Defective wills and estate plans can cost a bundle
Poor counsel and errors of omission can give advisors with otherwise sterling reputations a bad name. Such mistakes, as a recent panel discussion made clear, also can be enormously costly for clients on the receiving end.
Titled “Rules of the game: Developments in the areas of estate and gift taxes,” the panel explored noteworthy court cases and Internal Revenue Service rulings in 2005 during the annual gathering of the Society of Financial Services Professionals, Forum ’05, held in Phoenix last month.
One of these cases, decided by the U.S. 7th Circuit Court of Appeals in October 2005, involved the estate of a wealthy businessman who bequeathed $40 million in trust for the benefit of surviving adult children and other beneficiaries; and $90 million in a marital trust for his wife.
The IRS ruled the $40 million was subject to estate tax because the businessman, while still alive, retained sufficient control of the trust to warrant its inclusion in the estate. The court interpreted his will as indicating that taxes should be paid out of “the residue of the estate” (i.e., the $90 million outside of trust).
Upshot: The businessman’s widow was forced to pay $47 million in taxes–approximately $27 million more than would otherwise have been paid. That, noted Charles “Skip” Fox, an attorney with McGuireWoods LLP, Charlottesville, Va., is because the will’s provision reduced the marital deduction and, thereby, increased the size of the marital estate.
“This case shows the problems you can run into when you have an attorney who fails to carefully consider how to draft a tax clause of an individual’s will,” said Fox. “The attorney probably used a boiler-plate provision that is not so common now and says, ‘pay all taxes out of the residue of my estate.’”
A defective will was the focus of another case that pitted the estate of a deceased widow, Rose Posner, against two daughters. The U.S. tax court adjudicating the facts had to determine whether Posner, while still alive, possessed a general power of appointment over a marital trust created by her deceased husband’s will. The latter was defective because it failed to include “substantive dispositions”–income beneficiaries, remaindermen and powers of appointment–normally found in a document establishing a testamentary trust.
Of greater interest to the panelist describing the case, Ellen Harrison, an attorney with Washington, D.C.-based Pillsbury Winthrop Shaw Pittman, was the other key issue: whether Posner’s estate was bound by the “duty of consistency” (or “quasi estoppel”). If applicable, the legal concept would have prevented the estate from securing a $2.9 million estate tax refund. The estate premised the refund request on a subsequent claim–one that contradicted its initial position–that Posner had no general power of appointment.
The tax court judge, Harrison noted, ruled that the legal principle did not apply to “mutual mistakes on the part of the taxpayer and the [Internal Revenue] Service concerning a pure question of law.” The IRS erred, said Harrison, in granting Posner the power of appointment and marital deduction, despite the fact the IRS had a copy of the will and had audited the estate.