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

Huguette CLark, a 104-year-old heiress, has been in a hospital for the last 20 years? 

Read Verena Dobnik's article for the New York Post:  click here

• Email This
• Print
• Comments
• Trackbacks

Most of these United States use post-mortem probate. A person’s will is submitted for probate after his or her death. The idea is that after the testator is dead, the will is read and the testator’s estate is distributed in accordance with his wishes.

I always thought there should be some procedure to validate a will before the testator's death, a "pre-mortem probate." After all, the testator is the best source of evidence about his or her intent. And the best time to assess a testator's capacity or susceptibility to undue influence is at the time the will is made, right? It seems illogical that these issues have to wait for probate when the best evidence is no longer available.

Probating a will after the decedent’s death brings with it all sorts of family disputes, will contest suits, and other litigation. The worst aspect of the process is that it encourages spurious contests where unhappy beneficiaries bring actions claiming lack of capacity, fraud or undue influence, just to get a settlement. It’s the cost of their going away. Of course, even if a will contest results in no settlement or adverse verdict, the failed challenger has no responsibility to reimburse the estate for all of the costs it has been forced to incur to defend the testator’s intent. As stated by Aloysius A. Leopold and Gerry a Byer in the article, "Ante-Mortem Probate: A Viable Alternative," [T]esting the validity of the instrument after the testator’s death is the most illogical and impractical time for such scrutiny because even the simplest of errors have the unavoidable effect of destroying the validity of a will and upsetting the testator’s interests."

The alternative to a post-death probate is the "Ante-Mortem Probate." A court proceeding is held during the testator’s lifetime to validate the will. The most obvious and striking feature of this approach is that the person who has the best evidence of intention, the testator, is alive and can tell exactly what he or she intends.

Questions about the capacity of the testator can be resolved by direct testimony of the testator. The testator is there, thus able to answer questions, explain his or her intentions, correct misapprehensions and eliminate ambiguities. Beneficiaries would have to consider carefully their complaints or contests.

In some jurisdictions, guardian or conservatorship proceedings are used in an attempt to establish a life-time determination of competency and freedom from influence. While these kind of proceedings are not directly related to the validity of a will, they are related to competency issues and can provide current testimony and actual input from the testator to build a legal record. For example, in California, a posthumous challenge to a will was barred because the same issues of capacity and undue influence had already been litigated in a proceeding for guardianship while the decedent was alive. While this may provide some help, the proceeding is expensive and can be embarrassing. There should be another way.

Several states experimented with Ante-Mortem Probate alternatives in the 19^th century. The uniform commissioners have considered the matter several times, in the 1930's, the 1940's and 1970's. There is much discussion of the concept in academic literature. Currently, three states, Arkansas, North Dakota and Ohio, allow living probate procedures. In those states the procedure is like a will contest and results in a declaratory judgement.

There are issues that need to be resolved if pre-mortem probate is enacted. Who would receive notice of a scheduled proceeding? What kind of notice should be given? Would the decree bind beneficiaries of prior wills who did not have notice? How many times should a testator be allowed to bring another proceeding if the first probate fails?

Providing for pre-mortem probate is not a panacea. And no one recommends that port-death probate be eliminated. But there should be a way to validate a will while the testator is living to make sure the testator’s property is distributed as he or she intends.

• Email This
• Print
• Comments
• Trackbacks

If my father promises to give me money to buy a grand piano for my birthday and then reneges, can I sue him for the money? Is a promise to make a gift legally enforceable? In general, no, I cannot sue him to force him to give me the money for the grand piano.

But what if after he makes the promise I go to the piano store and sign a contract with the store to buy the piano? I relied on his promise. When a person reasonably relies to his or her detriment on another’s promise to make a gift, the promise becomes enforceable. Then I can sue him.

The same analysis applies in the context of a pledge to a charity. When we think of a charitable contribution, we think of a contribution that is freely given. However, most courts view charitable pledges as legally enforceable commitments. Whether or not the pledge is enforceable is a matter of state law.

Under general principals of contract law, a charitable pledge is enforceable if it is a legally

binding contract. There must be an agreement between the donor and the charity, and there must be "consideration" given in exchange for the pledge. That is, the charity must agree to do something (or not do something) in exchange for the promised donation.

It is also "consideration" if a charity has relied on a pledge to its detriment even though that reliance was not requested by the donor as consideration. The legal doctrine applied here is called "promissory estoppel." In the law of contracts, the doctrine of promissory estoppel provides that if a party changes his or her position substantially either by acting or forbearing from acting in reliance upon a gratuitous promise, then that party can enforce the promise although the essential elements of a contract are not present.

Actions that constitute such reliance based on the pledge include soliciting other donors, incurring costs, entering into contracts, or borrowing money based on the expectation that the donor’s promise will be kept. Promises by other donors can be the consideration for the pledge that the charity seeks to enforce. Courts have been very liberal in finding reliance such as where there are specific fund-raising goals for pledges or naming opportunities.

In some states, a charitable pledge is enforceable even without consideration or detrimental reliance as a matter of public policy. For example, in Ohio, a pledge is considered to be just like a promissory note.

In Pennsylvania, any written promise is enforceable despite the absence of consideration or reliance if the writing states that the maker intends to be legally bound. (33 P.S.§6)

According to the Financial Accounting Standards Board, unconditional promises must be listed as assets on the charities financial statements and reported as revenue when the pledge is made. Lenders will often use pledges as collateral for a loan to the charity.

The directors of a nonprofit corporation or the trustees of a charitable trust may have a duty to pursue the collection of legally enforceable pledges. In general, directors and trustees have a

fiduciary duty to protect and preserve assets. If a donor has declined to fulfill a pledge and clearly has adequate resources to fulfill the pledge, the charity may have a fiduciary duty to enforce the pledge. A breach of fiduciary liability can result in personal liability for the director or trustee.

There are tax issues as well. Charities enjoy tax exemption granted by the IRS. One of the conditions is that a charity not give its assets away except to another charity. Forgiving a pledge could be construed as a gift back to the donor - obviously an improper action for a charity. Forgiving a pledge could be a prohibited benefit for which sanctions could be imposed on the organization for giving a disqualified person an excess benefit.

While charities have the right to sue donors who default on pledges and while the directors owe duties to the charity to conserve its assets, they probably do not have an absolute duty to sue defaulting donors. So far, no court has held a charity liable for refusing to enforce a pledge. The costs of pursuing such legal action and the damage such a lawsuit might do to relationships with other donors are appropriate for the board to consider.

Most charities routinely file claims in a deceased donor’s estate to secure payment of a pledge. This is considered to be routine and is not seen in the same way as a suit against a living donor. Suing living donors in default has pubic relations ramifications.

As with any contract, a charitable pledge will not be enforced if certain defenses to recovery exist such as where the donor was a victim of undue influence or fraud. If a pledge is small or the debtor is in financial trouble, the prudent course may be not to seek to enforce the pledge.

Directors and trustees are placed in the unenviable position of deciding whether to accept a significant write-off of the charitable organization’s assets or putting pressure on donors to honor their pledges which, in turn, may jeopardize future donations.

• Email This
• Print
• Comments
• Trackbacks

Retail mutual fund shares are classes A, B and C. They differ in the amounts of internal 12-b1 fees and also on the loads, or sales charges.  Read about it here:  The ABCs of Mutual Funds.  There is another class offered for many funds: Class I, which stands for institutional class. Class I shares are offered only to large investors, typically investment firms and minimum purchases are often more than $500,000. Class I shares’ fees are typically 40% less than those of classes A, B and C.

What does this have to do with you and me? The connection is that our 401(k) managers can make Class I funds available as investment options for our retirement account. Since Class I funds have exactly the same underlying investment positions as the A, B, and C class shares (ABCs), you would expect the fund manager would go with the better deal for us. Wouldn’t you be upset if he were paying higher fees than he had to?

Think about it this way. You want to buy a car. There are two identical cars on the dealer’s lot. One costs $5,000 more than the other. Which one would you buy?

Why would you pay $5,000 for an identical car? Why would a fund dealer provide ABCs which carry a higher fee instead of Class I shares? Maybe carelessness. Or maybe because the additional fee charged benefits the fund manager or plan sponsor. That is exactly what happens when your 401(k) investment manager provides retail (ABCs) mutual funds for you. They call it "revenue sharing". The plan sponsor receives "offsets" from retail mutual funds, that is, the 12-b1 fees. They don’t call it a kickback.

A recent court case should make 401(k) plan sponsors think twice before offering retail funds as investment options in the plan when investment class shares, Class I, are available with lower expenses. In a case in the middle district of California, Tibble vs Edison International, a group of plan participants went to federal court to complain about the plan buying non-institutional shares. Judge Stephen V. Wilson ruled that the company violated its duty of prudence by selecting retail shares instead of Class I shares for three of the funds held by the plan.

The Edison International Trust Investment Committee made retail share classes of three mutual funds available to participants in the Edison 401(k) Savings Plan. In deciding which funds to offer, the committee did not consider, let alone evaluate, other share classes of the funds. However, it did solicit and rely upon the advice of Hewitt Financial Services, an affiliate of the plan’s third-party record keeper. A class of plan participants sued the committee, Edison International, and others seeking damages under ERISA for alleged financial losses suffered by the plan, in addition to injunctive and other equitable relief on account of breaches of fiduciary duty.

Judge Wilson stated, "In light of the fact that the institutional share classes offered the exact same investment at a lower fee, a prudent fiduciary acting in a like capacity would have invested in the institutional share classes."

Daniel Sonin reported this case on dailyfinance.com on July 28. He reported that Edison is not an isolated instance. He asserts that "over ninety percent of the funds he has examined have purchased retail class funds when institutional class funds of the same content were available."

If Class I shares’ fees are typically 40% less than those of classes A, B and C, what would a 40% reduction in fees by offering Class I shares look like? Consider a fund of $200,000. For simplicity, assume no additions or withdrawals. Assume a rate of return of 8% minus annual fees of 2% for a net annual return of 6%. If the fees of 2% were forty percent lower, they would be just 1.2 % per year, allowing the fund to grow at a net 6.8 % per year. After ten years at 6%, it would grow to $358,170. At 6.8 %, it would grow to $386,138, a difference of almost $28,000.

If Judge Wilson is correct and the company is liable for lost income, that would make many fund advisors think twice about recommending retail funds.

• Email This
• Print
• Comments
• Trackbacks

The New York Court of Appeals has broken new ground.  It has held that an attorney may be held liable for damages resulting from negligent representation in estate tax planning that causes enhanced estate tax liability.  The court held that a personal representative of an estate may maintain a legal malpractice claim for such pecuniary losses to the estate.  The case is Estate of Saul Schneider, Appellant, v Victor M. Finmann, et al., Respondents, New York Court of Appeals Opinion No. 104 (June 17, 2010), 2010 NY Slip Op 5281.

The case involved a $1 million life insurance policy that was included in the decedent's estate for estate tax purposes.

Before this case, NY courts have applied a strict privity rule, that lawyers owe no duty of care to non-clients, and only a client may sue a lawyer for legal malpractice.   As the New York Appeals Court Jude pointed out, the application of the privity rule "leaves the estate with no recourse against an attorney who planned the estate negligently."  The opinion stated: "We now hold that privity, or a relationship sufficiently approaching privity, exists between the personal representative of an estate and the estate planning attorney."

Further:  "The personal representative of an estate should not be prevented from raising a negligent estate planning claim against the attorney who caused harm to the estate," Judge Jones wrote. "The attorney estate planner surely knows that minimizing the tax burden of the estate is one of the central tasks entrusted to the professional."

The court made it clear, however, that strict privity should remain a bar against malpractice suits launched by estate beneficiaries or other third parties absent fraud claims or other special circumstances.

 I recommend that you read Steve Leimberg's insightful comments on the case in his newsletter at LISI Estate Planning Newsletter # 1660 (June 19, 2010) at http://www.leimbergservices.com Copyright 2010 Leimberg Information Services, Inc. (LISI).

• Email This
• Print
• Comments
• Trackbacks

Aron Heller writes for the AP:

"JERUSALEM – It seems almost Kafkaesque: Ten safety deposit boxes of never-published writings by Franz Kafka, their exact contents unknown, are trapped in courts and bureaucracy, much like one of the nightmarish visions created by the author himself.

The papers, retrieved from bank vaults where they have sat untouched and unread for decades, could shed new light on one of literature's darkest figures.

In the past week, the pages have been pulled from safety deposit boxes in Tel Aviv and Zurich, Switzerland, on the order of an Israeli court over the objections of two elderly women who claim to have inherited them from their mother."  Click here to read the rest of Heller's article.

From Wikipedia:

"Kafkaesque" is an eponym used to describe concepts, situations, and ideas which are reminiscent of the literary work of the Austro-Hungarian writer Franz Kafka, particularly his novels The Trial and The Castle, and the novella The Metamorphosis.

The term, which is quite fluid in definition, has also been described as "marked by a senseless, disorienting, often menacing complexity: Kafkaesque bureaucracies"^[1] and "marked by surreal distortion and often a sense of impending danger: Kafkaesque fantasies of the impassive interrogation, the false trial, the confiscated passport ... haunt his innocence" — The New Yorker.^[2]

Hat tip to Wills, Trusts and Estates Prof Blog - read his summary here.

• Email This
• Print
• Comments
• Trackbacks

Juan Altunez writes in his Florida Probate and Trust Litigation Blog about this recient Florida Supreme Court case:  Olmstead v. F.T.C., --- So.3d ----, 2010 WL 2518106 (Fla. Jun 24, 2010). Read his execllent summary and anlaysis of the case here.

An excerpt from the post:

"For those of you interested in understanding the charging-order policy issue I think is lurking in the background of the Florida Supreme Court's ruling, STARTrightLLC.com is an excellent starting point. Below is an excerpt from that website explaining why charging-order protection makes sense in a multi-member LLC scenario, and why it doesn't make sense for single-member LLCs.

The charging order protects the company and the member’s investment if one of the members is sued in his or her personal life. . . . The original charging order philosophy protected guys A, B from having to accept D as an unwanted partner if C, the person they originally went into business with gets sued. They don’t want to have to deal with D. To prevent this unwanted member . . . the charging order is all D can get out of C’s membership . . . The charging order limits D. He must wait for A and B to decide to distribute money. No distributions = no money.

The Single Member Hitch: When a the member of a single member LLC is sued, there is no other member to protect from D. Two bankruptcy courts have used this flaw in the LLC protection to allow creditors of a business owner to completely take over his LLC and liquidate it for cash. The first case was in Colorado and the nation held its breath to see what would happen next. The next case was in Idaho and actually used the Colorado case to base its decision on. This means the trend is starting to move in the direction of denying charging order protection to single member LLCs."

• Email This
• Print
• Comments
• Trackbacks

Remember when Treasury Secretary Timothy Geithner ran into trouble because he hadn’t paid his self-employment tax? There was quite a political stir because it meant a tax-evader would be in charge of the IRS.

Geithner had worked at the International Monetary Fund from 2001 to 2004. During those four years, he paid no social security or Medicare taxes. American citizens who are IMF employees don't have FICA and Medicare tax withheld from the paychecks because it is an international agency. They are considered to be self-employed and are supposed to treat the income as "self-employment" earnings, paying both employer and employee payroll taxes on the income.

The IRS audited Geithner in 2006 and discovered the problem for his 2003 and 2004 returns. Geithner paid just under $17,000 at the time, and the IRS waived any possible penalties. A three-year statute of limitations precluded the IRS from auditing the 2001 and 2002 tax returns. Geithner didn’t volunteer to look over 2001 and 2002 returns even though they contained the same mistake as the 2003 and 2004 returns. The additional amounts for 2001 and 2002 ($25,000) were discovered by the Obama vetting team and Geithner promptly paid up.

Mr. Geithner testified before Congress that he self-prepared his returns using Turbo Tax and that the error was a careless mistake. He paid his over-due social security taxes without penalty, and went on to become the Secretary of the Treasury. Did you ever wonder if it would work for the rest of us?

On June 21, 2010, the U.S. Tax Court handed down a decision in the case of another IMF employee, David Cameron Parker. Mr. Parker also failed to pay self-employment tax, used Turbo Tax to self-prepare his tax returns, and due to that fact argued that he had reasonable cause and acted with good faith with regard to the underpayment. Mr. Parker initiated contact with the IRS and voluntarily came forward with the problem, requesting a waiver of penalties. (He wasn’t caught in an audit.)

From May 25, 2005 through 2006, Mr. Parker earned gross annual compensation of approximately $175,000 while working for the IMF. On his 2005 return, Mr. Parker reported a tax liability of $20,212, which was about $12,000 less than what he actually owed. He asserted that he believed Turbo Tax included the self-employment tax in the tax he owed. He claimed that he called TurboTax and specifically asked "an expert" if self-employment taxes were included. He claimed the "expert" said they were included.

The Court did not believe such a conversation took place, since there were no self-employment taxes shown on the return. As for acting in "good faith" by initiating contact with the IRS regarding the underpayment, good faith must be shown before and during the act of filing. No later acts are included in the "good faith" definition. The IRS refused to waive penalties and the Tax Court backed up the IRS. Here is an excerpt from the opinion, Parker v. Commissioner, T.C. Summ. Op. 2010-78 (June 21, 2010):

"We shall address briefly petitioner's contention that the IRS granted "favorable treatment" in a case involving U.S. Secretary of the Treasury Timothy Geithner, which petitioner described as "incredibly similar" to the instant case. According to petitioner, "there should not be different, or favorable rules for the well-connected". The record in this case does not establish any facts relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner. In any event, those facts would be irrelevant to our resolution of the issue presented here. Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax."

Similarly situated taxpayers should be treated similarly. The Tax Court was not necessarily wrong in the Parker case. There are other cases holding that reliance on tax preparation software is not enough to escape penalties. The problem is that Geithner should have had to pay the penalty as well.

• Email This
• Print
• Comments
• Trackbacks

David Kocieniewski reports for The New York Times: (click here for full article)

"A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free, The New York Times’s David Kocieniewski reports.

Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.

Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.

Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury."

BUT DON'T FORGET ABOUT CARRY-OVER BASIS:  New Carry-Over Basis Rules for 2010

The fact that there is no estate tax is only half of the story.  The heirs will have to take over the decedent's basis in all assets and income tax liabilities will be huge on liquidation of assets.  Its not the free pass it appears to be at first blush.

• Email This
• Print
• Comments
• Trackbacks