Archive for the 'Estate Litigation' 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. )

One of The Top 3 Estate Planning Mistakes

One of the top 3 estate planning mistakes – in both frequency and severity –  is families not planning after second marriages.

These mistakes are so bad because there usually has not been any undue-influencing or other wanton shenanigans that would allow the plan to be set aside, its just that mom/dad or their attorney didn’t think things through when drafting their plan.  There are just so many options to consider and no one plan will fit all scenarios.

Professor Berry here links to an article on just subject and, in my opinion, its a must read for anyone who is either in a second (or third or fourth, etc…) marriage, or for anyone who is the child of a parent in a second marriage.

The below text is taken from the Professor’s post but I have reformatted it and added some additional content:

  • The first situation to consider is how money will be divided if both spouses die at the same time. This is actually the easier of all the scenarios.
    • One option is for each parent to pass property to his or her biological children.  This seems the most equitable on the surface, however, accomplishing such a distribution is a very difficult thing to do because very detailed attention must be paid to what assets are owned by mom and dad and, more importantly,  how they’re titled.  This option likely precludes joint ownership in any of their asset.  So while it sounds nice to pass each parent’s property down to their biological children, it would be quite a feat to accomplish this cleanly.
    • Another option is for all the assets to be divided among all of the children equally.  However, this could cause one heck of a rift where one of the parents has substantially more assets than the other.
    • Yet another is to divide assets based upon merit or need, but this can quickly become an emotional mess.
  • The more common—and complicated—situation occurs when one spouse dies first, usually dad.
    • If everything is left to the surviving spouse, she may spend those assets before spending her own (hey, its all hers so she is certainly allowed to), leaving nothing for dad’s surviving children. And at dad’s death, if his will leaves everything to mom or if his property is just passed to her via joint ownership or beneficiary designation, there is likely nothing that dad’s kids can do to change this result.
    • If at dad’s first death all of his assets are then left to his kids so that nothing goes to mom (or vice-versa, she  may not be able to maintain her standard of living during retirement.  (Again, this may sounds ok to dad’s kids but its usually anathema to dad’s wishes.)
    • Another possibility is for the surviving spouse to inherit half of the decedent’s property with the rest going to decedent’s biological children, but this non-need based decision model does not necessarily avoid any of the above problems, in fact, it could make them worse.

The best solution for planning for second marriages is to place assets in a trust.  And, because you can’t know who will die first, both mom and die typically need their own trust – avoid the dreaded joint trust! A properly drafted trust can allow the surviving spouse’s access to the deceased spouse’s assets during her lifetime, with reasonable restrictions, and on her death what remains will pass to dad’s surviving children.

“There is no one-size-fits-all solution to estate planning for couples in second marriages. Each situation is different and requires a different solution.”

What I do know, with certainty, is this is the situation which leads to more litigation than almost any other.  This is also the situation that is most likely to end the combined family by leaving everyone angry at everyone else.  But it doesn’t have to be this way.  Contact a qualified estate planning attorney in your area anytime you have a family with a second marriage.  Estate planning for “regular” families is tough enough; the second marriage – an arrangement that has almost become the norm – is doubly so.

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…

I was featured in Columbus CEO Magazine

Columbus CEO’s current edition has an article on estate planning for non-traditional couples in which I was quoted a couple times.  I don’t think they have an online edition but if your in my area and a subscriber give it a look.  Lisa Hooker (the freelance writer who did the story) did a nice job.

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.

Income From Restricted Endowment Can Be Used For Construction Project at Cleveland Museum of Art

The Cleveland Museum of Art’s Endowment fund may use the income from four “art-purchase funds” to contribute to the cost of renovating the museum even though such use is against the original intent of such funds, the Cleveland Plain Dealer reported this morning.  Yesterday’s ruling was handed down by Judge Anthony J. Russoof the Cuyahoga County Probate Court thus helping “the museum move its $350 million construction project to completion by 2013. The project is $138 million short of the goal.”

Russo said the museum may draw an annual minimum of $5,498,000 from the four art-purchase funds — a figure based on this year’s total draw. By providing income — not from the principal — for the construction project at an annual draw of 49.99 percent, the original purpose of the funds will be maintained through an allocation of 50.01 percent for the purchase of art.


The art-purchase money for the museum construction project will come from the J.H. Wade Trust (established in 1920), John L. Severance Trust (1935), Mr. and Mrs. William H. Marlatt Fund (1939) and Leonard C. Hanna, Jr. Purchase Fund (1952).

The Case That Will Never End – Anna Nicole Smith Investigated in Murder Plot

I thought all elements of this case had been covered…  Oh how naive I can be.

This article muses about Mrs. Smith’s possible involvement in a plot to kill her late husband’s son while they were battling over her husband’s estate.  And, while hundreds of millions of dollars is a pretty solid motive, the investigation doesn’t appear to have gotten anywhere beyond motive.

Smith’s FBI records, obtained exclusively by The Associated Press, say the agency investigated Smith in 2000 and 2001 in a murder-for-hire plot targeting E. Pierce Marshall


The documents released under the Freedom of Information Act depict an investigation going on as the fight raged over J. Howard Marshall II’s estate. Vast sections of the 100 pages of released materials – a fraction of Smith’s full FBI file – are whited out, and no evidence of her involvement in such a plot is detailed.

It is also unclear that killing Jr. would have yielded any benefits to Mrs. Smith anyways given the trusts involved, but the FBI, for reasons the AP is not aware of, nonetheless thought an investigation was warranted.

Stay tuned folks, the “original” case is still on remand from the Court of the Supremes which will decide just how much money, if any, will be inherited by Mrs. Smith’s sole surviving heir, her 3 year old daughter.  Poor girl.

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.