Archive for the 'Recent Cases worth noting' Category

So you gave some property to a relative and didn’t file a gift tax return. The IRS is coming.

This comes to us from today…

As part of a new national hunt for gift tax evaders, the Internal Revenue Service has asked a federal court for permission to order a California state tax agency to hand over its computer database of everyone who transferred real estate to relatives for little or no consideration from 2005 to 2010.

If granted, the sweeping request could expose many Californians–especially those who didn’t file federal gift tax returns–to audits as well as penalties or even substantial back taxes.

The little-known lawsuit, called “In the Matter of the Tax Liabilities of John Does,” was filed in December on behalf of the IRS in federal court in Sacramento, the state capital. That’s the home of the California Board of Equalization, which oversees property tax issues across the state. No action has been taken yet on the request.

From Professor Berry:

The IRS nearly admits that it is going on a fishing trip for John Does. However, it considers it to be in well-stocked waters as evidenced by the widespread noncompliance in 15 other states that have already been targeted. Gift tax returns were filed 0% of the time in Ohio and 10% of the time in Virginia and Florida. Other states that gave up this data include: Connecticut, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.

It may not amount to much in the way of dollars to the government giving the rise in the federal estate tax exemption during the targeted years and because of the way the estate and gift taxes are linked but audits are terrible.  So, if you want to transfer some property, contact a qualified estate planning attorney in your area to advise you on the gift tax consequences of doing so and on the propriety of doing so generally.

Estate Planning and Divorce

I’ve written here and here before on the unique challenges planners face when drafting a plan for people who are not in their first marriage.  One such challenge is advising clients whether they have any lingering rights or responsibilities from their divorce decree or another agreement that arose when their prior marriage ended.  Such decrees and judgments can have serious effects on any proposed plan and must be considered by your estate planner before signing anything.

Yesterday’s decision out of Oregon deals with a common aspect of divorce decrees when children are involved, the mandatory life insurance requirement.

In this case, decedent was required, pursuant to the terms of the stipulated judgement entry that ended the parties’ marriage, to maintain life insurance on herself – the requirement was reciprocal.  When she allowed the policy to lapse and subsequently died without such life insurance, her former spouse made a claim against her estate for the money he would have received had she not allowed her policy to lapse.  There was some discussion in this case about whether the surviving ex-spouse should be able to make such a claim given that he was the life insurance agent who issued the policy and therefore, the argument went, he should have known that the policy lapsed so he can’t now complain about his failures, but the court dismissed this argument almost out of hand and awarded the surviving ex-spouse his claim.

The point here is two-fold:  1) Pay attention to the documents that ended your prior marriage when doing planning now.  As much as you may want to, you can’t just pretend you were not previously married and, 2) Do what those documents tell you!

(As always there is a third point here:  Please, don’t try this at home!  For any planning needs, contact a qualified estate planning lawyer in your area. )

Same Sex Marriage, The Estate Tax & The [Possible] Death of DOMA

“There is nothing more powerful than an idea whose time has come.” – Victor Hugo

I posted last week about Hawaii having approved civil unions for same sex and couples (and for the rest of us breeders too).  Then the Obama administration one-upped that news by deciding to stop defending DOMA in the federal courts which lead directly to a number of posts and articles out there on the blog-o-nets about how a possible repeal of DOMA may have estate tax implications for same-sex couples.  It gets a little technical but my man Joel Shoenmeyer does a great job of getting us started in his post, DOMA, Same-Sex Marriage, and the Estate Tax.  Joel writes:

Federal estate tax law allows for a “marital deduction” for gifts made to a spouse at death, but the deduction is “equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse.” And, because of DOMA, same-sex married couples were not deemed to have a surviving spouse. This created a larger burden on same-sex married couples with estates subject to tax.

Some commentators have called this additional burden a “Gay Tax.” writes here:

The Williams Institute of UCLA School of Law has released a study [pdf] that shows that same-sex couples are assessed an average of $3.3 million more in taxes upon the death of their partner than a similarly situated opposite-sex couple. Because estate taxes are set federally, the Defense of Marriage Act prohibits even married same-sex couples from taking advantage of the marital deduction.

The Edith Windsor case, detailed here (and in this NYT article),  illustrates the point:

On November 9, 2010, Ms. Windsor, who shared her life with her late spouse, Thea Spyer, filed a lawsuit against the federal government for refusing to recognize their marriage. In the lawsuit, Ms. Windsor alleged that DOMA violated the equal protection clause of the U.S. Constitution because it recognized marriages of heterosexual couples, but not those of same-sex couples, despite the fact that New York State treats all marriages the same. Edie and Thea were married in Canada in 2007, and were considered married by their home state of New York.
When Thea died in 2009, Edie was the sole beneficiary of Thea’s estate. Because they were married, Thea’s estate normally would have passed to her spouse Edie without any tax. But because the federal government refuses to recognize otherwise valid marriages of same-sex couples due to DOMA, Thea’s estate had to pay more than $350,000 in federal estate tax. Earlier in 2010, Edie requested a full refund from the government. The IRS rejected that claim, citing DOMA.
These cases are going to come like a flood into the courts.  This NYT article describes how,  back in July of 2008, Judge Joseph L. Tauro of United States District Court in Boston sided with the Plaintiffs and ruled that DOMA “compels Massachusetts to discriminate against its own citizens in order to receive federal money for certain programs.” The other case [pdf], brought by Gay and Lesbian Advocates and Defenders, focused more narrowly on equal protection as applied to a handful of federal benefits. In that case, Judge Tauro again sided with Plaintiffs in ruling that DOMA violated the equal protection clause of the Constitution by denying benefits to one class of married couples — gay men and lesbians — but not others.
DOMA feels like its on its way out folks.  1996 was a long time ago and, though opinions on gay marriage have changed dramatically since then, the real force of change here looks to be the writing of unfair checks to Uncle Sam.  The insecurity over the future of the federal estate tax and a potentially lower exemption can only mean that we will see more of these cases.  And thus, another test of Mr. Hugo’s maxim may not be too far away…

Estate Planning Malpractice – NY Court Has A Warning For Ohio Planners

I’ve written on the issue of estate planners committing malpractice against their clients here and here on this blog before.   Its an issue of interest for Ohio attorneys  because Ohio still clings to the antiquated rule of privity to decide who has standing to sue the attorney who allegedly gave the bad advice.  Basically, requiring privity means you must have been the one in a contractual relationship with the attorney – the client.  In the estate planning context, however, this is a little complicated because if the bad advice was given during the client’s lifetime its more than probable than not that damages for the bad advice won’t accrue until the client dies.  Therefore, you’ve got no one left to sue the attorney for malpractice because the client is dead!  Kinda dumb, I know, I complain about it all the time.

However, tn The Estate of Saul Schneider v. Victor M. Finmann, N.Y.3d 2010 N.Y, Slip Op 05281 (pdf of opinion) decided this past June 17th, the New York court held:

the legal representative of a decedent stands in  that person’s shoes for the purpose of being able to maintain a malpractice action against the decedent’s estate planner where improper advice or negligent estate planning has resulted in a loss.

Imputing this legal fiction on the fiduciary means a malpractice action can now be maintained.  So there you go Ohio courts!  Lets get this done.  If you don’t want to update the law (to the much preferable California rule that follows the harm and allows the party that suffered as a result of the bad advice to bring a malpractice case) then lets give this a try…  Its a little awkward but its about time in Ohio stepped up and allowed aggrieved clients to sue the attorney who rendered the poor advice.

Thanks to Philip Bernstein of the New York Probate Litigation Blog for pointing this out to me.

Probate Creditor Deadlines Are Important

The above is actually important to point out.  Should be self-evident right?  Nope.

Too many talented and experienced attorneys blow their cases for failing to adhere to probate creditor claim rules and time lines.  This post by Juan Antunez of The Florida Probate & Trust Litigation Blog is a perfect example of how wrong things can go if you’re not paying attention to probate court rules.  The below summary of 2010 WL 479862 (Fla. 1st DCA Feb 12, 2010) is from Mr. Antunez:

Wald was involved in an automobile/motorcycle accident with the decedent and brought a personal injury lawsuit to recover damages. Wald eventually prevailed in his lawsuit, but the judgment was not rendered until after the decedent’s death. Some time after obtaining the judgment, Wald filed a claim against the probate estate.

The personal representative argued she had served notice on Wald’s attorney as required by Florida Probate Rule 5.041(b) (2009) on May 23, 2007, thus triggering the time constraints of section 733.702(1). Therefore, under the statute, Wald had until June 22, 2007, to file any claim he might have. Since Wald’s claim was not filed until July 2, 2007, the personal representative argued it was untimely and forever barred.

Scary stuff right?  Well, it happens all too often.  Juan wisely points out:

Plaintiffs suing estates often fail to realize that they’re really litigating their claims in two separate courts in front of two separate judges:

  1. The trial court adjudicating their lawsuit (this is where the decedent’s liability is established); and
  2. The probate court administering the decedent’s probate estate (this is where you go to collect on your judgment)

Ohio’s rules for presenting claims against an estate are found in R.C. 21172117.06 gives a creditor 6 months after a decedent dies to present a claim or, as in Florida, the claim is forever barred.  A distinction is necessary here though.  If the above case had happened in Ohio, the Plaintiff still likely could have won something from decedent defendant’s non-probate property.  I’m thinking here of decedent defendant’s auto insurance coverage.  Assets from insurance that are recoverable as damages in a tort action are non-probate property (typically).  Thus these assets aren’t governed by 2117.06.  You have the regular time allowed under Ohio law to bring a claim of this type – 2 years I think in Ohio for personal injury claims.  However, if the defendant dies during the case, or perhaps died as a result of the accident before the case was filed, you still have to pay attention to the probate court deadlines if you want to retain the ability to recover from defendant’s estate.  Hypothetical:  Plaintiff wins their case against defendant for liability stemming from a car accident.  Defendant died as a result of the accident.  Plaintiff gets a $1 million dollar judgment against Plaintiff.  (I know that’s high but its my hypothetical.)  Defendant had insurance which will pay Plaintiff, however, Plaintiff’s insurance company will not pay any more than policy limits.  SO, the insurance isn’t sufficient to pay the full claim and now Plaintiff wants to/has to recover the deficiency against decedent’s estate but we’re now more than six months from the date of defendant’s death.  Plaintiff is out of luck.  Nothing they can do about it.  Even if defendant dies with a multi-million dollar estate, Plaintiff gets nothing from that estate if their claim wasn’t timely filed.  This situation, similar to the one linked to above = a malpractice lawsuit against the attorney who failed to adhere to the probate code’s deadline.

In the opinion of the linked-to case (available here as a PDF), the court was none-too-pleased with plaintiff’s attorney for blowing this deadline:

Filing a probate claim is a relatively simple act and requires nothing more than submitting a written statement of the case. If for some reason Wald’s attorney was unable to file the claim, he certainly could have referred Wald to another attorney or advised Wald about the need to timely file a claim. Wald’s attorney failed to accomplish this simple task.

Ouch.  Probate deadlines are important people!  If you’re litigating a personal injury case or any other claim that even may have to be collected from a probate estate, find yourself a good probate attorney to advise on the collection procedures in your local probate court.  Otherwise you may need a good malpractice attorney.

Ohio Fells Another Trust Mill – UPDATE

My last post pointed to a Columbus Bar Association press release about Columbus Bar Assn. v. Am. Family Prepaid Legal Corp., Slip Opinion No. 2009-Ohio-5336, (available here as a PDF). In that case the Ohio Supreme Court found that “American Family Prepaid Legal Corporation (“American Family”) and its various allied entities and associates – after being pursued by the Columbus Bar since 2002 – were found to have practiced law without a license and to have used scare tactics, misinformation and false promises to induce thousands of individuals in Ohio and other states to purchase living trust packages and other estate planning documents at inflated prices.”

Game over right? Maybe not.

Two Motions for Reconsideration were filed this last Monday (10/26) by Defendants alleging that they were denied due process as the result of alleged collusion. You can read the press release here. Please also make your own decisions about the motions’ merits…

So, whats the big deal with these cases? Why have I dedicated so much screen space to cases like this? Because companies whose sales pitches involve misstating the tax code in order to make a buck, make it more difficult for an already leery society to trust actual estate planning lawyers who are sincerely interested in helping people work with the code to preserve and pass on their estate. Because providing poorly thought-out estate plans can often cause more harm than doing nothing. Because the most susceptible among us deserve nothing short of our most earnest efforts to protect their legacies. Because these legacies belong to the greatest generation whose passage we are now bearing witness to; a generation that lived through the great depression, that beat down Hitler through the Rising Sun only to return home to work their butts off to make this country the greatest power for good the world has ever known. Because fidelity to our humanity demands that we care as much now for those helpless multitudes who raised us as they cared for us when we were helpless ourselves. And because there is a special place in hell for those who prey on the fears of the elderly for their own gain. [Caveat: I’ve never read any of the materials offered by Defendants so I do not have any first-hand knowledge of their merit… But I’m sure they’re terrible.]

It should also be pointed out that this isn’t the first time Mr. Norman has gotten a legal spanking for lying to the elderly – apparently they’re his favorite targets… According to this story in the LA Times, in 1993 “Orange County Deputy Dist. Atty. Robert C. Gannon Jr. charged that officials with Vanguard Assisted Care Inc. pose ‘a continuing threat to the consumers of the state [of California] in that more elderly individuals and senior citizens may be misled and enticed into purchasing’ the company’s companion-care plan.” “Named in the lawsuit were Vanguard’s President Stanley Norman; his son and company Vice President Jeffrey L. Norman; and company consultant Barbara Bufty.”

From its offices in Lake Forest, Vanguard salespeople have been selling the companion-care plan, particularly to residents of the nearby Leisure World retirement community in Laguna Hills. Under an agreement, senior citizens must make an initial $6,600 payment to qualify for the plan’s benefits. They also must make co-payments when they call for an in-home worker to help them with housecleaning, preparing meals or getting to doctor’s appointments.

Pretty nasty stuff.

Once again, I applaud the Columbus Bar Association for their hard-fought victory in this case.

Ohio Fells Another Trust Mill

From a Columbus Bar Association press release last Wednesday:

The Columbus Bar Association announced today that the Supreme Court of Ohio, in a unanimous decision in Columbus Bar Assn. v. Am. Family Prepaid Legal Corp., Slip Opinion No. 2009-Ohio-5336, (available here as a PDF) took a momentous step to protect Ohio’s citizens from illegal trust mills that prey upon seniors and other vulnerable individuals. American Family Prepaid Legal Corporation (“American Family”) and its various allied entities and associates – after being pursued by the Columbus Bar since 2002 – were found to have practiced law without a license and to have used scare tactics, misinformation and false promises to induce thousands of individuals in Ohio and other states to purchase living trust packages and other estate planning documents at inflated prices. Often these legal documents were not needed or legally appropriate, and did not fulfill the purposes of the people who purchased them. As a result, the Ohio Supreme Court issued a permanent injunction to shut down their operations and penalized them with heavy fines, including a $6,387,990 sanction against American Family and others. 

After 2005’s Cleveland Bar Association v. Sharp Estate Services, Inc. et. al., you’d have thought people would know better than to try to prey on the elderly in Ohio…  Guess not.

Well done CBA and those involved in pursuing and winning this righteous case!

New “Asisted” Suicide Case in Austrailia

CNN reports that an Australian man, Christian Rossiter, recently won his right to die, by refusing food and water, from the Australian Supreme Court.  The case is interesting for two reasons: 1) Chief Justice Wayne Martin wrote “Mr. Rossiter is not a child, nor is he terminally ill, nor dying. He is not in a vegetative state, nor does he lack the capacity to communicate his wishes, and 2) Mr. Rossiter is a quadriplegic thus requiring the intervention of the nursing home workers (where he resides) to assist him with taking pain medications.

It is this latter point that lead Mr. Rossiter’s nursing home to file the suit seeking a declaration from the court that they would not face liability for assisting Mr. Rossiter with his wishes.  In Australia one is able to make their own decision regarding their right to to die but assisting someone else in actualizing those wishes can lead to a life sentence.

It appears this is the first case of an individual not under a legal disability or otherwise lacking capacity that has made this decision in Australia.

Most ironic quote:  “Rossiter appeared ‘very happy’ afterward.”

Professor Berry posted on this story yesterday.

Heir to IBM Fortune Adopts Her Lesbian Parter in Maine – Supreme Court Upholds Adoption’s Validity

This seemed as good a topic as any to ease myself back into the blog-o-webs, so here goes:

According to this story at (a CW network affiliate out of Houston),

Maine’s highest court gave a legal victory Thursday to a woman who stands to stake a claim to a share of one of America’s premier business fortunes thanks to her adoption by her lesbian partner.

Back in ’91, Olive Watson, daughter of Thomas Watson Jr. – the guy who built IBM – adopted Patricia Spado.  At issue in the case was whether the adoption was legal at all.  The two longtime partners spent “several weeks” each summer in North Haven.  Like many other states, Maine requires peitioners for adoption to live in the state and, after Mr. Watson, Jr. and his wife passed away, the Trustees for Mr. Watson’s trust “alleged that the couple obtained the adoption through fraudulent means by not disclosing their relationship to the court. The petition further alleged that Spado and Watson, as New York residents, had not fulfilled the statutory requirements of living in Maine at the time of the adoption.”  On appeal, the Trustees further argued “that the adoption should have been annulled on the grounds that it was obtained by two partners seeking to manufacture inheritance rights who did not intend to establish a normal parent-child relationship.”

In yesterday’s decision, Maine’s supreme court ruled that even if Spado did not live in Maine under the law, the adoption should not have been annulled [in the lower court] because there wasn’t enough evidence to support the claim that Watson had committed fraud.

The court also rejected the trustees’ claim that the adoption should be annulled based on a public policy prohibiting adoptions involving same-sex couples. Historically, adult adoptions have been recognized as a means to convey inheritance rights, to formalize an existing parent-child relationship or to provide perpetual care to a disabled adult adoptee, the decision reads.

Its interesting to ponder what would have happened if Watson and Spado were allowed to marry…  Under the terms of most standard trusts, its unlikley that Spado, as Watson’s spouse would have inherited anything given that most trusts attmpt to keep assets in the bloodline of the Grantor.  Being the adopted child of Watson, however, Spado is deemded to be just that.  Interesting.

To Restate Or Not To Restate – That Is The Question

Professor Berry tangentially raises the above question in a post today on the Wills, Trusts & Estates Prof Blog via his telling of the case of Soefje v. Jones, 270 S.W.3d 617 (Tex. App.—San Antonio 2008, no pet. h.).

The case pits brother against sister in a dispute over the meaning of a trust amendment to dad’s trust.  “Brother argued that the amendment only added to the property to which Sister was entitled under the original trust instrument but left the property to which he was entitled intact.  On the other hand, Daughter claimed that the amendment revoked the entire property distribution provided for in the original trust causing property originally given to Brother to pass under the trust’s residuary clause permitting her to share in that property.” Sounds like brother was being reasonable, sister was being greedy.  But I haven’t read the trust yet folks so shelve the mail bombs.

Daughter won.  Brother appealed.  Appellate Court reversed:

The court began its analysis by recognizing that a trust amendment does not revoke a provision of the original trust “unless the words used in the amendment clearly show the [settlor’s] intent to revoke the trust.”  Soefje at 629.  The court studied the trust and the amendment and held as a matter of law that the instruments are unambiguous.  The amendment merely added to Sister’s entitlement by giving her certain properties to which Brother was originally entitled under the original trust.  The amendment did not act to revoke gifts of other property to Brother.

The case is interesting in and of itself but its more useful as a tale of the trouble with amending one’s trust.  If you want to substitute a fiduciary, amend how qualified assets are handled, even expand/reduce the fiduciary’s authority, an amendment can be fine.  But they’re tricky.  They muddle the Grantor’s original intent which is drawn from the whole of the original document, its one more piece of paper for you to lose as the years pass and they’re usually more expensive than the change alone is worth.

The question therefore is, do you amend the trust?  Or do you restate the trust in its entirety?

More often, I’m a fan of the latter option.  The sanctity of the single document is maintained and you lessen – to the extent possible – the likelihood of interpretive litigation.  Also, believe it or not, the cost is about the same.