My colleagues have written on the enforceability of in terrorem clauses, and the courts continue to confront challenges in reconciling the testator’s intent to impose an in terrorem condition with the rights of beneficiaries to challenge the conduct of their fiduciary. The New York County Surrogate’s Court’s recent decision in Matter of Merenstein provides further guidance to practitioners in assessing the kind of conduct that will trigger an in terrorem clause. It illustrates that the courts, in construing broad in terrorem provisions, will draw a distinction between conduct aimed at challenging the conduct of an executor and conduct aimed at nullifying a testator’s choice of executor.

In Merenstein, the decedent bequeathed his estate to his two daughters. His daughter Ilene was favored under the will – – she received 73% of the decedent’s residuary estate and was nominated the sole executor. His daughter Emma received 27% of the decedent’s residuary estate. The in terrorem clause in Merenstein provided as follows:

If any person in any manner, directly or indirectly, challenges the validity or adequacy of any bequest or devise to him or her in this Will, makes any other demand or claim against my estate, becomes a party to any proceeding to set aside, interfere with or modify any provision of this Will or of any trust established by me, or offers any objections to the probate hereof, such person and all of his or her descendants shall be deemed to have predeceased me, and accordingly they shall have no interest in this Will.

Decedent’s will was admitted to probate and Ilene was appointed executor without objection.

Emma brought a proceeding asking the court whether certain contemplated conduct on her part would trigger a forfeiture of her beneficial interest under the in terrorem clause. Her first question was whether a petition to compel the executor to account, and a subsequent petition to remove the executor in the event that the executor disregarded a court order to account, would trigger the in terrorem clause. That was easy. The court held, consistent with well-settled law, that a beneficiary will not trigger an in terrorem clause by demanding an accounting of an executor, by objecting to an executor’s accounting, or by seeking removal of the executor in the event of the executor’s failure to comply with an order to account.

Emma also asked whether she would trigger the in terrorem clause by petitioning for limited letters of administration giving her the authority to conduct an investigation into whether Ilene had fraudulently used the decedent’s credit card during the decedent’s life. This was another easy one. Consistent with well-settled law, the court held that a petition for the issuance of limited letters to pursue an investigation into whether there are assets of the estate in the possession of others, including someone who is also a fiduciary, does not seek to challenge the validity of the will or any of its provisions. The filing of such a petition and even a subsequent discovery or turnover proceeding would not cause the beneficiary to forfeit her benefits under the will.

The court drew a line however, when Emma asked whether filing a petition to suspend Ilene’s letters testamentary during the investigation into the credit card charges would trigger a forfeiture under the in terrorem provision. Emma claimed that such an order of suspension was necessary to prevent Ilene from interfering with her investigation as limited administrator. The court held that such an application would trigger the in terrorem clause. Such conduct, according to the court, would constitute an attack on the decedent’s choice of fiduciary. The court explained:

Seeking the suspension of Ilene’s letters pending any investigation that Emma may pursue and in the absence of any allegation of misconduct by Ilene in her fiduciary capacity is akin to a challenge to the testator’s choice of fiduciary as established under the will. The in terrorem clause in decedent’s will disinherits a beneficiary who commences a proceeding to set aside any of the provisions of the will, and therefore, the filing of this type of petition, which does not fall within the safe harbor provisions of EPTL 3-3.5 (b), would result in forfeiture in this case

Finally, Emma asked the court whether a petition to remove Ilene as executor in the event that Ilene was determined to have engaged in improper conduct with respect to the credit card charges would trigger the in terrorem clause.   The court declined to rule on that question. It did however, point out that the alleged credit card charges occurred while the decedent was still alive, and earlier in the decision, cited to Matter of Cohn, which was affirmed by the Appellate Division, First Department.

In the Cohn estate, the courts confirmed that public policy will bar the application of an in terrorem clause where a beneficiary seeks removal of an executor based on allegations of the executor’s misconduct in their capacity as executor, but will not bar the application of an in terrorem clause where a beneficiary seeks to remove or supplant an executor based on some other ostensible basis that constitutes an attack on the testator’s choice of fiduciary, or on the powers and authority given to the fiduciary by the testator. There, the courts recognized that an attempt to displace the testator’s chosen executors based on the allegation that such executors had failed to fully inform the testator of the compensation that they would receive as executors was simply an attack on the testator’s choice of fiduciary that would trigger an in terrorem clause similar to the in terrorem provision in Merenstein.

The court in Merenstein, like the courts in the Cohn estate, recognized that fidelity to a testator’s intent warrants a fact-sensitive inquiry in enforcing terrorem clauses. Based on Merenstein and Cohn, it is clear that a beneficiary would be hard-pressed to claim that a limited administrator should supplant an executor in representing the estate in a litigation where the executor has no conflict, has not failed to act, and has not engaged in misconduct as executor, without triggering an in terrorem provision like that in Merenstein. Similarly, a beneficiary should understand that petitioning for a limited administrator to perform some estate administration task on the mere allegation that the executor has bias or hostility towards the beneficiary because of some events that occurred between the beneficiary and executor while the decedent was still alive is sure to be considered a challenge to the testator’s choice of fiduciary. Such a challenge will trigger an in terrorem clause like that in Merenstein. When faced with an in terrorem provision like that in Merenstein, a beneficiary must consider whether it is challenging the conduct of the fiduciary, or attacking the decedent’s choice of fiduciary. There is a difference, and it could mean a forfeiture.

This is a common question from clients involved in litigation – – especially estate litigation. As a general rule, a party cannot recover attorney’s fees for successfully prosecuting or defending a lawsuit. This is the “American Rule,” and it is engrained in our legal system. New York courts are wary of deviating from the American Rule, and will only do so under certain circumstances, such as (1) where the dispute litigated arises out of a contract, and the contract expressly provides for recovery of attorney’s fees; or, (2) where an applicable statute or rule expressly and unambiguously permits recovery of attorney’s fees.

Award of Legal Fees Pursuant to Contract

Sometimes, parties to a contract will agree that the “prevailing party” to any litigation arising out of the contract may recover legal fees incurred in the litigation. This begs the question – – what does “prevailing party” mean? The courts have defined a “prevailing party” as the party that succeeded on the central relief sought, or prevailed on the central claims advanced and received a substantial remedy.

Once the court identifies the “prevailing party” it will fix the legal fee. The attorneys for the “prevailing party” will apply for an award of fees and the court will permit recovery of a reasonable legal fee after considering several factors. Some courts have held that the most important factor in fixing the reasonable legal fee of a “prevailing party” is the “degree of success obtained.”  It follows that a “prevailing party” who achieved only modest success on its claims advanced and relief sought should not recover the same measure of legal fees as a prevailing party who achieved total victory on all claims advanced and requests for relief.

In deference to the American Rule, the courts narrowly construe contracts that provide for recovery of legal fees. In some cases, attorneys have attempted to recover attorney’s fees for their time and effort in making an application for an award of fees. However, the courts have made it clear that legal fees for time and effort incurred in making a legal fee application will not be awarded absent unmistakably clear language in the contract permitting recovery of same.  

Award of Legal Fees Pursuant to Statute

There are statutes in various contexts that provide for an award of attorney’s fees. Like contractual fee shifting provisions, such statutes have been narrowly construed.

With respect to estates and trusts, the fiduciary stands in a unique position. The fiduciary who incurs legal fees in discharging his or her fiduciary responsibilities may pay such fees from the estate (to the extent that they are reasonable and always subject to court review). For example, a nominated executor generally may pay legal fees incurred in seeking the probate of the decedent’s will from the decedent’s estate. Legal fees incurred by an executor or trustee who files a formal judicial accounting with the court seeking approval and discharge, and litigates over objections in the accounting proceeding, are also generally a proper charge to the estate. The Surrogate’s Court considers the following factors in fixing a fiduciary’s attorney’s fees: (1) the time and labor required; (2) the difficulty of the questions involved, and the skill required to handle the problems presented; (3) the lawyer’s experience, ability and reputation; (4) the amount involved and benefit resulting to the client from the services; (5) the customary fee charged by the Bar for similar services; (6) the contingency or certainty of compensation; (7) the results obtained; and, (8) the responsibility involved.

In certain litigations, where a beneficiary’s attorney brings a benefit to the estate, the Surrogate’s Court may grant an award of fees from the estate.

Moreover, as my colleagues, and others, have observed, in certain instances, the Surrogate’s Court may direct the source of payment of legal fees of the fiduciary to beneficiaries or distributees depending on several factors, namely: (1) whether the objecting beneficiary acted solely in his or her own interest or in the common interest of the estate; (2) the possible benefits to the individual beneficiaries from the outcome of the underlying proceeding; (3) the extent of the individual beneficiary’s participation in the proceeding; (4) the good (or bad) faith of the beneficiary; (5) whether there was justifiable doubt regarding the fiduciary’s conduct; (6) the relative interest of the objecting beneficiary in the estate; and (7) the effect of allocating fees on the interest of the individual beneficiary. Thus, where one beneficiary objects to a fiduciary’s administration of the estate, and those objections are without merit, the legal fees incurred in connection with defending such objections may be charged against the objecting beneficiary’s share of the estate.

Mental Hygiene Law Article 81 governs guardianships, and allows for a petitioner’s legal fees to be paid from the assets of the incapacitated person where the petitioner secures the appointment of a guardian for an incapacitated person or otherwise brings a benefit to the incapacitated person (MHL 81.16 [f]). It further allows reasonable legal fees incurred by a movant who succeeds in removing a guardian for cause (MHL 81.35). Further, it permits charging a petitioner with the attorney’s fees incurred by court-appointed counsel for an alleged incapacitated person where the petition is dismissed or withdrawn (MHL 81.10[f]). Like all statutory provisions that provide for an award of legal fees, these provisions are narrowly construed. For example, MHL 81.10 [f] only allows recovery of legal fees of court-appointed counsel for an alleged incapacitated person; the courts have rejected an expansive view of Mental Hygiene Law 81.10 [f] to allow recovery of the legal fees of an alleged incapacitated person’s retained counsel.

Finally, the courts will sometimes shift attorney’s fees and costs as a sanction for frivolous litigation conduct.  Allegations of frivolous litigation conduct have become common to the point of being meaningless – – it has become the standard practice for some attorneys to seek sanctions against parties and attorneys who disagree in good faith on a point of law, or who dare to adduce evidence in defense of a cause of action that contradicts or refutes the allegations forming the basis of that cause of action. However, the courts will occasionally shift fees for truly frivolous litigation conduct.

Very often, when the proponent of a will (and sometimes even the attorney-draftsperson or witness) is questioned about the decedent’s mental state and the decedent’s instructions, the reflexive response is that the decedent was “as sharp as a tack” and was “as clear as a bell.”  But making a will is not “splitting the atom.”  In fact, testamentary capacity has been described recently by the New York County Surrogate’s Court as “the lowest acceptable level of cognitive ability required by law.”  Overselling a decedent’s capacity and clarity of communication using tired metaphors may result in the trier of fact becoming suspicious of the proponent, perhaps perceiving the proponent as dishonest where other evidence reveals that the decedent likely had diminished capacity.

The Basics

In a will contest, the proponent has the burden of proving that the decedent had the capacity to make a will. This burden is often easily established, as a testator is generally presumed to be of sound mind and to have sufficient mental capacity to execute a valid will.  The proponent must show that the testator understood the nature and extent of her property, knew the natural objects of her bounty, and the contents of her will.  Age, illness, or hospitalization are not determinative – one can suffer from physical weakness and infirmity, a disease of the mind, and failing memory and still possess testamentary capacity at the time of the execution of the will.

A Recent Illustration

A recent decision from Kings County Surrogate’s Court in the Estate of Eleanor Martinico, 2014-3403, NYLJ 1202770885618, at *1 (Sur Ct, Kings County 2016), provides some illustration.  There, the decedent, age 83, executed her will while hospitalized – – she was admitted to the hospital nine days prior to the execution.  A form in her hospital records completed by staff, entitled “Adult Patient Without Capacity With Surrogate for DNR [Do No Resuscitate] Order,” stated, “I have determined that the patient lacks capacity to make this decision,” by reason of “dementia.”  Other medical records stated that the decedent became confused and disoriented during dialysis on the day that she was admitted, and suggested that the decedent had periods of confusion.

However, the attesting witnesses to the decedent’s will were both attorneys who knew the decedent for several years. One knew the decedent for approximately 15 years, had represented her in several matters, and found her demeanor during the propounded instrument’s execution consistent with his prior interactions with her as a person of sound mind acting on her own volition. The witnesses both averred that the decedent, was of “sound and disposing mind, memory and understanding, competent to make a will, free of restraint, and not suffering from any defects which would affect her capacity to make a will.”  Further, decedent’s medical records on the date of the execution of the will contained notes indicating that she was alert and oriented to person, place, and time.

This case did not make it to trial. The court, on a motion for summary judgment, held that the objectants failed to proffer evidence sufficient to raise a triable issue of fact that the testator lacked testamentary capacity at the time of the execution of the propounded instrument.

Another Illustration

In another widely cited case from the Kings County Surrogate’s Court, Estate of Gallagher, NYLJ, Oct. 19, 2007, at 19, 2007 NY Misc LEXIS 7639 (Sur. Ct. Kings County), the testator, in her eighties, made her will two years after suffering from a traumatic debilitating stroke, and only a few months before the Supreme Court adjudicated her an incapacitated person under New York’s Mental Hygiene Law Article 81.  Following the Article 81 hearing, the Supreme Court found that the decedent was suffering from organic brain syndrome and dementia, could not express herself verbally, and was, at times, greatly disoriented. The Supreme Court held that she required one-on-one attention, in a medically assisted supervised home.

The will was offered for probate upon the decedent’s death, and on a motion and cross-motion for summary judgment the Surrogate’s Court held the issue of testamentary capacity should go to a jury. On the motions, the proponent submitted that the testimony of the attorney-draftsperson, a subscribing witness, and affidavits of witnesses who stated that the decedent was able to converse normally, was able to understand her surroundings and act appropriately, and frequently mentioned her trips and interactions with the proponent.  Additionally, the Court Evaluator in the Article 81 proceeding affirmed that the decedent was able to communicate and identified her signature on the will.  The objectants submitted evidence from the Article 81 guardianship proceeding and the testimony of a treating physician that the decedent lacked testamentary capacity.

Sharp as a Tack?

Not everyone is as “sharp as a tack,” or has the gift of making every communication “as clear as a bell” – – even in the prime of their life.  Reflexively insisting that an octogenarian, who suffered from periods of confusion, with a diagnosed illness of the mind, who could not communicate verbally, was “as sharp as a tack,” and “as clear as a bell,” is unnecessary, and could be untruthful and backfire.  Ultimately, if the issue of testamentary capacity is presented to a jury, the learned and ponderous musings of lawyers expressed in law reviews, CLE materials, journals, treatises, and yes, blogs, will yield to the opinions of six citizens, some of whom might be suspicious upon hearing that an elderly person suffering from dementia who executed her will in the hospital was, at the time, “as sharp as a tack.”

Estate litigators arguably see more probate contests than any other type of conflict. While the details are always unique, they almost always include allegations that someone unduly influenced the decedent to change his or her will to either disinherit, or favor, a particular person.  These cases also often include an allegation — which is usually contested — that the purported influencer was in a “confidential relationship” with the decedent.  The frequency of such claims beg the questions (1) what exactly is a “confidential relationship,” and (2) what is the practical benefit to an objectant in establishing that one existed?

A confidential relationship is characterized as unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other. Some relationships are considered confidential as a matter of law, i.e., attorney-client, guardian-ward, and physician-patient, to name a few, while others will be deemed confidential as a matter of fact, based upon the details of the relationship, i.e., when one person is dependent on, and subject to the control of, another (see Matter of Satterlee, 281 AD 251 [1st Dept 1953]).

In a probate contest, it always is the burden of the objectant to prove that someone perpetrated undue influence upon the testator by establishing motive, opportunity, and the actual exercise of that undue influence (Matter of Walther, 6 NY2d 49, 55 [1959]; see Matter of Ryan, 34 AD3d 212, 213-14 [1st Dept 2006]).  However, where it is established that the decedent was in a confidential relationship with the alleged influencer, and there were other “suspicious circumstances” present (such as the alleged influencer having retained the attorney-draftsman for the decedent, or having accompanied the decedent to the will execution, for example) an inference of undue influence arises.  That inference requires the person in the confidential relationship to explain the circumstances surrounding the relationship between him and the decedent, and to establish by clear and convincing evidence that the subject bequest was fair and voluntary. (see Matter of Neenan, 35 AD3d 475, 476 [2d Dept 2006]; Matter of Bartel, 214 AD2d 476 [1st Dept 1995]).

As with most aspects of the law, there is an exception. Where the person in the confidential relationship also shared a close family relationship with the decedent, no inference of undue inference arises, and therefore, no explanation of a bequest in favor of that person will be required (see Matter of Walther, 6 NY2d 49 [1959]; Matter of Zirinsky, 10 Misc 3d 1052[A] [Sur Ct, Nassau County 2005]). This is generally because “a sense of family duty is inexplicably intertwined in this relationship” (Matter of Zirinsky, 10 Misc 3d at *8-9).  The exception exists despite the presence of “suspicious circumstances.”  Unsurprisingly, this often leads to questions about what degree of family relationship is close enough to negate the inference.

It must be noted that the inference of undue influence that may arise as a result of a confidential relationship should not be confused with shifting the burden of proof from the objectant (see Matter of Neenan, 35 AD3d 475 [2d Dept 2006]).  The burden of proving undue influence in the context of a will contest never shifts (see Matter of Bach, 133 AD2d 455, 456 [2d Dept 1987] quoting Matter of Collins, 124 AD2d 48, 54 [4th Dept 1987]).  The inference just makes it a little bit easier for an objectant to satisfy that burden, and ultimately succeed in his or her case.

Continuing the discussion of tax considerations in settling probate contests, the following additonal issues should be considered.

Marital Deduction

In determining the taxable estate, a deduction is allowed for the value of property which “passes” from the decedent to his surviving spouse.

If, as a result of a controversy involving the decedent’s will, or involving any bequest or devise thereunder, the surviving spouse assigns or surrenders a property interest in settlement of the controversy, the interest so assigned or surrendered will not be considered to have passed from the decedent to the surviving spouse and, so, will not qualify for the marital deduction.

Conversely, if a property interest is assigned or surrendered to the surviving spouse, the interest will be considered as having passed from the decedent to the spouse and, so, may qualify for the marital deduction, but only if the assignment or surrender was a bona fide recognition of the rights of the surviving spouse in the decedent’s estate that are enforceable under state law, and it meets the other requirements for the marital deduction (for example, the QTIP requirements for a transfer in trust). Thus, a transfer to a surviving spouse may qualify if it is made in settlement of her claim arising under an alleged failure by the estate to fulfill the decedent’s obligations under a prenuptial agreement; in that case, the transfer represents a bona fide settlement of enforceable rights. Such a bona fide recognition is presumed where the transfer is pursuant to a decision of a local court rendered upon the merits in an adversarial proceeding following a genuine contest. 

Charitable Deduction

 

In general, a deduction is permitted for federal estate tax purposes for bequests or other transfers to or for a charitable purpose. In determining whether an interest in property has passed from a decedent to a charity, the rules relating to marital bequests, described above, are applicable.

 

Thus, an amount distributed from an estate to a charity pursuant to a settlement agreement following a bona fide will contest is deemed to have passed directly to the charity from the decedent, and is eligible for a charitable deduction where the charity had a recognizable and enforceable right to a portion of the estate. However, the amount of the deduction cannot be greater than the value of what the charity would have received under the original will if it had litigated its claim to conclusion.

 

If a charitable organization assigns or surrenders a part of a transfer to it pursuant to a compromise agreement in settlement of a controversy, the amount so given up is not deductible as a transfer to that charitable organization. Thus, an estate which settles a will contest from funds in a residuary charitable bequest is required to pay tax on the settlement amount.

 

Gift and Income Taxes

 

The settlement of a will contest may involve several transfers of property, either between the estate and a beneficiary or claimant, on the one hand, or between beneficiaries or claimants, on the other. While each of these transfers may have certain estate tax consequences, as described above, the various parties must also consider the possible gift tax and income tax consequences.

 

In general, it is unlikely that a transfer made pursuant to the settlement of a will contest will be treated as a taxable gift if it is the product of a bona fide, arm’s-length transaction that is free of donative intent. Where that is not the case – as where two beneficiaries agree to “revise” the decedent’s will as it concerns dispositions of properties to themselves ‑ the readjustment of their property interests may be deemed a taxable gift.

 

In light of the facts and circumstances, a payment by the estate to a claimant may be treated, under the terms of a settlement, as taxable compensation for services rendered to the decedent, rather than as a non-taxable bequest.

 

Alternatively, the payment (or distribution) to a beneficiary may result in taxable income to the beneficiary if the estate has distributable net income.

 

It is also possible that beneficiaries who transfer or exchange property, as part of a settlement, will be treated as having sold such property, thereby realizing taxable gain (some of which may be treated as ordinary income, depending upon the asset).

 

If the property is an interest in a pass-through entity, such as an S corporation or a partnership, the transfer of such an interest will effect a change in its ownership (presumably effective from the date of the decedent’s death) which may necessitate the amendment of the returns of both the entity and the owners. This, in turn, may require additional economic outlays among the parties in order to restore any benefits lost (including distributions), or to indemnify any losses incurred by any of the parties.

 

Finally, where the estate holds items of income in respect of a decedent (“IRD”), such as retirement funds, it may behoove the estate to consider distributing such items to a charitable organization in settlement of the organization’s claim to a share of the decedent’s assets; in this way, the estate and its non-charitable beneficiaries may avoid the income tax thereon. 

 

Conclusion

 

The foregoing discussion highlights some of the tax considerations that are attendant to the settlement of a will contest. The manner in which each of these is addressed can have a significant impact on the net economic results realized by the parties to the settlement. It is imperative that the parties and their advisors be aware of the tax implications of their actions throughout the will contest, and especially during the negotiation of the settlement. In this way, the parties may better understand their true economic goals and costs, and their advisors may better manage their client’s expectations.

The period following someone’s death can be an emotional time. Unfortunately, the period of administration of the decedent’s estate can be just as emotional, though for different reasons. As the intended disposition of the decedent’s assets becomes “public,” the estate’s beneficiaries, and others, may challenge such disposition. The manner in which these challenges are resolved can have significant tax and economic consequences for the decedent’s estate.

Estate Tax

The estate tax is imposed upon the transfer of the assets comprising a decedent’s estate. The taxable estate is determined by subtracting from the value of the gross estate certain deductions authorized by the Internal Revenue Code. Under various conditions and limitations, deductions are allowable for administration expenses, charitable transfers, and transfers to a surviving spouse. Once the taxable estate has been ascertained, the estate tax rates are applied to arrive at the gross estate tax (before authorized credits).

 

In theory, the process of compiling the necessary information for determining the tax is straightforward. In practice, however, it can become challenging. The fiduciary must: identify and “collect” the decedent’s assets; determine the decedent’s outstanding liabilities; and dispose of the decedent’s estate.

 

The starting point for directing the disposition of the decedent’s assets, including the identification of deductible transfers, is the decedent’s last will or revocable trust. These instruments may provide for an outright transfer of property to the decedent’s spouse or a charity. In some cases, they will grant the fiduciary authority to select a charitable recipient. Rather than an outright transfer, the instrument may create a split-interest trust for the benefit of the spouse or a charity, and certain non-marital and non-charitable beneficiaries (usually from the decedent’s family).

 

The Contest

What happens, however, when the validity of the will or trust, or of the dispositions of property provided therein, are challenged? The fiduciary will certainly incur additional legal, accounting and other fees and expenses in defending the instrument. As a result of the legal proceedings, the disposition of the decedent’s assets may change – either by court decision or through a settlement by the parties – and, consequently, the value of the taxable estate. For example, it may be determined that an asset does not belong to the estate, or that a disposition under the will should not have been made to a specific charity. 

 

These determinations have estate tax and other tax consequences of which the fiduciary should be aware because they impact the economic result of the settlement. Frequently, however, not enough attention is paid to the tax treatment of the settlement and, consequently, the economic cost may become more expensive than it otherwise could have been.

 

Estate Tax Return and Payment

The timing of the will contest raises a number of tax considerations. In general, the estate tax return must be filed, and the estate tax paid, within nine months after the decedent’s date of death. If a timely extension application is made, the estate will have an additional six months to file the return. Extensions of time to pay the tax are granted less frequently, and require a showing of good cause.

 

In the event the will contest cannot be resolved before the due date for the return, the fiduciary should disclose the nature of the dispute on the return, since the resolution thereof will likely affect the amount of estate tax owed by the estate. Similarly, the fiduciary will have to determine how much estate tax to remit while the contest is pending. This necessitates consideration of the merits of the claims and of the expected litigation costs. In the case of an “overpayment,” the fiduciary must be mindful of the possibility of claiming a refund. If it appears that the litigation will continue beyond the limitation period for a refund, the fiduciary should consider filing timely a protective refund claim.  

 

Will the IRS respect the Settlement?

Whether the IRS will respect the settlement is an issue characterized by the intersection of state property law and federal tax law.

 

The determination of the federal estate tax is based upon the respective property rights of the decedent (what assets did he own at his death), of his creditors (what liabilities do the decedent and/or his estate owe), and of the beneficiaries of his estate (to whom do the decedent’s assets pass after the satisfaction of these liabilities). These various property rights arise under state law. In the case of a will contest, the adversarial nature of the proceeding is an important factor in determining the federal tax consequences of the settlement, though it may not be determinative; the IRS is generally free to review the applicable state law for the purpose of determining whether the terms of the settlement are, in fact, consistent with the property rights of the parties under such state law. It is important to bear in mind that the IRS may not be bound by a settlement agreement.

 

Litigation-Related Expenses

Administration expenses are those that are actually and necessarily incurred in the administration of the decedent’s estate; for example, for the collection of assets, payment of debts, and distribution of property. These may include legal fees incurred by the fiduciary, which are usually deductible for estate tax purposes. However, expenditures that are not essential to the settlement of the estate, but that are incurred for the individual benefit of the decedent’s heirs, may not be taken as deductions. For the expenditure to be allowable as an administration expense, it must have benefited the estate as a whole, as contrasted with the personal benefit of a beneficiary. This distinction is often difficult to make.

 

A settlement may establish the amount of a claim or expense for tax purposes, provided that the expenditure is allowable under local law, the settlement resolves a bona fide issue in a genuine contest, and it is the product of arm’s-length negotiations by parties having adverse interests with respect to the claim or expense. No deduction will be allowed for amounts paid in settlement of an unenforceable claim. A consent decree should be accepted as fixing a claim when the consent was a bona fide recognition of the validity of the claim – not a mere “cloak” for a gift to a family member – and was accepted by the court as satisfactory evidence upon the merits. However, if a local court does not adjudicate the merits of a claim, its decision as to its deductibility will not necessarily be accepted by the IRS.

 

The foregoing assumes that the settlement payment represents an expense. A review of the underlying claim may indicate otherwise. For example, if a payment is made by the estate to someone claiming a share of the estate as a beneficiary, it is likely that the payment will not be deductible as an expense for estate tax purposes (though it may qualify for the marital or charitable deduction).

In recent years, Surrogate’s Courts have become increasingly inclined to grant motions for summary judgment in contested probate proceedings when warranted.   A decision issued last week in Monroe County is yet another example of this trend. While the evidence presented by the objectants in this particular case appears to be exceptionally weak, the following analysis provides a cohesive illustration of the considerations and standards that Surrogates routinely utilize in analyzing typical objections. 

In Matter of Feller, 2010 NY Slip Op 50001(U), eight of the decedent’s eleven known distributees filed objections to probate, alleging the customary lack of due execution, lack of testamentary capacity and undue influence. The decedent executed a last will and testament nine months prior to her death, leaving her estate to ten charities and four individuals in equal shares, and naming the attorney-draftsman as executor. The New York State Attorney General’s Office filed a motion for summary judgment, seeking to dismiss the objections.

Due Execution

The objectants contended that the will was not duly executed within the requirements of EPTL 3-2.1 because the attorney-draftsman/proponent, not the testator, requested that that the witnesses act. But the testimony of the attorney-draftsman demonstrated that the testatrix responded in the affirmative when questioned as to whether she wanted those present to witness the execution of the instrument. The Court opined that this conduct coupled with the circumstances surrounding the execution ceremony satisfied the due execution requirements of EPTL 3-2.1. Indeed, “[a]ttorneys routinely lead their clients through the will execution formalities in order to ensure that the requirements of EPTL 3-2.1 are satisfied . . . and . . . publication and instruction . . . is not required to be in any ‘ironclad ceremonial or ritualistic language’” (Matter of Feller, supra, citing In re Douglas’ Will 193 Misc 623, 631-632 [Sur Ct, Broome County 1948]).

Testamentary Capacity

With respect to testamentary capacity, the Court noted the presumption in favor of capacity when a will is drafted by, and the execution supervised by, an attorney. In this case, the Court held that the proponent established a prima facie case of the requisite capacity based upon the following facts:

·        The decedent herself sought the services of the attorney-draftsman;

·        The decedent personally met with the attorney-draftsman and brought detailed notes as to her desired estate plan;

·        The decedent told the attorney-draftsman about her familial situation;

·        The witnesses were aware of the decedent’s involvement in her estate planning, and testified that she appeared to have no visual, auditory or cognitive difficulties; and

·        The decedent made specific and accurate changes to the draft of the will.

In fact, the only basis for the allegation of lack of capacity was one of the objectant’s observations that the decedent had appeared preoccupied, reserved and distracted during a visit that occurred around the time that the will had been executed. Citing holdings of the Appellate Division that evidence of sadness or confusion alone is insufficient to prove lack of capacity, the Court rejected this contention. The Court further explained that a diagnosis of dementia, Alzheimer’s, or simply old age, without more, would also be insufficient to override a prima facie showing of capacity (id., citing Matter of Nofal, 35 AD3d 1132 [3d Dept 2006]; Matter of Castiglione, 40 AD3d 1227 [3d Dept 2007]; Matter of Minasian, 149 AD2d 511 [2d Dept 1989]; Matter of Hedges, 100 AD2d 586 [2d Dept 1984]).

Undue Influence

Addressing the claims of undue influence, the court reiterated that it is an objectant’s burden to demonstrate by a preponderance of the evidence, (1) motive, (2) opportunity, and (3) actual undue influence. Undue influence must amount to “a moral coercion, which restrained independent action and destroyed free agency or which . . . constrained the testator to do that which was against his free will and desire . . .” (id.,quoting Children’s Aid Society of NY v Loveridge, 70 NY 387, 394 [1877])., The Court further noted that undue influence may proved by circumstantial evidence, “but the circumstances must lead to it not only by a fair inference but as a necessary conclusion” (id., quoting In re Will of Henderson, 253 AD 140 [4th Dept 1937]).

The objectants’ claim of undue influence alleged that the proponent persuaded the testator to change her funeral home of choice to one that was a client of the proponent. However, the proponent testified that he made no recommendations regarding the decedent’s testamentary plan, but tried to persuade her to choose another executor. In addition, the record demonstrated that every time the decedent met with the proponent regarding her estate plan, she was not accompanied by anyone. In view of these facts, the Court held that the Objectants failed to meet their burden in connection with their allegations of undue influence (see Matter of Feller, supra).

Interestingly enough, there was no discussion of a confidential relationship between the decedent and proponent in this case, and thus, the burden of proof did not shift. After all, an attorney-client relationship often gives rise to a confidential relationship, and a consequential presumption of undue influence (see e.g., Weber v Burman, 22 Misc 3d 1104[A] [Sup Ct, Nassau County 2008]; Estate of Olson, 5/16/2006 NYLJ 33 [col 4] [Sur Ct, Richmond County]). Perhaps this was not considered because the attorney-draftsman was not a beneficiary, but I would submit that such a relationship is arguably relevant here, in light of the allegations.

Discovery in a contested probate proceeding is generally governed by what Surrogate’s Court practitioners call the “three/two” rule (22 NYCRR 207.27). This rule limits discovery to the “three-year period prior to the date of the propounded instrument and two years thereafter, or to the date of the decedent’s death, whichever is the shorter period” (id.). It is a “pragmatic rule" intended to prevent the abuses associated with a “runaway inquisition” or “wild goose chase” (Estate of Das, NYLJ, 5/1/2009, at 31 [Sur Ct Nassau County]).

Notwithstanding that general rule, however, the time period for discovery may be extended by the Surrogate’s Court when “special circumstances” exist, such as when “a scheme of fraud or a continuing course of conduct of undue influence” is alleged (id.). For example, in Matter of Kaufman, the objectants sought discovery with respect to the entire period of cohabitation between the proponent of the decedent’s will and the decedent, which lasted from September 1948 until the decedent’s death in April 1959 (11 AD2d 759, 759-60 [1st Dept 1960]). The objectants argued that the departure from the three/two rule was warranted because the proponent’s long relationship with the decedent gave rise to testamentary capacity and undue influence concerns (id.). Although the Surrogate’s Court denied the objectants’ motion, the Appellate Division reversed, reasoning that a full examination of the decedent’s relationship with the proponent was warranted (id.).   

           

 

   

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