Almost every estate has some tax issues, whether federal or state estate taxes, real or personal property taxes or income taxes. Sometimes the tax tail can wag the settlement dog and it makes sense to ask how Uncle Sam, or the state and local taxing authorities, can contribute to settlement?
Taxes can move settlement forward particularly when one or more of the following situations apply:
1) The Decedent died while married to a second, third or fourth spouse;
2) The surviving spouse and the children from the decedent’s earlier marriage(s) do not get along;
3) The parties are made aware that by using the “marital deduction” , or a spousal exemption, taxes will not be levied on assets passing to the surviving spouse, or a trust for the surviving spouse; and
4) The surviving spouse may be able to use his or her exemption to pass additional assets to the children or others tax-free at death.
Educating the surviving spouse and adverse parties (including the children) on estate taxes and the marital deduction is seldom easy and capital gains, real property and income taxes only further muddy the waters. For example, some states exempt from reassessment real property interests that pass to a surviving spouse or to children, but not to a caregiver or siblings or a non-relative.
I’m familiar with one case in which the ancestral home, but for the settlement, would have gone to the decedent’s sister. As a result, the annual property taxes would have increased by thousands of dollars. The children were to receive a recently purchased warehouse that already was assessed high property taxes. By swapping inheritances with their aunt, the children got a property they were just as interested in, and the difference in value was more than made up for by property tax savings.
In another case, a surviving spouse, who had asserted numerous causes of action, found that a settlement which recognized her community property interests in the vacation home afforded her a step-up in basis to the date of death value and gave her the flexibility to sell the property without a significant capital gains hit.
1) Employ tax professionals (accountants, attorneys, etc.) and use them during settlement discussions;
2) Educate clients about the applicable taxes and options for reducing the same through creative settlement; and
3) Consider not only the obvious (estate) taxes but assessments, exemptions, etc. at the state and local level.
In a will or trust contest the most important witness, the decedent, is obviously not around (unavailable in legalese). Important issues are rarely resolved by the disputed document itself. The judge or the jury would love to just get a few answers from the decedent (“Were you really that mad at your daughter?”, “Did you want the caregiver to get all the money in the joint tenancy account or just want her to be able to buy groceries?”).
To address the gap, litigants find people to show up and tell the court what the decedent meant…. wanted…. intended. This is different from a contract dispute where each of the parties can say “This is what I meant.” A further oddity in a will or trust contest is that the next most important and available witness to the decedent’s intent is often the lawyer who drafted the documents. This brings into play issues of attorney-client privilege. Moreover, the lawyer may have met the decedent only a few times and often years before the dispute arose.
Not surprisingly, many people are somewhat private about their wills and whom they want to inherit. This can complicate the process of finding good witnesses. Sure, a labor dispute or a divorce or even a personal injury action may be something a person doesn’t want to talk about, but the testimony of litigants in those sorts of cases gives them a chance to help or hurt their outcomes, and there are often third parties directly involved. A will contest may turn on an old letter or email, that no one can testify about, for example one in which dad writes that his son doesn’t have to repay a loan.
Another issue is that Wills and Trusts include quite a bit of “boilerplate” language that the lawyer may, or may not, have ever discussed with the decedent. Imagine the difficulty in a 10 or 20-year-old trust with a standard tax apportionment clause driven by taxes that are no longer in play. Not only did the lawyer not (and could not) consider the current tax rules when the trust was drafted, but the lawyer likely has absolutely no recollection, or notes, as to whether or not there was a discussion about the clause which is now being used to reinterpret the clause to reflect the decedent’s intent under the new tax system. In the practice of estate planning, it would be difficult to go over every such clause with a client.
With these issues in mind, when I’m going to have to try a case, I’d appreciate it if estate planners had the following information in their files:
1) a list of the decedent’s priorities, in order (e.g. is it more important to avoid taxes or maximize the wealth to a particular child);
2) notes of every substantive meeting;
3) drafts of documents with any substantive comments, or cover letters describing any changes that are made between drafts;
4) superseded documents (to show intent over a long period of time)
5) a memo to the file discussing major events that affected the estate plan (death of a beneficiary, estrangement, illness).
Estate planning attorneys who give a thought to what will help settle a future dispute or who answer the question the court can’t ask the deceased client end up doing everyone a big favor.
While every litigator is faced with the best way to obtain the necessary background information from a client in estate and trust disputes, emotions, and sometimes the family history, both of which are part and parcel of estate and trust disputes, can (and do) get in the way of ‘cutting to the chase.’
Rather than spent hours acting as a pseudo, and poorly trained therapist, consider the following alternatives:
A Narrative. Ask the client to prepare a written account. Explain that because lawyers charge by the hour, and most people can read 250 words a minute (and some at twice that speed), they will save money by writing a narrative, rather than sitting down and telling the whole story in-person.
That narrative can then be sent back to the client, highlighting what is important to the case and interlineated with the important evidentiary questions “who else knows about this fact?” and “is there anything in writing about this fact?” Because state law can restrict who can testify, and the substance of that testimony (colloquially known as application of the Dead Man’s statute), who knows about a fact can be crucial.
Interrupting Their Story. No one likes to be interrupted; however, what may seem important to the client may not be the core of the issue, conversely that which seems trivial to the client may, in fact, be heart of the matter. In an emotional, stressful arena such as estate litigation, it helps to begin with the following qualification:
- You will always know more about what happened, how it affects you, and how wrong it was then I as a lawyer will ever know;
- However, as a lawyer, I know that certain very particular details are important;
- I want you to tell me the whole story, but please understand that I’m likely to interrupt to obtain clarification and additional information where I need it (such as a date, or what particular words your mother used, or who else heard that conversation); and
- If you feel that there is additional information that I need to know, please offer that up.
Get it all. Clients rarely understand that discovery means EVERYTHING – every email, every letter, text, and Christmas card. Clients have a natural tendency to bring just the documents or emails they think are important (and they might be right). More worrisome, as individuals, trust and estate clients rarely know or understand how to preserve evidence, particularly electronic evidence. But the opposing side is going to ask for it all, so it is important to explain that to the client at the onset and put them to work compiling everything. In addition, consider hiring an outside ediscovery vendor to do an initial pull down of email, texts and other ediscovery. That avoids inadvertent deletions and provides you, as the lawyer, with some protection in the event of a discovery battle.
During most of his thirty-five years in the practice of law, Mr. Keeler has concentrated on estate and trust litigation. Licensed in Oregon and California, Mr. Keeler has tried cases involving estates, trusts and conservatorships throughout Oregon, California and neighboring states. Mr. Keeler is also certified by The State Bar of California Board of Legal Specialization in Estate Planning and Trust & Probate Law.