Court Considers Estate Planning Documents In Deciding Corporate Dispute
This post concerns a decision issued by a Supreme Court Justice in a complex corporate dissolution proceeding. It highlights the importance of familiarity with estate practice, even if you never plan to step foot into a Surrogate’s Court.
In Matter of Pappas v Corifan Enterprises Ltd., NYLJ 2/19/09 (Sup. Ct. Kings County 2009), the issue was whether the Petitioner -- the surviving spouse of the decedent -- had standing to petition for dissolution of two closely held corporations. Respondent argued that the decedent -- and, thus, the Petitioner -- lacked the requisite 20 percent ownership interest in the corporations. He argued that he was the sole owner of the corporations. After a hearing limited to the issue of standing, at which the court heard 14 witnesses testify over eight days and admitted 48 documents into evidence, the court determined that the Petitioner met her burden of demonstrating an ownership interest in one corporation, but not the other.
The substantive legal aspects of the decision are beyond the scope of this post (although an article published by my colleague, Peter Mahler, on his New York Business Divorce blog, contains an excellent discussion of the same). What should be of interest to the trust and estate litigator is the evidence the court analyzed in reaching its determination.
Continue Reading...Cases of Attorney-Fiduciaries
Within the past year, several decisions have been rendered that impact upon the appointment of the attorney as fiduciary, and provide cautionary tales to the attorney-draftsman of instruments in which counsel is named to serve in a fiduciary role.
In re Estate of Wrobleski, NYLJ, 6/4/08, p. 41 (Sur. Ct. Kings County)(Sur. Johnson), the court was confronted with the issue of whether the acknowledgement of disclosure submitted by the nominated attorney-fiduciary was in compliance with the dictates of SCPA 2307-a.
The court noted that while the statements contained in the acknowledgment did not comply with the current requirements of SCPA 2307-a, they did appear to comport with those required by the statute at the time the acknowledgment was executed.
Nevertheless, the court noted that an essential element missing from the acknowledgment was the signature of the witness to the instrument. It was held that the petitioner’s attempts to cure the defect after-death were insufficient to rectify the attorney-fiduciary’s failure to comply with a material requirement of the statute. Specifically, in this regard, the court held that inasmuch as both model statements included in the statute contained a line for the witness’ signature, the signature was a substantial component of the statutory requirement that could not be overlooked. Since the statute failed to provide any remedy for failure to include the signature of the witness to the statement, the court found, under the circumstances, that the petitioner’s commissions should be reduced to one-half.
In re Estate of Deener, 2008 N.Y. Slip Op 28470, N.Y. Sur., Nov. 28, 2008 (Sur. Roth), the issue before the court was whether the disclosure requirements of SCPA 2307-a were applicable to the proponent, an out-of-state attorney named as fiduciary.
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Tax Apportionment on Gift Tax Recapture
Decedent made substantial gifts and paid gift taxes thereon within three years of his death. Under IRC §2035, the gift taxes are brought back into the estate for estate tax purposes. Who should bear the burden of those additional estate taxes, the donees of the lifetime gift, or the decedent’s estate? This was one of the questions facing Surrogate Scarpino in a recent case in Westchester County Surrogate’s Court. In Matter of Rhodes 208 NY Slip Op 28472 December 1, 2008 (NY Law Journal), the Court found that the burden fell on the donees.
While Congress eliminated the old “contemplation of death” rules for gifts within three years of death, a last vestige remains and that is that the gift taxes on gifts made within three years of death are recaptured into the decedent’s gross estate for estate tax purposes. This provision was meant to eliminate the perceived abuse of people making large death time gifts, which because of the tax inclusive nature of the estate tax versus the tax exclusive nature of the gift tax, would allow the gift tax on assets transferred lifetime to escape the transfer tax system, a result which would not happen if the transfer were made on death by Will.
Here are the facts. Mr. Rhodes died on June 18, 2007 survived by three sons and two grandchildren who were issue of a predeceased son. Decedent’s will had a number of pre-residuary bequests both of real property and money and left her residuary estate in equal shares to his three sons. The tax clause in his will provided that taxes on his probate assets would be paid from his residuary estate and that estate taxes on property passing outside his will would be apportioned in accordance with New York State law. The decedent’s federal estate tax return disclosed that a number of lifetime gifts had been made and that gift tax of $1,144,277 had been paid during the three year period prior to his death which tax was accordingly included in his gross estate under IRC § 2035(b). It appears there was a shortfall in the residuary estate and an initial question arose as to whether the shortfall should be borne by the pre-residuary bequests in the Will (which the Will specifically exonerated from taxes) or against the recipients of the gift. The Court found that any shortfall of the residuary estate to cover the estate tax should be paid from the interests bequeathed under Article Fourth of the Will, i.e., the pre-residuary bequests.
With respect to the question of whether the donees of gifts made within three years of death are responsible for paying estate tax attributable to the inclusion of the gift tax paid on those transfers, the Court held that while the phrase gross taxable estate does not technically include adjusted taxable gifts because such gifts are added after the tax computation schedule, gift taxes paid are treated differently and are a component of the gross estate as defined by IRC § 2035 and as such are subject to apportionment under EPTL 2-1.8. The Court thus found that the donees of the gifts made within three years of decedent’s death were responsible for paying their ratable share of the estate tax attributable to the inclusion of the gift tax paid.
Parents of Decedent Have No Rights to Preserved Reproductive Tissue
A unique issue was decided this week by the First Department. In Speranza v Repro Lab Inc., 2009 NY Slip Op 01543, Plaintiffs, as administrators of their deceased son’s estate, sought possession from Defendant, Repro Lab, Inc., of frozen semen specimens that the Decedent deposited prior to his death. He apparently chose to deposit the specimens to preserve his ability to have children in the event that his cancer treatments resulted in infertility. Plaintiffs sought the specimens after their son’s death, in hope of ultimately having a grandchild by a surrogate.
Upon being contacted by Plaintiffs after the Decedent passed away in 1998, the Lab advised them that the specimens were intended for the Decedent’s own use and thus had not undergone the requisite screening to be donated to a member of the public. Nonetheless, it agreed to maintain the specimens as long as Plaintiffs continued to pay the yearly fee, which they did for several years.
In 2005, Plaintiffs requested information from the Lab on obtaining the specimens for purposes of artificial insemination. Only at that time did Defendant produce a contract the Decedent signed, explicitly providing for the destruction of the specimens upon his death. This prompted litigation in which Plaintiffs alleged that the Lab’s acceptance of annual payments to preserve the specimens rendered them property of the estate, and requested a preliminary injunction to direct the Lab to continue preservation of the specimens pending the outcome of the action.
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