Pennsylvania Trusts and Estates Lawyer & Expert Witness : Patti Spencer Law Firm : Fiduciary Litigation, Planning : Lancaster, Harrisburg, Philadelphia, Pennsylvania

1918 photo of 18,000 troops at Camp Dodge in Iowa as they prepared to go off to war. 

Blogging credit to Susan Cartier Liebel at Build a Solo Practice.

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The general rule is that damages for a decedent's pain and suffering (the survival action) are an asset of the decedent's estate and subject to federal estate tax and PA inheritance tax.  The wrongful death award that goes to next of kin for loss of society, consortium and support are not estate assets and are not subject to estate or inheritance tax.

Trusts & Estates carried an article by John T. Brooks and Samantha Weissbltuh, entitled Estate Tax on Wrongful Death Claims? which discusses an Illinois case where the appellate court held that the wrongful death damages went to the estate.  The case, Bender v. Eiring, 2008 WL 351126 (Ill. App. 1st Dist. Feb. 7, 2008) established, in the words of the authors. "a potentially dangerous precedent."

Brooks and Weissbluth say:  "We not only think the appellate court made a mistake, but also worry that the decision could have an unfortunate ripple effect. Will wrongful death proceeds now be subject to estate tax? Spousal elections? Creditors' claims?"

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Tax cheaters will try anything.

"There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government."

                                                                                                              Benjamin Franklin

Here are a few charitable deduction scams that the IRS and Justice Department officials have been focusing on:

• Kickbacks. A charity solicits donations. It asks for a very big donation, and then secretly promises a refund. The donor takes an income tax deduction for the big donation, gets a tax benefit, and then the charity gets gives back a big portion of the donation. The result - the charity gets a donation, the donor gets a big tax deduction but gets most of his money back. The U.S. Treasury is left holding the bag. On June 16, 2008 the Wall Street Journal reported on such a scam carried on by the Spinka religious group where up to 95% of the "contributions" were returned to the donors. Three participants have pled guilty, but several more participants and leaders of five charitable organizations will go to trial later this year. One "donor" who pled guilty will pay more than $1.5 million in back taxes. The investigation continues, and the IRS expects to find more than 100 "donors."

This is a large scale version of the fraud where a person puts a check for $100 into the collection plate, takes out $90 in change, then deducts the whole $100.

• Big game scam. Treasury has cracked down on the trophy hunting industry. Hunters were writing off the cost of hunting vacations by engineering charitable deductions for the donation of their skinned or mounted "trophies" to a charity. The charitable deduction of a grossly over-appraised donation was often enough to cover the cost of the hunting trip.

• Professional preparers. Government officials have been cracking down on professional tax return preparers who make up phony charitable deductions. These preparers curry favor with their clients claiming to get them bigger refunds or lower tax bills - because of the inflated and fraudulent charitable deductions or other scams.

Tom Herman, writing for the Wall Street Journal, warns: Beware of anyone who bases his or her fee on the size of your refund, or who promises a bigger refund than anyone else, or who prepares your return but refuses to sign it. Also, never, ever, sign a blank return.

• CEO gifts of stock. Dave Yermack’s study of CEOs who make large gifts of stock found that they tend to make large gifts of stock right before the price falls. This uncanny coincidence leads him to surmise that these gifts are back-dated. In his study he reports that "[t]ests used to infer the backdating of executive stock option awards yield results consistent with the backdating of CEO family foundation stock gifts." at inflated values (with the collusion of the museums) for inflated tax deductions.

• Fake churches. Some individuals declare their home a church and that they are clergy (with a mail-order ordination) for that church. This involves not only income tax fraud, but also an attempt to get exemption from real estate taxes. Usually the officers and members of the church are just family members. The "minister’s" income is claimed to be the church’s income and, therefore, tax exempt.

• Disguised payments. According to the IRS, there has been a marked increase in the number of instances where taxpayers have taken charitable deductions for tuition payments. When tuition is paid to a private school that is run by a religious organization or other non-profit, the check may only have the name of the non-profit on it as the payee. These taxpayers try to get away with reporting these fees for service as charitable donations.

• Overvaluations. There is much abuse in the area of charitable gifts of tangible personal property. This ranges from large scale fraud on the valuation of artwork, to over-valuing the bags of used clothing you give away. Shares of stock in the family business given to charity are also targeted for investigation for over-valuation, as are transfers of interests in real estate.

• Abuse of Supporting Organizations. A taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income - thus keeping the benefit of the asset but simultaneously taking an income tax deduction for a charitable contribution.

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"Heaven has no rage like love to hatred turned, Nor hell a fury like a woman scorned."

                                                                                            from William Congreve's The Mourning Bride (1697)

Fritzi Benesch, 86 year old multimillionaire and former owner of the clothing company, Fritzi California, is suing her lawyer for malpractice.  The case, brought in 2000 went to trial the week of October 27, 2008.  See ABA Journal report here.

Her lawyer, now retired trust and estates lawyer William Hoisington, of Orrick, Herrington & Sutcliffe did estate planning for the Benesch family for 20+ years.  Fritzi and her husband Ernst started working with Orrick in 1977.

In 1981 daughter Valli (and later, her husband Robert Tandler) also retained the Orrick firm for advice on their own estate, corporate and tax matters, and for the family business.   Fritzi, the plaintiff in this action, now alleges that the Orrick firm did not inform her of the representation of her prospective heirs, nor was the potential conflict of interest inherent in that representation ever explained to her, nor was she ever asked to consent to that representation or to waive the conflict.

In the summer of 1999, 16 years after she had passed control of the family business to her older daughter, Valli and Valli's husband Robert Tandler,  In that same year Fritzi discovered that her husband had had an affair and Fritzi filed for divorce.  The attorney for the defense says that Fritzi Benesch's discovery of her husband's infidelity sparked her desire to undo decades of estate planning and stock transactions.

Plaintiff's attorney argues that Fritzi's attorney had a conflict of interest.  "What this case is about is a law firm favoring one set of clients over another," he said. "They were getting richer as my client was getting lesser."  (Isn't that what we do all the time in estate planning? Don't' we usually call that good planning?)

Here is brief submitted to San Francisco Superior Court on behalf of Fritzi Benesch, Plaintiff and Appellant.

Here is Juan Antunez's blog post discussing the ethics issue.

What do you think?

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Robert Anbrogi has an excellent article posted at Findlaw:  Ethics: Hiring Experts You Don't Plan To Use.   He asks:  "Do lawyers ever retain experts just to lock them out from being hired by the other side?"

"Lawyers do occasionally contact or 'retain' experts solely to disqualify them from working for the other side," says Erik Anderson, senior attorney in the corporate legal department of Safeco Insurance Company of America. He should know: he faced this situation in a case not long ago in which one party sought to disqualify the other's expert.

Another lawyer who has seen it done is David W. White, a trial attorney in Boston who is also president of the Massachusetts Bar Association. Although he would never do it himself, he once found himself the victim of this tactic.

"It was an antiques case, where fraud was alleged," White says. "There wasn't an available independent expert on the east coast of the U.S. because the plaintiff had consulted them all." 

When the expert is contacted, how much can be disclosed?  Typically the hiring attorney wants to be able to discuss that case with  the expert.  Must the expert refuse to hear any details before being hired?  Must you request a retainer just to talk about whether or not you want to take the case? Sure sounds like it.

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We are happy to welcome a guest post from political commentator Don Feldman:

It could have been worse.

*         In the year of the “perfect storm” for Republicans, the charismatic Democratic candidate got 52% of the vote.  If not for the timing of the economic meltdown, McCain might have won.

*         As it is supposed to, the Electoral College margin exaggerated the size of the victory.   This will probably save the Electoral College for another generation or so which is a big plus for the country.

*         Although we will sorely miss Liz Dole and especially John Sununu in the Senate, so far we have kept Al “the Barbarian” Franken at the gates (at this writing, the sainted Norm Coleman – the only candidate in history to quote Maimonides in a stump speech – is leading by 750 votes out of 3 million cast).  The Democrats will not get 60 seats in the Senate.

*         Bans on gay marriage were approved in Arizona, Florida, and (likely) California.

*         In a long overdue development, it looks like convicts will have fair representation in the Senate in the form of the indomitable Ted Stevens.  Sleazeballs will continue to be overrepresented by among others, the shameless William Murtha.

*         And of course, we have the inspiring Sarah Palin to look forward to in 2012!  Keep your chins up!

Updates to follow.

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2010 is the year for Throwing Momma from the Train.  In 2009 the estate tax exemption is $3.5 million.  In 2011 the estate tax exemption goes way down to $1 million.  In between?  In 2010 there is no estate tax at all.

Obviously, something has to be done.

The Urban-Brookings Tax Policy Center has published a report entitled Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax. (Blogging credit to North Carolina Estate Planning Blog.)

An outline of the presidential candidates' and other recent proposals for reform is contained in Table 11 on page 20.

Obama's proposal is an exemption of $3.5 million and a 45% rate.

McCain's proposal is an exemption of $5 million and a 15% rate.

Last March Wealth-Counsel, LLC began a contest.  They announced they would give $10,000 to the first estate planning attorney who submits the most accurate prediction that is closest to the actual result enacted by Congress and signed into law.  What did I predict?  $3.5 million and 45%.  Wonder if I was first?

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The October 29, 2008 edition of Trust & Estates contains this article:  A Final Win for the Lawyer of Erin Brockovich Fame. 

Edward Masry was the California trial lawyer who with the help of an assistant named Erin Brockovich brought a class action lawsuit against Pacific Gas & Electric Company for groundwater contamination which caused wide-spread illness and even death in the town of Hinkley, California.  The case settled for $333 million.  Masry got a check for $40 million.

The story of the suit was brought to the big screen in the movie version Erin Brockovich.  Julie Roberts played Erin (winning the Oscar for Best Actress in 2001) and Albert Finney played Ed Masry (nominated for best supporting actor). 

Masry married Joette in 1992.  In 2004 they created a joint trust to hold property acquired during their marriage.  Before he died in 2005, Masry revoked his interest in the joint trust and transferred his portion of the assets to a new trust controlled by his kids from his first marriage.   Joette didn't find out about this until after Ed Masry was dead.  Problem was, the trust by its terms was only revocable by the two of them.

The trial court, with whom the appellate court has agreed, found that the delivery of the notice of revocation to the other Settlor (Joette) was not required since Edward's delivery of the revocation to himself as trustee complied with the applicable provision of the California Probate Code, and the trust document did not specify the the method of revocation set forth in the document was the exclusive way to revoke the trust.

As John Brooks and Erika Alley, authors of the Trust & Estates article put it:  "Even after the lawyer of Erin Brockovich fame was dead, he managed to win a case."

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See our prior blog post on the issue of whether an inconsistent will can overcome the presumption that a joint account passes to the surviving joint owner.  (You may be surprised at what the Superior Court said.)

The Pennsylvania Supreme Court has granted the petition for Allowance of Appeal from the Order of the Superior Court in the Estate of Alice Novosielski.  The saga conitnues.  See the Order here.

In Novosielski, the executor of the decedent's estate, who was also the decedent's attorney-in-fact. took ownership of a joint account as the surviving joint owner.  In September 2000, the decedent signed a will leaving the executor approximately 10% of her estate.  Four days after the codicil was executed, the decedent signed a Treasury bill, bond, note tender prepared by the executor which created a joint interest in a treasury account between the decedent and the executor.

If the executor was the owner of the joint account, he would have received approximately 4/5 of the decedent's total estate.  The court found that there was clear and convincing evidence that the decedent did not want the executor to be the owner of the joint account, because of her mental state, the short time that had elapsed since the execution of the codicil, and the "vast difference" between what the executor would have received under the codicil and from the joint account. 

A similar result in In Re Piet makes us estate planners feel like the earth is shifting under our feet.

Here are the issues to be briefed in the Novieliski appeal:"

(1) By applying state law to override federal  treasury regulations, is the Superior Court's  award of the joint treasury account to the decedent's estate precluded by the Supremacy Clause of the United States Constitution?

(2) Did the Superior Court err in holding that  the presumption of survivorship under   20 Pa.C.S.A. § 6304(a) is defeated, per se, if the joint account results in an allocation of the estate that is  inconsistent with an existing  will?

(3) Did the Superior Court err in determining,   under 20 Pa.C.S.A. § 6304(a), that there was  clear and convincing evidence of a different  intent at the time the account was created?

(4) Did the Superior Court err in failing to accord the factual findings of the master the same weight and effect as a jury verdict?

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