA imposes minimum standards of conduct for LLC members (if member-managed) and managers (if manager-managed), including the duties of loyalty, care, good faith and fair dealing. These standards of conduct cannot be waived in the operating agreement; however, certain modifications are permitted.
Member Removal. The ULLCA allows for the removal of a member in certain circumstances upon the vote of all other members of the LLC. Grounds for removal include: (i) it is unlawful to carry on the business of the LLC if the member remains a member of the LLC; (ii) the member no longer owns interest in the LLC; or (iii) a member that is an entity has dissolved. In addition, the ULLCA permits the LLC or any member of the LLC to petition the court for the removal of a member for wrongful conduct, for material breach of the operating agreement or for conduct that makes it impracticable to carry on the activities and affairs of the LLC.
Charging Order. In certain circumstances, a court can order foreclosure on a member’s interest in an LLC to satisfy a judgment creditor.
Uniform Fiduciary Income and Principal Act - HB1693 (Act 1088)
Revised Fiduciary Guidelines. This act, which takes effect January 1, 2022, revises fiduciary guidelines by replacing the existing Uniform Principal and Income Act (UPIA) with the Uniform Fiduciary Income and Principal Act (UFIPA). The key differences between the UFIPA and the UPIA are outlined below.
Power to Adjust. The UFIPA gives an independent fiduciary the power to adjust between income and principal if the fiduciary determines that the exercise of the power to adjust will assist the fiduciary in administering the trust or estate impartially. If the fiduciary chooses to exercise its power to adjust under the UFIPA, the fiduciary must communicate the same to the beneficiaries of the trust.
Power to Convert to a Unitrust. Under the UFIPA, a trust can be converted to a unitrust unless the trust specifically prohibits the application of this provision of the UFIPA or specifically states that net income cannot be calculated as a unitrust amount.
Court Review of Fiduciary Exercise of Discretionary Powers. Under the UFIPA, a court cannot overturn a fiduciary decision unless the court finds that such decision was an abuse of the fiduciary’s discretion.
HB1518 (Act 804)
Attorney-in-Fact Can Create a Trust. This act specifically provides for the creation of a trust using a power of attorney. Note that the instrument itself has to specifically grant the attorney-in-fact the power to create a trust.
Elective Pass-Through Tax Act - HB1209 (Act 362)
SALT Deduction Workaround. Under this act, general partnerships, limited partnerships, limited liability companies and S corporations may elect to be taxed at the entity level at a flat 5.9 percent rate. This is Arkansas’ version of a workaround for the $10,000 deduction limit with respect to state and local income taxes at the federal level.
Independent Tax Appeals Commission Act - HB1468 (Act 586)
Creation of Three-Member Commission - This act creates a three-member independent commission to take the place of the Department of Finance and Administration’s Office of Hearings and Appeals. The three commissioners must either be licensed to practice law in Arkansas or be certified as a CPA in Arkansas, and the chief commissioner must be licensed to practice law in Arkansas and be a CPA. The process for selecting the three commissioners is as follows: (i) the Arkansas Bar Association nominates three lawyers; (ii) the majority of the Arkansas Supreme Court nominates three individuals who are licensed to practice law in Arkansas and a CPA; (iii) the Arkansas Society of CPAs nominates three individuals who are CPAs; and (iv) the Governor appoints one commissioner from each pool of candidates, and the chief commissioner is appointed by the pool of candidates nominated by the Arkansas Supreme Court. Each commissioner will serve a nine-year term.
Regarding the effective date, the Tax Appeals Commission and the initial commissioners will be appointed by July 1, 2022, and the Commission will be prepared to accept and try tax disputes by January 1, 2023. The Department of Finance and Administration’s Office of Hearings and Appeals will wind up all tax disputes instituted prior to January 1, 2023 by May 31, 2023, and will be fully closed by June 30, 2023.
HB1718 (Act 801)
Trust Tweak. With respect to certain irrevocable trusts created by a grantor for a beneficiary, including a spousal lifetime asset trust (SLAT), this act permits the beneficiary of the trust (using a limited or general power of appointment) to transfer the assets thereof back for the benefit of the original grantor of the trust without the assets being subject to the creditors of the grantor.
HB1162 (Act 570)
Release of DHS Liens. This act precludes the Department of Human Services from recovering reimbursement benefits from a grantee under a beneficiary deed.
HB1801 (Act 925)
You Can’t Skip the Paperwork. This act provides that a designated or named beneficiary of a life insurance policy or annuity contract can only be changed according to the terms of the life insurance policy or annuity contract (i.e., you have to request and complete the change of beneficiary designation paperwork); the beneficiary cannot be changed in a will. This act overrides years of Arkansas case law permitting the change of beneficiary by will.
For more on any of these bills, please contact one of our Trust and Estate Attorneys.
Katie Watson Bingham is a partner in the Trust and Estate Planning Practice Group and holds a master’s degree in taxation from the University of Florida. Her areas of practice include estate planning, estate and trust administration, estate and gift taxation, tax planning for individuals, entity formation, probate matters and formation and planning for exempt organizations.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.