Category: Estate Planning

FIDUCIARY COMPENSATION

“We don’t pay taxes, only the little people pay taxes.” Leona Helmsley

This is what Leona Helmsley’s summer house keeper testified that Mrs. Helmsley had previously said, during a 1989 tax evasion trial that resulted in Mrs. Helmsley serving 19 months in jail.  At trial, her own lawyer described her as a “tough bitch”.  Leona Helmsley was known as the “Queen of Mean” for her heaping cruelty meted out toward her employees in her real estate empire worth billions.  She was legendary in penny pinching her employees, returning used shoes to stores for refund and gipping contractors that worked on her properties.  When her only child died she served his widow with an eviction notice shortly after the funeral and took judgment against his estate for a debt and property that she claimed he had borrowed from her.  It seems that while she was alive she paid no one fairly.

Mrs. Helmsley died in 2007.  Her husband (number three) Harry, predeceased her in 1997.  Fortunately for Mrs. Helmsley, she got what she wanted:  he left her his entire estate estimated to be well over $5 billion.

Her estate plan was what one would expect under the circumstances.  It cut out certain family members and manifest some rough edges.  Mrs. Helmsley’s estate in large part was left to a charitable trust.  Her Maltese dog, Trouble, was benefitted by a $12 million trust fund.  It was reduced by the court as excessive based upon litigation and alleged lack of capacity.  The court determination included providing benefit for some relatives.

In August 2019, the New York County Surrogate made a final determination on the application for judicial settlement of the final account of Mrs. Helmsley’s executors (See In re Judicial Settlement of the Final Account of Proceedings of Panzirer, 2019 N.Y. Misc. Lexis 4512).  Ironically, the focus of the court’s attention was the matter of determining reasonable compensation for the fiduciaries.

Mrs. Helmsley’s will stated that her executors were not to receive statutory commissions.  Instead, her will stated:

“Any one or more executors…may render services to the Estate…as an officer, manager or employee of the Estate…, or in any other capacity, notwithstanding the fact that they may appoint themselves to serve in such capacities, and they shall be entitled to receive reasonable compensation for such services.  No such person shall be required to furnish any bond in connection with such employment.”

The executors commenced a proceeding to be paid and filed their account.  The executors asserted that the estate was mammoth and highly complex and that they were responsible for enormous risk and potentially exposed to personal liability.  Thus, they sought $100 million ($25 million each).  This was based on well settled law in New York, concerning established factors on which reasonable compensation is to be determined (See In re Estate of Freeman, 34 N.Y.2d 1, 311 N.E.2d 480, 355 N.Y.S.2d 336 [1974]; In re Potts’ Estate, 213 A.D. 59, 209 N.Y.S. 655 [4th Dept 1925], affd 241 NY 593, 150 N.E. 568 [1925]). 

The Attorney General objected.  The Attorney General did not allege impropriety, but instead claimed that the amount sought was not “reasonable compensation.” 

The argument made was that a proposed methodology akin to quantum meruit should apply.  Only time spent should be considered, rather than the long standing law favoring multi factor analysis.  According to the Attorney General, her theoretical time and rate based formula should determine the result.

In a well reasoned and thoughtful determination the Surrogate crushed the opposition of the Attorney General, rejecting it entirely, as “misguided at best” and “simply wrong.”  The Attorney General argued that the compensation “should be based on a simple arithmetic formula which considers only the reasonable amount of time spent multiplied by an appropriate hourly rate.”  Incredibly, the Attorney General further argued that the court should appoint an expert to advise on the reasonable value of each executor’s contribution to the estate, based upon services actually rendered and based on the individual knowledge of and skills of each.

The position taken by the Attorney General was baseless and incredibly wrong.  The determination of the court reflects a displeasure with the arguments lacking any legal support.  The court stated that the Attorney General herself, self promulgated certain “guidelines” that the court found to simply be “unworkable”, and “which would foist an unwieldly time consuming and costly process onto the parties and the estate.”  Further, rejecting the notion of appointment of an expert, the court found that would involve the retention of additional professionals to help the expert, necessitate more discovery, and possibly a hearing – all at the additional expense of the estate.  Finally, the court reminded the Attorney General that the Surrogate is uniquely qualified to determine fiduciary compensation based upon the reasonable compensation standard.  The court does that routinely in these cases.  The Legislature conferred that authority to the court (see SCPA 1412(7) re preliminary executors, 2312 re corporate trustees, and 2110 re attorneys).

Despite the efforts of the Attorney General, Leona Helmsley’s fiduciaries will be fairly compensated after all.

Business Succession Agreements

It is important for businesses to plan ahead.  It is especially true to plan for those events that are foreseeable.  Whether we want to admit it or not, there will come a time when we will no longer be able to continue working.  It is also true of business owners. But what happens to the business when the founder or key member of the company retires, has a serious illness or dies?  That is where the business succession agreement comes into play.

A business succession agreement can address a multitude of issues that may arise when there is a change in the business’s management.  Among other things, it can specify what the roles and responsibilities of the new controlling members will be and under what circumstances the succession plan will be implemented. 

It can be especially difficult when these events involve family businesses.  If not properly addressed in a succession agreement, litigation between family members may arise or the family business may not survive.  For example, in Crabapple Corp v Elberg (153 AD3d 434 [1st Dept 2017]), siblings became embroiled in litigation over who would become the managing member of the family’s business after the death of their father. There was no succession agreement regarding the management of the LLC in the event of the death of their father, the majority member. 

Ruben Elberg, the son of Jacob Elberg, asserted that he was the sole managing member of the LLC.  His sister, Tamara, as co-executor of their father’s estate, asserted that their father was the sole owner of the LLC and that she was the LLC’s co-manager by virtue of her status as the co-executor, along with Ruben.  The record demonstrated that Ruben was a minority member and not a managing member.   Pursuant to Limited Liability Company Law § 608, the executor of a deceased member may exercise all of the member’s rights for the purpose of settling his or her estate.  Therefore, the Court held that their father’s controlling interest in the LLC passed to his estate upon his death, and Ruben and Tamara, as co-executors of the estate, both had authority as co-managers of the LLC.

Even where a succession agreement exists, if not carefully drafted, litigation may still occur.  In Shyer v Shyer (2019 NY Misc LEXIS 4022 [Sup Ct, New York Co, July 18, 2019]), after the death of Robert, one of the four siblings who owned and managed Zyloware Corporation, the company filed a third-party complaint against his widow, the preliminary executrix of his estate,  in her individual capacity, for among other things, wrongful interference with a contract.

In Shyer, the Shareholders Agreement and Master Executive Employment Agreement the siblings entered into were to formalize the succession of leadership in the company.  Pursuant to the Shareholders Agreement, the company informed Robert’s estate that it intended to purchase his remaining shares along with the price it was willing to pay for those shares.  Robert’s widow, on behalf of the estate, rejected the company’s terms.  She claimed that the company’s offer breached the Shareholder Agreement.  The company claimed the estate’s actions breached the agreement as it “ran contrary to the Shareholders Agreement.

The company alleged that the widow, in her individual capacity, improperly interfered with the Shareholders Agreement by inducing the estate to breach the shareholders agreement by failing and refusing to deliver the shares to the company no later than the Closing.  The company alleged that the widow procured the estate’s breach by forcing and directing the estate to act contrary to its contractual obligations.  The company alleged that she, as preliminary executrix, caused the estate to breach the agreements. 

The company argued that the widow was implicated in her role as preliminary executrix of the estate since the estate could act only at her behest as she was the “sole executor” of the estate.  The company claimed that the estate’s actions in allegedly breaching the shareholders agreement could not be “decoupled” from the widow’s ordering the estate to do so.

The court however reasoned that the claim that the widow interfered with the Shareholders Agreement was tantamount to a claim that she should be held personally liable for the estate breaching the Shareholders Agreement.  It held that the widow’s actions did not describe the procurement of a breach, but the breach itself.

Under New York Estates Powers and Trusts Law § 11-4.7(b), a personal representative is individually liable for obligations arising from ownership or control of the estate or for torts committed in the course of administration of the estate only if she failed to exercise reasonable care, diligence and prudence.

The court held that the company’s claim threatened to circumvent the statutory standard for imposing personal liability on estate administrators.  The company’s allegations against the widow stemmed from her “control of the estate or for torts committed in the course of administration of the estate.”  The company did not allege that the widow “failed to exercise reasonable care, diligence, [or] prudence.”  Although the court dismissed the company’s claim against the widow in her individual capacity, it did go on to say that the company could still sue the estate for breach of contract.

Planning for succession in a business, including a closely held family business, can help ensure the continuity of the management and operation of the business long after the founder or majority manager is gone.

Contribution by Jacque K. Vincent, J.D.

Estate Litigation Post-Divorce and Separation Agreements

Many trust, estate and probate litigation cases in New York are engendered by divorce. The great wealth transfer presumably will grow the trend of estate related disputes arising from circumstances of divorce. There are many reasons why the dissolution of a marital relationship can cause estate litigation. Wealth and emotion often are the primary drivers. This single case experience raises many common issues and reflects a litigated final outcome.

Facts
Mom and dad married in the 1960s. During the course of the marriage dad worked long hours and mom raised two children who were the product of the marriage. When the children were in high school mom and dad separated and then ultimately, became divorced, after about twenty years of marriage. Mom raised the two children and did not remarry. They got by on mom’s hard work and commitment to the children.

Mom was not happy about this outcome, as she had intended to remain married until she found out that dad had not been true to his vows. Mom, feeling scorned, set out to do the best that she could for herself and her children monetarily in the divorce proceedings. She retained counsel.

In the divorce proceedings dad offered present day, “price of freedom” assets like stocks and bonds and bank accounts. Mom accepted the offerings. The signed separation agreement also contained a provision that was not in focus at the time. It appeared natural and what was later described as some boilerplate language. The terms offered no present-day money or solace to the mom. When the division of the marital assets was finally determined by the separation agreement, it stated: mom and dad each agree to bequeath outright or in trust at least one – half of his or her adjusted gross estate to their children in equal shares, per stirpes.

The separation agreement defined “adjusted gross estate” as “the entire value of the decedent’s gross estate for federal estate tax purposes, less deductible funeral and administrative expenses, claims against the estate and a pro rata share of mortgages or indebtedness on property which is included in the gross estate, but not including any community property.” With respect to community property it stated that if either spouse owned any community property on death, “then the portion which is not vested in the spouse of either of them shall be bequeathed, either outright or in trust, to his or her children equally, per stirpes.”

Dad went on to marry his paramour, and they remained married for many years. They accumulated wealth and assets together. They commingled what they each brought into the marriage with the other’s assets. They had accounts set up that were titled in both of their names, as husband and wife, and they bought real property together and similarly titled it. They had a long marriage at Shangri- La, which brought no children, where they shared everything among themselves.

Years later, dad became ill. His two children were now independent adults living far away and with limited, if any, connections to him. He had a will prepared by an attorney that provided for all of his wealth to pass to his wife (number two). Wife number two fully participated in his planning process with his counsel. She was aware of his then stated intentions on death that everything they had went to her as well as the content of his will. She cared for him in his illness and until he died.

His will provided that on his death his wife would become the executrix of his estate. He left the residuary of his estate to her, in trust, and on her death the remainder of the trust was to be divided into two equal shares for his daughters.

After his death, his ex-wife remained mindful of their children. She produced the separation agreement anticipating that wife number two would comply in providing each of the children from the first marriage with their respective share of their father’s estate.

Dad’s wife refused to comply. His two children sued her and his estate. Their mother was not a party to the lawsuit. Wife number two advanced several reasons and justifications to the court for her position.

She made the classic estate litigation argument, that the outcome under the agreement was not the decedent’s intent. She argued that Dad intended for his second wife to receive everything.

Her position was that the decedent’s intent was manifest by his recent last will – not a separation agreement made with an ex-spouse five decades prior. Dad made a will and engaged in joint estate planning with wife number two, where the joint plan was for her to get it all. Her position was that the will controlled his estate over that old agreement.

She argued that she owned everything outright. Dad and wife number two had titled and retitled the marital assets in such a manner that they became hers on death by operation of law. Her counsel argued that the assets Dad owned at the time of this death were in his name jointly with his wife as tenants by the entirety. Thus, the assets were already hers.

Her further position was that there was no estate and that if there were, there were no assets in it. Since there was nothing in the estate as result of the retitling, wife number two, as his executrix, would not file a petition for probate of the will with the New York Surrogate’s Court. She argued that there was no need to probate the will.

Her attorneys also argued that since wife number two and the estate were not parties (did not sign) the separation agreement, therefore, it was not binding on them.

All of these arguments are common in these cases (See, e.g., Estate of Coffed, 59 AD2d 297 [4th Dept 1977], affd 46 NY2d 514 [1979]; Rubenstein v Mueller, 19 NY2d 228 [1967], and Matter of Shvachko, 2016 NY Misc LEXIS 3742 [Sur Ct New York County, October 14, 2016]). They are losers. In 2008, the New York State Legislature enacted EPTL 5-1.4 that provides for the automatic revocation of the fiduciary on divorce (see Matter of Sugg, 49 Misc 3d 455 [Sur Ct Erie County, June 29, 2015][holding former spouse’s designation as beneficiary to insurance policy is ineffective unless expressly provided otherwise]). The old rule made no such provisions and allowed for some awkward administrations of estates. Smart divorce lawyers counsel their clients to obtain strong and competent estate planning advice at the outset, during and post-divorce proceedings. It seems that in many cases they counsel their clients to change their wills at the outset, in recognition of the New York’s rule that one cannot entirely disinherit one’s spouse. Instead, by EPTL 5-1-1-A the legislature enacted a law whereby a spouse may elect a one third share of the other spouse’s estate regardless of what the will says. Further, where there is no will, the spouse of the decedent is provided for under the rules of intestacy EPTL 4-1.1.

This is a thumbnail sketch of the issues in one case. the ultimate outcome here was that the two daughters received their fair shares of their father’s estate in the end.

Hard Promises – Multi Court Cases For Tom Petty

In 1981, Tom Petty and the Heartbreakers released the album Hard Promises, containing the single:  The Waiting.  In it, Tom sings, “oh baby don’t it feel like heaven right now?  Don’t it feel like something from a dream?  Yeah, I’ve never known nothing quite like this”.

Tom’s lyrics uncannily describe an opposite reality of the evolution of what on its face appeared to have been careful and deliberative estate planning on his part.  The most recent turn in Tom’s estate plan is that his daughters (from marriage number one) have just filed their own lawsuit against his widow.  The fight continues for Tom’s valuable artistic catalogue.  We now have developing hard knuckles estate litigation.

It is increasingly common that a family’s estate litigation does not occur in a single court.  The trend is multiple legal disputes in more than one jurisdiction – sometimes at the same time.

In all of his work planning his estate, Tom likely never envisioned that his survivors would be fighting in court – let alone two courts at one time.  His wife Dana’s petition in probate court sought to have the court approve a professional manager to handle the catalogue of Tom’s legendary works.  In that probate court, his daughter Adria, filed another probate petition to wrestle control of the estate from Dana.  So, in Tom’s estate the initial battle line was formed by two applications for competing relief in the same court.  This is not all that uncommon.  Probate court is often confronted with dueling petitions competing for the same or similar relief.  The classic arguments are that one party or another is better suited or more fit to handle the fiduciary duties for the estate than another competing party.

Beyond dueling petitions (often termed “cross petitions”) in one court for the same relief, what prompts litigants in these cases to pursue more fights in various and different courts?  In many cases separate initiation of multiple suits by the same parties are driven by the nature of the relief available in a particular court.  In Tom’s case his daughters started their separate lawsuit in a state court in California.  That is not atypical in more complicated or asset laden estate disputes where the claims are directed by persons, seeking to gain benefit from the estate, against individuals who stand in their way or who have themselves allegedly benefitted to the detriment of the other party. 

While the Surrogate’s Court in New York has jurisdiction over the handling of the estate and many related proceedings, many estate disputes spawn and emanate satellite litigation in New York State Supreme Court.  Litigants start proceedings in that forum for injunctive (restraining orders) and other relief, including money damages.  Some litigants sue the other party for breach of a fiduciary duty in the other forum or sue to recover items of property (replevin) or money (conversion).  Sometimes the state court is called upon to address alleged breaches of contract or matters pertaining to administration of trusts related to the decedent’s estate.

In Tom’s case the claims seem to be less esoteric and more direct.  His daughters claim that his widow deprived them of their role in “equal participation” in determining how his works are released.  In short, their argument is that this phrase means that the two of them have a majority vote representing two thirds of the three ladies handling the decisions. 

That position and the argument is the same as that which they advanced in the probate court dispute.  What motivates advancing the same argument in another court?  Perhaps it is that his daughters are actually forum or judge shopping.  It could be that they sense that the probate court forum favors Dana.  Their logic may not be that far off.  It is often asserted that a probate or Surrogate’s Court is a friendly forum for the estate and the individuals designated by the decedent to handle the estate.  The thinking is that the probate court is overly protective of the estate and the decedent’s nominated fiduciary – often bending over backwards in deferential accommodation to the alleged talismanic “decedent’s intent”.  It is also possible that the daughters, after having filed their competing petition in the probate court, sense an unfavorable reception or perhaps even an imminent defeat.  In addition, the daughters have now upped the ante by seeking financial damages ($5.0M) from Dana in the state court case.  That claim is based on the contention that Dana usurped estate assets to the detriment of the daughters.

The daughters also made the classic move to justify activity in state court, getting around the probate court, by making Tom Petty Unlimited the plaintiff in the case they just started.  It is an LLC which was formed in March of 2018, to manage the assets after Tom’s death.  As we continue to learn more, it seems that this entity controls Tom’s rights as a recording artist and his memorabilia. In the suit the claim is advanced that Tom’s widow created another company, Tom Petty Legacy, to usurp the other LLC’s business and misappropriate its assets.

Tom is a classic rocker and despite his death his work is a staple for classic rock outlets.  It is widely enjoyed and listened to every day.  While his music plays, it certainly is becoming more apparent that his estate plan will unfold in the courts with the ultimate decisions pertinent to management and control being made by the courts rather than his family.

https://nypost.com/tag/tom-petty/