Archive for May 2014 | Monthly archive page
Dutchess County Bar Association
Guardian Ad Litem Training Program
May 6, 2014
ACCOUNTING PROCEEDINGS*
Table of Contents
I. GENERALLY: TYPES OF ACCOUNTINGS
A. “Informal” Accounting
B. Judicial Accounting
II. BASIC ACCOUNTING PROCEEDINGS
III. BASIC JUDICIAL ACCOUNTING INSTRUMENTS
IV. EXAMINATION OF THE ACCOUNT
A. Review Will or Trust Instrument
B. The Total (of the Schedules of Account) Should Equal the Sum of Its Parts
C. Expenses (Schedules C [Principal Expenses Paid], C-1 [Unpaid Administration Expenses] and C-2 [Income Expenses Paid] and D [Debts]
1. Expenses and Debts In General
2. Legal Fees
3. Commissions
a. As Always, Check the Basics
b. Specific Legacies; Real Property
c. Advance Payment of Commissions
d. Commissions for Attorney-Executor
e. Trustees’ Commissions for “Old” Trusts
V. REVIEW FIDUCIARY’S CONDUCT
A. Self-Dealing
B. Conflict of Interest
C. Exercise of Discretion
D. Marshaling Assets
E. Payment of Claims
F. Tax Returns
G. Investment of Assets
1. Prudent Investor Statute (EPTL 11-2.3)
2. Principal and Income Act
VI. THE GUARDIAN’S REPORT
A. Qualification to Act as Guardian; Review of Court Files
B. Jurisdiction
1. Service on Your Ward and Necessary Parties
2. Service on Other Necessary Parties
3. Review Petition
4. Jurisdiction As To Adopted Persons
C. Meeting With Your Ward
D. Objections
E. Recommendations to the Court
VII. OBJECTIONS
A. Deposition of Fiduciary Before Filing Objections
B. Basis for Objections
C. Your Ward’s Interests
D. Pretrial Proceedings; Settlement
EXHIBITS
10 Things a Guardian Should First Check in an Accounting
Copies of the Official Judicial Accounting Forms prescribed by the Surrogate’s Court Procedure Act
Exhibit B
Website address for Schedules of Accounts for an estate with trusts
Exhibit C
Outline 1994 N.Y.S.B.A. Practical Skills Course “Preparation of the Account and Filing the Accounting”
Exhibit D
Analysis of Trustee commissions in periods before the present 1993 and 2001 amendments
Exhibit E
Format of a relatively simple Report of Guardian Ad Litem (for the “Susan” Estate)
Exhibit F
Report of Guardian ad Litem with Schedule by Schedule comments
Exhibit G
Report of Guardian ad Litem with Extensive Discussion of Jurisdictional Issues
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I. GENERALLY: TYPES OF ACCOUNTINGS
A. “Informal” Accounting
The account of a fiduciary is most commonly settled “informally” (i.e., non-judicially), due to the additional expense, delay and publicity of a judicial accounting.
The operative documents in an informal account are usually:
(i) A “Receipt, Release and Refunding Agreement” (sometimes coupled with Indemnity provisions).
(ii) An “account”, which can run the gamut from (a) full schedules of account in judicial format to (b) statements of assets on hand at the beginning and end of the accounting period.
There is a large body of law connected with informal accountings. Since, however, a Guardian ad Litem would not be appointed in connection with an informal accounting (except perhaps in the most unusual circumstances)*, we will proceed to a discussion of judicial accountings.
B. Judicial Accounting
There are some situations in which a judicial accounting (SCPA 2208) is preferable or unavoidable. For example:
(i) Where an interested party is under a disability.* A Guardian ad Litem would be appointed for a person under a disability.
(ii) Where intransigent beneficiaries can derail the informal accounting by withholding their consent.
(iii) Where the fiduciary has a conflict of interest.
(iv) Where significant amounts of money are involved, and the fiduciary wants the certainty of discharge from liability which is available with a judicial accounting.
(v) An interested party may also petition for a “compulsory accounting” (SCPA 2205). If the Court grants the relief requested, the accounting proceeds in the same manner as a voluntary accounting under SCPA 2208.
II. BASIC ACCOUNTING PROCEEDINGS
The most common types of Accountings are for Trustees and for fiduciaries of estates (e.g., administrators, administrators d.b.n., administrators c.t.a, ancillary administrators (d.b.n., c.t.a.), executors, preliminary executors and temporary administrators). Other fiduciaries who might account include guardians of the property of an infant or other incapacitated person, attorneys-in-fact (under a power of attorney) and donees under a power-in-trust.
III. BASIC JUDICIAL ACCOUNTING INSTRUMENTS
The three basic documents in a judicial accounting proceeding are a Petition, a Citation (or a Waiver of Citation and Consent), and Schedules of Account.
Attached as Exhibit “A” are copies of the following Official Forms Prescribed by the Surrogate’s Court Procedure Act:*
• JA-1 Petition for Judicial Settlement of Account
• JA-2 Receipt and Release
• JA-3 Waiver of Citation and Consent in Accounting
• JA-4 Trust Accounting with Instructions
• JA-5 Decree of Judicial Settlement for Executor with Trust or Trustee
• JA-6 Citation
• JA-7 Non-Trust Accounting with Instructions
• JA-8 Non-Trust Decree of Judicial Settlement
• JA-9 Compulsory Accounting Citation
• JA-10 Petition for Compulsory Accounting and Related Relief
You may also be able to access surrogate’s court forms on line at www.courts.state.ny.us/forms/surrogates.
The forms for Schedules of Account require special mention.
(A) “Form” JA-7 (“Non-Trust Accounting with Instructions”) isn’t actually a form: it is simply instructions. Form JA-7 is not helpful as a guide as to what schedules of account should look like.
(B) There are two basic types of Schedules of account
(i) Estates with no trusts
These schedules report income receipts separately (Schedule A-2), but otherwise commingle income and principal).
(ii) Trusts, and estates with trusts
Income and principal are important categories for trusts. These schedules report income receipts separately, and they also separate expenses chargeable against principal (Schedule C) from expenses chargeable against income (Schedule C-2), and report principal on hand (Schedule G) separately from income on hand (Schedule G-1).
Attached (as Exhibit “B”) for your reference is a website reference to Schedules for an estate with trusts.
IV. EXAMINATION OF THE ACCOUNT
An in-depth analysis of the subject matter of accounting schedules is impossible in the few minutes allotted to this presentation. This presentation will concentrate more on the types of issues a Guardian should be looking for in reviewing an accounting (only some of which are contained in the Schedules of Account). For a more detailed guide to the analysis of the schedules of account, see the attached New York State Bar Association “Practical Skills” outline (attached as Exhibit “C”) I prepared for a CLE program a number of years ago.*
A. Review Will or Trust Instrument
Your ward’s interests are usually created by a Will or Trust Instrument (for brevity’s sake, hereinafter collectively referred to as “Will”). It may seem obvious, but an essential first step is to review the Will. Some issues are basic (for example, if the Will says your ward is entitled to 1/4 of the residuary estate, the accounting should show that your ward will receive 1/4 of the residuary estate).
There may be other, less obvious, issues. Read the whole instrument, not just the limited portion which defines your ward’s interests. You never know what you may find there:
1. There may be a relevant provision located at the other end of the instrument (e.g., a definition of “issue;” an authorization of (or restriction on) discretionary income and principal distributions; allocation of commissions contrary to statute).
2. There may be something relevant hidden in the “powers” section (e.g., restrictions on types of investments).
3. There may be ambiguities which require a construction proceeding under SCPA 1420 (for example, recently when reviewing an accounting and the underlying Will I noticed an “anti-lapse statute” (EPTL 3-3.3) issue which the preparer had missed).
Let your imagination roam free. Don’t be confined by the section in which your ward’s interest appears, or by the description of your ward’s interest by the petitioner – there is no guarantee that the petitioner got it right.
B. The Total (of the Schedules of Account) Should Equal the Sum of Its Parts
Again, it may seem obvious, but the schedules should add up and cross-reference properly. While I am not suggesting that all the math be reviewed (especially when the schedules have been prepared using an accounting program), at a minimum the totals on each separate schedule should agree with the total shown for that Schedule in the Summary Statement.
It may seem even more obvious that the numbers in the Summary Statement should add up, and you should check to see that they do. In a judicial accounting I brought on recently the Schedules were prepared by qualified accountants using the latest programs, and but because of a glitch in the program the numbers in the Summary Statement did not add up.
C. Expenses (Schedules C [Principal Expenses Paid], C-1 [Unpaid Administration Expenses] and C-2 [Income Expenses Paid] and D [Debts]
1. Expenses and Debts In General
To make up a statistic which empirically sounds correct, 90% of potential objections to an accounting will be found in these Schedules. Large expenses/debts* and “unusual” expenses/debts may require explanation or verification. Some random illustrations: Are cable TV bills or magazine subscriptions (or any other bills normally considered as personal to the decedent) still being paid a year after death? Are there any “5 figure” debts or expenses paid without explanation which are not legitimate on their face? Are storage charges for decedent’s tangibles being paid more than a year after death?*
2. Legal Fees
You are required to review legal fees (whether paid or unpaid). The attorneys will be required to submit an Affidavit of Legal Services.*
The standard for legal fees in estate proceedings is that of Matter of Potts, 241 NY 593, and Matter of Freeman, 34 NY 2d 1.
Uniform Rules for Surrogate’s Courts section 207.45 provides that if an estate has not been fully distributed (or judicial accounting filed) within 2 years of the date when permanent letters testamentary or administration have been issued (or 3 years, if a federal estate tax return is required), a statement as to the status of the estate must be filed with the court. Failure to file such a statement may constitute a ground for disallowance of fees.
3. Commissions
The area of fiduciary commissions is densely complicated. Some rules are arcane, others counter-intuitive.* Some issues and areas to examine:
a. As Always, Check the Basics
Assuming there is no question as to whether the assets are commissionable, are the correct commission tables being used?* Is the math correct? Are Executors’ commissions calculated separately on “receiving” commissions and “paying” commissions? When trusts are involved, are Executors’ commissions properly allocated against principal and income?
b. Specific Legacies; Real Property
SCPA 2307(2) provides that commissions are not payable on specific legacies. Commissions are payable on general legacies. See EPTL 1-2.8 for the definition of a “general disposition” and EPTL 1-2.17 for the definition of a “specific disposition.” Commissions also are not payable on real property, unless the Executors have in some manner exercised “dominion and control” over the real property (such as selling the real property to raise cash needed for debts, expenses and/or taxes).
c. Advance Payment of Commissions
SCPA 2307(1) prohibits payment of Executors’ commissions prior to the judicial accounting,* unless application for advance payment was made pursuant to SCPA 2310 or 2311. Unauthorized advance payment of commissions can result in surcharge and/or payment of interest on unauthorized payments.
d. Commissions for Attorney-Executor
If an attorney is also acting as an Executor, SCPA 2307-a requires that the testator execute a written acknowledgment of disclosure that Executors’ commissions are payable in addition to legal fees (and requires certain additional information). In the absence of such disclosure, the commissions of an attorney who also acts as Executor shall be one-half the commissions to which he would otherwise be entitled.*
e. Trustees’ Commissions for “Old” Trusts
Commission rates and commissionability of trust assets (and the proportion in which commissions are charged against principal and income) have changed over the years. If a trust is old and there has not been an accounting for many years, you should check as to the rates used and the allocation of the charges for commissions.
Attached as Exhibit “D” is an analysis of Trustee commissions in periods before the present 1993 and 2001 amendments.
V. REVIEW FIDUCIARY’S CONDUCT
The fiduciary’s conduct should be reviewed as to the following areas, among others:
A. Self-Dealing
For example, were there any purchases and sales to fiduciary without court approval?
B. Conflict of Interest
For example, did the fiduciary steer business to himself or a relative, without an express exoneration of conflicts contained in the governing instrument?
C. Exercise of Discretion
For example, if you as Guardian ad Litem represent a remainderman of a trust, and there have been significant principal invasions to the income beneficiary, were such invasions authorized by the governing instrument?
D. Marshaling Assets
For example, are there assets on Schedule A (statement of original assets on hand) that are not on hand at the end of the accounting period, with no explanation as to their sale, distribution or other transfer out of the account? Also, Schedule A should be cross-checked against the estate tax return, or if none, against the Inventory of the Executor or Administrator required to be filed in Court (22 NYCRR section 207.20).
E. Payment of Claims
For example, have all the claims reflected in the accounting been paid or otherwise dealt with? Should the fiduciary have asserted a statute of limitations defense against a claim?
F. Tax Returns
Were the necessary tax returns filed (such as decedent’s final income tax returns, estate tax returns, fiduciary income tax returns)? Were penalties or interest paid for late filing?
G. Investment of Assets
1. Prudent Investor Statute (EPTL 11-2.3)
For example, did the estate contain disproportionate investments in 1 or 2 stocks or other assets which dropped significantly in value during the accounting period, which the fiduciary should have diversified, or were there other investments which dropped significantly in value? A drop in the value of an investment of, say, 25% may prompt the Guardian ad Litem to investigate more closely the fiduciary’s investment performance, and require the accounting fiduciary to provide an explanation of the loss. See Matter of Janes, 90 NY2d 41 (1997), in which the Court of Appeals surcharged the Executors of an estate that was over-invested in Kodak stock.
Did the governing instrument specifically permit retention of assets that originally constituted a disproportionate share of the estate – which although not a perfect defense to imprudent retention, nevertheless gives the fiduciary some ground to stand on?
2. Principal and Income Act
There can be Principal and Income Act questions under EPTL 11-2.1, et. seq. (prior to January 1, 2002), and under EPTL Article 11-A (on or after January 1, 2002). For example, were estate or trust expenses properly charged against principal or income? Were receipts properly credited to principal or income?
VI. THE GUARDIAN’S REPORT*
Your investigations will culminate in a report that you will submit to the Court. The Guardian ad Litem is required to file his or her Report or Objections “within 20 days after the appointment unless for cause shown the time to file such Report or Objections is extended by the Surrogate.” Your report should cover some or all of the following:
A. Qualification to Act as Guardian; Review of Court Files
The report should recite that the Guardian has filed his or her qualification papers, and reviewed the Court files.*
B. Jurisdiction
There are numerous jurisdictional issues and questions which may need to be addressed.*
1. Service on Your Ward and Necessary Parties
The citation should be served on your ward, unless he or she is an infant under the age of 14.*
If your ward is an infant, service should also be made on his or her parent (unless Petitioner is the infant’s parent).*
If your ward is institutionalized, process should also be served on an employee of the institution authorized to accept service of citation.
Admissions of due and timely service are not allowed. Waivers and Consents should also probably be avoided.
2. Service on Other Necessary Parties
The due diligence of Petitioner should be examined if Petitioner claims there are necessary parties who cannot be found. If Petitioner’s due diligence seems insufficient, the Guardian might contact the Petitioner, or report his or her concern to the Court.*
Timeliness and adequacy of service on other necessary parties should be examined.*
3. Review Petition
You should review the petition, to determine whether all necessary parties named in the petition have timely received citation in the accounting proceeding, or have waived process.
4. Jurisdiction As To Adopted Persons
In Exhibit “G” there were questions as to whether jurisdiction was required over a person who might have been “adopted out”.
C. Meeting With Your Ward
Your Report should discuss your meeting with your ward. A meeting with your ward can be significant, even if your ward cannot communicate or comprehend the substance of your meeting. What you come away with from the meeting which can be significant.*
D. Objections
Filing objections should be a last resort, and will be discussed in Section VII of this outline.
E. Recommendations to the Court
After discussing issues, you should make your recommendations to the Court. It is important to remember that, in addition to representing your ward, you are also an officer of the Court. It may be that your recommendations should be adverse to the interests of your ward.
“The primary allegiance of the guardian ad litem is the ward, but he or she has a concurrent obligation as an officer of the court to make a thorough, fair and objective report.” Guidelines for Guardians Ad Litem, May, 2003, revised and edited by the Committee to Revise Guidelines for Guardians Ad Litem, at Page 22.*
VII. OBJECTIONS
If there are imperfections in the accounting, the Guardian ad Litem should attempt to resolve the issues prior to filing Objections. If the issues cannot be resolved informally, the Guardian ad Litem can file Objections, either in his or her Report, or by separate Objections.
A. Deposition of Fiduciary Before Filing Objections
You can depose the fiduciary prior to filing Objections (SCPA 2211(2)). It may be that a deposition is necessary to determine whether Objections should be filed.
B. Basis for Objections
The basis for the Objections would be the lines of inquiry discussed above.
C. Your Ward’s Interests
It is worthwhile to observe here that your ward should have a pecuniary interest in any Objections you might file. Even if the fiduciary is clearly responsible for acts which require surcharge, as Guardian ad Litem you do not have the mandate to file Objections unless your ward’s economic interests are adversely affected.
Even if your ward’s interest is not sufficient to warrant the filing of Objections, you should raise your concerns in your Report.
D. Pretrial Proceedings; Settlement
If Objections are filed, you will be required to participate in pre-trial proceedings. As matters progress, you would do well to encourage (where circumstances merit) appropriate settlement of the matter, and participate in a settlement, though such controversies can only be settled with leave of court.
Materials by Stephen C. F. Diamond, Esq. and Vincent L. Teahan, Esq.
To download a copy of the 2014 Guardian ad Litem Training Program Accounting Proceedings presentation and exhibits, please click here.