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Court Decide Issue of Estate Tax in Estate Case

A New York Probate Lawyer said that, the decedent, died on January 4, 2006, survived by two children, the petitioners herein. A purported will dated July 16, 2003 and codicils dated September 29, 2004 and April 5, 2005 (herein collectively referred to as the “purported will”) have been offered for probate by respondents who are nominated as executors thereunder. By order dated April 5, 2006, A New preliminary letters testamentary issued to respondents. The purported will bequeaths the residuary estate to The Sunshine Foundation. The Sunshine Foundation is a charitable organization which was founded by the decedent during her lifetime. The preliminary executors are also the trustees of The Sunshine Foundation.

A Nassau Estate Administration Lawyer said that, at the time of her death, the decedent owned a 1% general partnership interest and a 50% limited partnership interest in Hewlett Associates. Article TENTH of the purported will provides as follows with respect to the decedent’s limited partnership interest in Hewlett Associates: “TENTH: If at the time of my death I own a limited partnership interest in Hewlett Associates, I direct that as soon after my death as may be practicable, my Executors (subject to the terms and conditions of the Partnership Agreement of Hewlett Associates) shall offer in writing (the “Offer”) to each of my children, the option to purchase for cash up to one-half (½) of said limited partnership interest that I may own at my death, at its value as finally fixed and determined for federal estate tax purposes after independent appraisal. If either such child desires to exercise his or her option to purchase said limited partnership interest, he or she shall notify the Executors in writing by certified mail, return receipt requested, within fifteen (15) days after the date of the Offer that he or she exercises his or her option to purchase said limited partnership interest. The closing of the purchase of said limited interest shall occur within sixty (60) days after the date of the Offer at a place designated by the Executors. If either of my said children shall not exercise his or her option to purchase all of his or her portion of said limited partnership interest, the other child may purchase the remaining portion, subject to the same terms and conditions set forth in this Article TENTH hereof.”

A Westchester County Will Lawyer said the decedent also created a revocable trust, under an agreement dated July 16, 2003, between herself as grantor and herself, respondents, as trustees. The trust provides that upon the grantor’s death, the remaining trust principal is to be paid over to The Sunshine Foundation. The decedent’s husband, died on May 4, 1990, leaving a will dated May 26, 1982, which was admitted to probate by this court on May 29, 1990. Under Article THIRD of the decedent’s husband will, a marital deduction trust was created for the benefit of his wife.
A Nassau Estate Administration Lawyer said that, petitioners argue that the relief requested is warranted because if the Haims appraisal is used the SK Trust will be subject to substantial unnecessary additional estate tax which will have a crippling financial impact on the trust and may actually require a liquidation of the trust’s holdings. Pursuant to Section 2044 of the Internal Revenue Code, the SK Trust is includible in the decedent’s estate even though the trust does not pass under the purported will since a qualified terminable interest property (QTIP) election was made for the trust by the executors of Sidney’s estate. The purported will provides that any estate taxes imposed with respect to property includible in the decedent’s estate but passing outside her will shall be apportioned against and paid by the persons in possession of or benefitted by such property. Thus, as is typically the case with a QTIP trust, the SK Trust is responsible for the estate taxes attributable to its inclusion in the decedent’s estate.

Westchester County Probate Lawyers said that, respondents oppose the application on numerous grounds. First, respondents argue that the instant application is in disregard of the court’s prior ruling on this issue. Respondents argue that petitioners previously commenced a proceeding to compel the payment of the estate tax by the residuary beneficiary, The Sunshine Foundation. On October 3, 2006, a stipulation of settlement was entered into with respect to that application, which counsel claims bars the current relief. Second, respondents argue that petitioners have not provided any evidence to substantiate the claimed conflict of interest. Third, respondents argue that petitioners’ reliance on Section 6018 of the Internal Revenue Code, which provides that if an executor is unable to file a complete return, he shall include a description of the property he is not including, is misplaced since that statute applies only if an executor is unable to make a complete return. Fourth, respondents argue that even if it is determined that respondent has a conflict, it has no conflict and would be able to file the return with respect to the SK Trust. Fifth, respondents argue that removal is a drastic remedy and must be exercised sparingly and only upon a showing of serious misconduct. Lastly, respondents argue that the preliminary relief requested subsumes the entirety of the petition and, therefore, should be denied.

The issue in this case is whether under certain specific circumstances, limited letters may issue for the purpose of preparing and filing a portion of the estate tax returns to be filed on behalf of a decedent’s estate.

Suffolk County Probate Lawyers said thorough analysis of this issue must begin with a discussion of the duties which a fiduciary owes to an estate and the beneficiaries thereof. It is well-settled that an executor has an absolute duty of impartiality to the beneficiaries of the estate. “An executor owes a duty to all beneficiaries to be fair and impartial in all transactions that affect them; not preferring one to the detriment of others or conferring a benefit upon one at the expense of another hence, neither beneficiary has a right to expect that the executor will discriminate in his or her favor to the detriment of another. The executor must act in the best interests of the estate as a whole, which may incidentally benefit some beneficiaries more than others but not because of any partiality on his part”. A “fiduciary is under a duty of absolute loyalty to all beneficiaries and of fairness and impartiality to all. If in dealing with the respective beneficiaries their interests are so conflicting that the fiduciary cannot deal fairly with respect to them, he cannot properly act without applying to the court for instructions”.

A fiduciary also has a duty to minimize the overall tax burden on the estate and its beneficiaries. With respect to that duty, in general, a “court will have no part in the determination of Federal taxes and will not assume the duties of the executor by compelling him to file a tax return in accordance with a determination made by the court.” The courts have also recognized that the estate tax imposed on an estate is ultimately the function of the tax authorities which fix the tax. Typically, questions relating to whether a fiduciary improperly overpaid estate taxes is a question of surcharge in an accounting proceeding.

SCPA 702(8) provides that limited letters may be issued, “in the discretion of the court, to represent the estate in a transaction in which the acting fiduciary could not or should not act in his or her fiduciary capacity because of conflict of interest.” SCPA 702(10) provides that limited letters may issue for “any other purpose or act deemed by the court to be appropriate or necessary in respect of the affairs of the estate, the protection thereof or to the proper administration thereof.” Thus, the application of SCPA 702(8) is discretionary with the court.
SCPA 702 was amended in 1993 to add subdivision (8) (L. 1993, c.514). “The new subdivision was enacted upon the recommendation of the EPTL-SCPA Legislative Advisory Committee, which suggested that while the authority to issue limited or restrictive letters in cases of potential or actual conflict already existed by virtue of the catch-all provision (formerly subdivision 8, now subdivision 10), the under-utilization of such a mechanism in those circumstances merited its explicit mention in the statute”.

Thus, SCPA 702(8) recognizes that, under certain circumstances, a fiduciary may be unable to carry out his duties because of a conflict of interest. It is clear, however, that simply because a fiduciary is both a trustee of a qualified terminable interest property trust and the executor of the surviving spouse’s estate, there is nothing inherently conflicting in the duty of loyalty that the fiduciary owes the trust and the duty of loyalty he owes to the estate. Accordingly, the fact that the respondent is both a trustee of the SK Trust and a preliminary executor does not, in and of itself, create a conflict. Moreover, the court is mindful that insofar as the conflict of interest is a situation created by the decedent’s will, it will not be a basis for removal.

SCPA 702(8) and (9) have typically been used to protect an estate from the prospect of self-dealing by the fiduciary. Limited letters, however, have also been issued with respect to conflicts of interest relating to tax matters.

The court, however, disagrees with respondents’ claim that the prior application and the stipulation put on the record somehow bars the instant application. The prior proceeding related to the issue of whether the estate or the SK Trust would make a payment of the estate tax with the application for an extension of the time to file. In the spirit of cooperation, the parties agreed on an amount that would be paid and the source of that payment and also agreed to give the petitioners a role in the estate tax process.

For all of the foregoing reasons, pending a hearing on the permanent injunction, the court grants the preliminary injunction to the extent that the petitioners shall be granted limited letters for the purpose of completing and filing with the Internal Revenue Service and New York State any portion of the estate tax returns of the decedent’s estate that concerns the valuation of the SK Trust. The court notes that the ultimate relief has not been granted. The court has not made a final determination as to who will have the ultimate right to file the estate tax return with respect to the SK Trust since the estate tax return may be supplemented. Neither has the court decided who will defend the interests of the trust in an audit. These issues will be resolved after a hearing. The hearing will be limited to the issue of the respondents’ conflict of interest and its impact on their duty of impartiality. For example, the affidavit of James Levy puts at issue whether the co-preliminary executors have acted on the alleged conflict of interest by favoring the interests of The Sunshine Foundation. Ultimate resolution of that issue, therefore, turns on the credibility of respondents. Accordingly, a hearing on the issue of the preliminary executors’ conflict of interest is scheduled for April 16, 2007, at 9:30 a.m.

If you are having an issue with estate tax, seek the legal advice of a Nassau Estate Litigation Attorney and Nassau Estate Administration Attorney at Stephen Bilkis and Associates.

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