posted by Natalie Jackson on Uncategorized

“TAX QUESTIONS TO CONSIDER WHEN SELLING A BUSINESS IN NEW YORK”

Dutchess County Bar Association

CLE Program – December 8, 2017

Presented by James P. Constantino, Esq.

This course is intended to introduce you to the initial issues an attorney should pursue when a client wishes to sell a New York business.  In it, I will focus on tax [footnote*] matters. Of course, there are other issues besides tax an attorney would want to discuss with a client selling a business — not the least would be, for example, when to sell, how to negotiate for the best possible price, etc. Still, I want this course to be an introduction to the tax questions involved in selling a business, so no prior knowledge is assumed (aside from perhaps your income tax class in law school).

Let us focus on the following six key questions:

1. What sort of business entity does your client have? In this section we will discuss the various entity-types available to business owners in New York and, further, some typical kinds of assets owned by businesses.
2. Can your client sell? If so, how? In this section we will discuss different entity and asset types and some of the particular issues involved in selling them or, as the case may be, not being able to sell them.
3. From a tax perspective, how are different assets treated when sold? In this section we will focus on how the sale of certain assets can be characterized for tax purposes, with an eye to potential ambiguities, and how that can ultimately change your client’s tax liability.
4. What are the different taxes my client might have to pay or collect? In this section, we will discuss how different kinds of entities and assets are subject to different taxes in New York, what those taxes are and how they are administered.
5. How are these taxes calculated? This section will involve a quick review of basic tax concepts before exploring the mechanics of federal and New York taxes that sellers of businesses must plan for.
6. What additional issues should I be aware of? In this section we will discuss tax questions beyond calculation and administration that you should consider when planning the sale of a business for a client.

Included in this packet is an outline of the substantive material I will cover in answering these questions, along with citations to primary and secondary sources that you might find helpful in learning more.  I am also going to work through an illustrative contract to show you “thinking points” and “negotiation points” in crucial tax areas.

1.     What sort of entity does your client have?

a.     Sole proprietorship

i.     No distinction between the owner’s property and the business entity.

ii.     Business income is reported on the owner’s personal tax return.

Further reading:

• NYS Tax Bulletin TB-IT-620: New York Source Income – Sole Proprietorships and Partnerships
• 26 CFR 301.7701-2 – Business entities; definitions

b.     General Partnership

i.     Like a sole proprietorship in that the assets and liabilities are not distinguished from ownership, except that in a general partnership ownership is shared among partners.

ii.     Also like a sole proprietorship, business income to a general partner is reported on the partner’s personal tax return. I.e. the entity does not itself have a return. This is called “flow-through” taxation.

iii.     Partnership agreements—which generally specify how duties, responsibilities, and income are divided among partners—can be extremely complex. As a corollary, the taxation of partnerships is one of the most technical areas of tax law.

Further reading:

• NYS Tax Bulletin TB-IT-620: New York Source Income – Sole Proprietorships and Partnerships
• NYCL Partnership Law
• 26 CFR 301.7701-2 – Business entities; definitions

c.     Limited Partnership

i.     A business form familiar to attorneys, wherein liability for limited partners does not exceed the amount of their capital contribution.

ii.     As with a general partnership, LP income is taxed at the individual level and not as a separate entity (i.e. “flow-through”). I have included them here for thoroughness.

Further reading:

• NYS Tax Bulletin TB-IT-620: New York Source Income – Sole Proprietorships and Partnerships
• NYCL Partnership Law
• 26 CFR 301.7701-2 – Business entities; definitions

d.     Corporations

i.     Under the Internal Revenue Code(“IRC” or “code”), a corporation can be taxed as either a “C” corp or an “S” corp. They are so-called because sub-chapters “C” and “S” of Chapter 1 of the IRC respectively deal with the rules of these corporations.

ii.     The key distinction between them is corporate taxation versus flow-through taxation. C-corp income is taxed first at the business level and then shareholders are taxed on corporate distributions. Thus, there are two points of income taxation for shareholders of C-corps.

iii.     Double-taxation for C-corps occurs also in the sale of the corporation. First, the corporation must pay corporate income tax on any gains from the sale of its assets, and then shareholders must pay capital gains tax on their distribution from the liquidation of the corporation.

iv.     S-corps have the limited liability of a C-corp, but they also have the benefit of flow-through taxation. That is, shareholders of an S-corp are only taxed once, at the individual level.

v.     To properly elect to be taxed as an S-corp, an entity must fit within certain parameters: the corporation must be domestic, have no more than 100 shareholders, and the shareholders cannot be non-resident aliens.

vi.     The policy purpose was to create a more business-friendly environment for smaller corporations. In fact, S-corps can be quite large.

Further reading:

• NYCL Business Corporation Law
• IRC § Subchapter S
• IRC § Subchapter C
• NYS Technical Memorandum TSB-M-15(7)C, (6)I, Impact of New York State Corporate Tax Reform on New York S Corporations and their Nonresident and Part-Year Resident Shareholders

e.     Limited Liability Company

i.     These were created in New York State under the Limited Liability Company Law

ii.     They were designed to provide the flexibility of a partnership (in terms of ownership, duties, and division of income) with the limited liability of a corporation. Agreements forming LLCs are called “operating agreements.”

iii.     LLCs benefit from flow-through taxation, as in partnerships

Further reading:

• New York Limited Liability Company Law, 2006
• NYS Publication 16, New York Tax Status of Limited Liability Companies and Limited Liability Partnerships
• IRS Publication 3402, Taxation of Limited Liability Companies

2.     Can your client sell? If so, how?

a.    Sole Proprietorship

In the case of a sole proprietorship, the sale will be properly characterized as the sale of the owner’s personal property. As such, taxable income to your client will possibly take the form of tangible assets, real estate, intangible assets (e.g. contracts, good will, customer lists). Additionally, your client will have a sales tax liability on the sale of tangible property (more on this below).

b.     Corporations, Partnerships, and LLCs

Corporations, partnerships, and LLCs can have more complicated rules about selling. Often, the situation is more complicated than simply finding a buyer. In the case of small partnerships and LLCs, the partnership agreement or operating agreement will frequently specify that the remaining partners/managers have a right of first refusal. In such a case, the attempt to sell to a third party first would be a breach of contract.

3.     From a tax perspective, how are different assets treated when sold?

a.     Capital Asset – IRC § 1221

i.      Expected useful life of more than one year

ii.     The acquisition cost exceeds the capitalization limit

iii.     The asset is not sold in the ordinary course of the business

iv.     Examples include real estate, equipment, furniture, improvements to land, fixtures

b.     Intangible Asset – IRC § 197

These are defined in a list in the Code and include:

i.      Good will

ii.     Going concern value

iii.    Customer lists

iv.    Government permits

v.     Intellectual property

c.     Other Assets

i.     Proceeds from the sale of other assets, such as inventory, consumable office supplies, and accounts receivable, will be considered ordinary income.

d.     To the IRS, the sale of a business is not necessarily the sale of a single item, but rather of all the individual constituent parts that make up the business. For example, the sale of a restaurant might include the sale of underlying real estate (capital asset), the restaurant building (capital asset), equipment such as stoves and dishwashers (capital asset), a trademark of the restaurant’s name or logo (intangible asset), cooking ingredients on hand (ordinary asset), the value of any existing catering contracts or gatherings held at the restaurant (ordinary asset).

e.     In the case of a corporation, the seller has the option of either selling the corporation’s stock or having the corporation sell its assets. In general, the former is preferable for the seller, while the latter is preferable for the buyer.

 4.     What are the different taxes my client might have to pay or collect?

a.     Personal Income Tax – Federal, State, and New York City

b.     Corporate Income Tax – Federal, State, and New York City

NOTE: The New York City General Corporation Tax(“GCT”), does not recognize the S-corp flow-through treatment, and so S-corporations with a GCT liability in New York City are subject to traditional double taxation.

c.     Sales Tax – State and Local

5.     How are these taxes calculated?

a.     Income Tax Basics

i.     Amount Realized on a sale – Basis = Gain or Loss

ii.     Basis is usually the price at which you acquired the asset

1. Basis for the seller will subtract any depreciation deduction
2. Basis will also subtract any casualty loss claimed
3. Basis will also add any expenses of selling an asset

iii.     Amount realized is usually the amount you received when selling it

iv.     That is, an increase in value is not itself income; the gain must be realized

v.     Gain on the asset, with certain proper subtractions, is multiple by the applicable rate.

b.     The allocation of purchase price determines the tax treatment for the sale of the assets that comprise the business. NOTE: the allocation of the purchase price is often a significant part of the overall negotiation, as tax treatment that benefits the seller may be to the buyer’s detriment.

i.     The IRS provides guidance as to the allocation of purchase price at IRC 1060, the underlying regulation, and in the instructions for the filing of Form 8594 – Asset Acquisition Statement Under Section 1060.

c.     Capital gains are generally preferable for the seller over ordinary income because the tax rate is much lower than ordinary income rates.

d.     Sales Tax Basics

i.     In New York, retail sales of tangible personal property are subject to state and local sales tax unless specifically exempted. Certain enumerated services are also taxable.

ii.     For selling a business, the key is to remember that the sales tax must be collected on sales to the final user. A “sale for resale” is specifically exempt.

1. For example, if a convenience store is being sold, then paper cups, plates, cash registers, and non-affixed furniture will be subject to NYS sales tax, because the purchaser will be the end user of the product.
2. In the same scenario, the newspapers, food, and drink for sale are inventory with the intent to resell them to customers, who will be the final consumers of the product. Thus, when these assets are included in the sale of the business, they are not subject to NYS sales tax.

Further reading:

• NYS Tax Bulletin ST-740 (TB-ST-740), Quick Reference Guide for Taxable and Exempt Property and Services
• NYS Publication 718, New York State Sales and Use Tax Rates by Jurisdiction

6.     What additional issues should I be aware of?

a.     Depreciation

i.     The IRS definition: “Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.”

ii.     Most tangible and intangible property is depreciable. Real property is never   depreciable, although improvements to real property are.

iii.     For sellers of a business, the recapture of a depreciation is ordinary income.

1. For example, you have machine purchased by your business for $10,000. By the time of sale you have taken $5,000 in depreciation deductions in the years you have owned it. When the business is sold, the basis in the machine has become $5,000 dollars. When the machine is sold, your gains up to $5,000 will be taxed as ordinary income, and any amount above that will be taxed as a capital gain.

Further reading:

• IRS Publication 946 (2016), How To Depreciate Property

b.     Installment Sale

i.     If the purchaser is financing the sale of your business, then capital gain income can benefit from installment sale treatment.

ii.     Specifically, the “Gross Profit Percentage” is computed for each asset sold. This is the gain on an asset divided by the selling price.

iii.     When you receive a payment for the business, the principal component of the payment is multiplied by the GPP to determine the taxable gain.

Further reading:

• IRS Publication 537 (2016), Installment Sales

posted by Natalie Jackson on Uncategorized

NEW YORK STATE COURTS ELECTRONIC FILING
(NYSCEF)

(as part of the The IV Annual Symposium of Journal «The Herald of Civil Procedure»:«2017 – E-Justice and Information Technologies in Civil Procedure)

Presented by:

Vincent L. Teahan, Esq.
(U.S.A.)
Teahan & Constantino LLP
41 Front Street, Suite A
P.O. Box 1181
Millbrook, New York 12545
(845) 677-2101
(845) 677-1054 – Fax

(For a full PDF version of this presentation, please click here.)

TABLE OF CONTENTS

PART I:

• THE WORLD OF LEGAL PAPER- COURT FILING BEFORE E-FILING

PART II:

• ELECTRONIC FILING COMES TO NEW YORK

PART III:

• ASSESSMENT OF E-FILING IN NEW YORK

PART IV:

• OUR FIRM’S EXPERIENCE WITH E-FILING:
  A.    SUPREME COURT E-FILINGS
  B.    SURROGATE’S COURT E-FILINGS

EXHIBITS, REPORTS AND ARTICLES

• Exhibits
• Reports
• Article

NOTES:

1.    Accompanying this article is an Internet presentation in Prezi format at:

http://prezi.com/gmozmpsjy4tf/?utm_campaign=share&utm_medium=copy

2.    To view a MP video illustrating how our office e-files a Petition for Letters Testamentary, please click here===>MP4 Video.

3.    Exhibits, Reports and Article are not part of the printed materials in Kazan University Law Review but are available at the end of this article.

PART I:
THE WORLD OF LEGAL PAPER- COURT FILING BEFORE E-FILING

My practice is centered around the Dutchess County (District) “Surrogate’s Court” in the State (rough equivalent of an Oblast) of New York.  This is a specialized Court concerned with the affairs of deceased persons.  Every one of New York’s sixty-two counties has one Surrogate Judge, except that the hugely important County composing of the island of Manhattan (New York County) has two.

The Surrogate’s Court is not one in which money damages are typically sought.  Rather, Surrogate’s Courts supervise persons charged with administering decedent’s estates and trusts (known as “fiduciaries” – – from the Latin “fidus,” meaning faithful or loyal) so that they correctly carry out their duties, pay estate/trust bills, ultimately distribute assets from the funds they hold.

My work for clients often involves the probate of a decedent’s Will (where a Will is formally recognized, or “probated” by the Surrogate’s Court, and an “Executor” is appointed), the administration of estates of an intestate (not leaving Wills) decedent, where an “Administrator” is appointed, and the accounting of Executors or Administrators to show the estate beneficiaries how the fiduciaries have managed the estate’s moneys – – as supervised by the Surrogate’s Court.  The Surrogate’s Court also supervises Trustees, who administer funds given to them to manage for the benefit of another person or persons, and whose activities are overseen by the Surrogate’s Court.

In these matters, I initiate a Court proceeding by filing a Petition for Letters Testamentary* which, if initially acceptable to the Court, results in the Court’s issuing a Citation*(formal notice that a hearing will be held on a specified date, in which the cited person is entitled to appear in Court, but if he does not appear, it will be assumed that the cited person does not object to the relief presented in the Petition) and after that hearing, a Decision and/or Decree Granting Probate* where the Court approves the Will (“admits the Will to Probate”) and issues court certificates to the appointed Executor evidencing the Executor’s authority to act (these Certificates are called “Letters Testamentary”*). In the case of an Administration* (without a Will) the Court appoints an Administrator and issues Certificates of “Letters of Administration.”*

The attached copies of specimen Petition, Citation, Decision and/or Decree Granting Probate to this outline are for probate proceedings.  Official forms of them are kept on the New York State Courts website* and we are required to use them, but at times, when appropriate, we can modify them to provide additional information.

In every one of the last 43 years, I have physically delivered Petitions to the Court, with a Citation (or Waivers of Process; Consent to Probate*, in cases where the family wishes the Court to act on an expedited basis without a hearing because it has no disagreement about the proceeding) and a proposed Decree Granting Probate (some Courts do their own Decrees).  Once the Court accepts the Petition and sets a date when the matter will be heard (“the return date of the Citation”), I must then serve the Citation upon the parties to whom it was directed (usually the closest living relatives of the decedent who would take if there were no Will).   This can be difficult, as a resident of New York State must get personal service, by hand, of the Citation, and New York’s a big state, with distances of up to 600 kilometers within its borders).  Also, persons entitled to Citation may appear by counsel, who file “Notices of Appearance”* indicating that counsel represents a party, and demanding that all further Court papers be served upon such counsel.

As you will see, the Court proceeding usually does not end upon my filing of initial papers in Court.  The persons who are necessary parties to a proceeding must get their Citations delivered to them, and I, as counsel, must show the Court that I or my staff or another person designated by me either personally served, or mailed notices to the interested parties or their counsel.  Every time this is done I must prove it was done, and proof gets made by an “Affidavit of Service”* on a separate piece of paper.  The Court will not move the matter along unless everyone has been properly served and written proofs of service are recorded in the Courthouse.  This, of course, places a huge record keeping burden on the Courts.

Indeed, the Courts are jammed with filed papers.  Dutchess County has maintained Court records of this sort since 1721 (we got our County Court late because Ulster County – – across the Hudson River from us – – kept records for both our areas, starting in 1683).  So you can just imagine the sheer volume of paper records accumulated over 300 years.  The United States Postal Service, which 60 years ago featured urban mail delivery two times a day, is undergoing systemic breakdown.  In many cases, my office only gets first class (priority) mail two or three times a week.  Letters mailed to the Dutchess County Court House (it’s 25 kilometers from my office to the Courthouse) are sent from my local Millbrook post office to a mail center 120 kilometers away and at times to yet another remote mail center, and then finally down to the Court House in Poughkeepsie, our county seat (main city where the Court House is located).  So my proving of service of legal papers, which once could be done fairly promptly and reliably by ordinary mail, has now significantly slowed.  To deal with this, I or my paralegal frequently drive from my office to the Court House to deliver the papers in person.  The drive takes thirty-five minutes, but there’s parking, entering the Court House and going to see the Clerk for filing the papers – – after which we would return to my office.  All this is highly inefficient.  I also note that in the 19th and early 20th centuries, lawyer’s offices clustered around the County Court House, which was also traditionally close to the main county post office.  But this is not so common now.

The burden of paper compliance is not just on the record rooms (the Court Clerk’s offices) in the Court House.  There is the parallel problem of what happens in our own law offices, where we have had to keep paper records of client files, opposing counsel papers etc.  In the last 10-15 years, we have scanned papers into our computer network, but it takes time to scan and this is a lot of unnecessary work.  Think of paper build up in Manhattan offices and the allocated rental costs for law firms (some with 750 lawyers) having to pay Manhattan rents!

There’s another way in which the world of paper isn’t suitable for modern law practice.  Court Houses in New York are open only between 9:00 a.m. and 5:00 p.m. with smaller courts closing for lunch.*  And sometimes the Court staff is not eager to take in papers.  So Court hours have been yet another logistical hurdle we lawyers have to jump over.

If you add all these factors together, you will see that something had to be done by the turn of the 21st century to ease the burden of paper on the court system and upon the lawyers who practice in it.

PART II:
ELECTRONIC FILING COMES TO NEW YORK

In 1999, at the request of the Unified Court System of New York State, legislation was enacted under creating a “pilot program” to test the usefulness of electronic court filing.  After a decade of experience, e-filing ceased to be a pilot program and new laws were passed giving the Chief Administrative Judge of New York State the power to issue rules authorizing a formal program of consensual electronic filing and service of documents in the Supreme Court (the local district court having jurisdiction over ordinary civil cases), the Court of Claims (where lawsuits are heard against New York State) and the Surrogate’s Court.  For the first time, the State judicial authorities began to require the use of e-filing in certain counties for certain types of actions or proceedings.  Pursuant to this, cases have been filed on a mandatory basis since May, 2010 beginning with commercial cases in the New York County Supreme Court.

After a slow start – – not surprising for a innovative and technologically advanced program in a historically conservative profession – – the pace of e-filing more or less exploded after 2009, with more than a million cases having been e-filed with the New York system by 2015.  (At the same time, while these numbers appear formidable, there are millions of court matters – – especially criminal ones – – which are still going forward strictly on paper.)

The implementation of e-filing has required the engagement and building of a staff under the supervision of the Unified Court Systems State Wide Coordinator of electronic filing.  Statewide staff develops plans and time schedules for the expansion of e-filing of new court venues where the Chief Administrative Judge has authorized e-filings.  When a venue is identified for “consensual” (e-filing allowed though not  required – – but if you start a proceeding electronically, you have to complete it electronically) or “mandatory” (e-filing required), the state coordinator and staff can then work closely with the relevant county staff.  I note that while Surrogate’s Court records are kept on file by the Surrogate’s Court Clerk in each county’s Surrogate’s Court, the “file room” for other civil courts in a county is, for the most part, the Office of the relevant County Clerk, who also keeps records of Deeds, Mortgages and other important records.

A vital principal underlies the e-filing program, namely that it must take place through a single platform, known as the NYSCEF (New York State Court Electronic Filing) system.  Under this, the serving and retrieval of court documents should not vary depending on the location of the court and the county in question.  The 2015 report on e-filing quite properly indicates:

“were this principal not in place, e-filing would be a vast Tower of Babel.  Attorneys would be plagued by the need to learn different systems and procedures depending on if they are filing in say,  Supreme Court or the Surrogate’s Court, or whether they are doing so upstate (in the counties north of New York City) or downstate (New York City and surrounding counties).  If a single platform were not in place, the variations would make for chaos, rendering e-filing impossibly burdensome and inefficient for the Bar and the Courts, dealing a fatal blow to the entire program.”

Before e-filing is introduced to a new Court or County, the NYSCEF Resource Center provides training to lawyers and court personnel in the Court venues affected.

As part of this, I attended on January 4, 2017, a training session for the consensual e-filing to be undertaken in the Dutchess County Surrogate’s Court on January 18, 2017.*  NYSCEF Resource Center also regularly offers an on-line training course.  The e-file authorities contend that formal training:

“often proves to not be necessary for attorneys and parties to be able to use the NYSCEF system effectively.  The system is to a large degree intuitive.  Furthermore, it provides explanatory material online (through “HELP” and “WHAT’S THIS” links and a video following the filing process) to be prospective users.  And, in addition, to the “live” or real NYSCEF system, the platform makes available an exact replica for unlimited practice and training.”

Despite the foregoing assurances, not all Courts have quickly or easily adjusted to e-filing in New York State, if only because of a shortage of Court resources and training sessions and time needed for people to learn the new system.  It is hard to give up the system described above in Part I of which Court personnel have been familiar for more than 300 years and replace it with a new relatively paperless system.  In Part III, I will discuss assessments of how e-filing has been implemented, and the reaction of lawyers and local Courts to e-filing.  I’ll then proceed to Part IV, which is my own law firm’s experience with e-filing.

PART III:
ASSESSMENT OF E-FILING IN NEW YORK

Chief Administrative Judge of New York A. Gail Prudenti  issued a favorable Report on the State’s e-filing program in her “Report to the Legislature, the Governor and the Chief Judge of the State of New York on the Electronic Filing Program of the New York State Courts” dated March, 2015*.

In her Report, Judge Prudenti stated “it was high time to move ahead with boldness,” and that “broader use should be made of mandatory e-filing.”  This must have been a sign that she wished to see e-filing in the Criminal Courts of the State and the Family Courts.  (In both of these huge and troubled court systems, there is not now e-filing).  Judge Prudenti’s Report also contained a review of e-filing in the Federal Courts (which occurred far faster and more thoroughly than in New York State, perhaps because U.S. Courts are better funded, and less regulated by the legislature, than are Courts in the State of New York, which are rather tightly controlled by the Legislature (State Assembly and Senate) both financially and politically.  The subtext underlying to the Judge’s Report is that New York’s  Legislature – – has too much control over the financing and operating of the state’s court.

After Judge Prudenti’s 2015 Report, there followed a second Report, “The Electronic Filing Program of the New York Courts” by the new Chief Administrative Judge, Lawrence K. Marks, dated June 1, 2016*.

Judge Marks, as did his predecessor, described the benefits of e-filing in New York:

“The benefits of e-filing are significant and far-reaching. For counsel, it greatly simplifies and reduces the cost of the filing and service of documents. It also is very convenient as it makes the case file accessible online to all counsel of record at any time and from anywhere. In addition, e-filing sharply reduces record storage and retrieval costs, eliminates the burden and expense of serving hard-copy papers on opposing parties and minimizes the need to travel to the courthouse.

“For courts and public officials, e-filing likewise has demonstrated many benefits. It has increased productivity and reduced costs for both the courts and the County Clerks. It has enhanced the efficiency and effectiveness with which judges can manage and administer their inventories, providing them and their law clerks with easy access to case files even on the weekends or at night from home. In our 2015 report, we provided estimates of the cost savings and improvements in productivity that e-filing has brought.

“In addition to all of these benefits, e-filing contributes to a greener, more environmentally responsible system of justice, by sharply reducing both the vast amount of paper consumed by the litigation process and the need to travel to serve and file papers.”

Attached to both Judge Prudenti’s and Judge Marks’ Reports are many letters – – almost all complimentary – – on the e-filing system in New York.  The most frequent requests appear to be that:

• The e-filing system be expanded and made mandatory in all of New York’s Courts;
• E-filing, while excellent for lawyers and the Court personnel, is hard on non-lawyers who are representing themselves; and
• The required practice in many Courts for attorney to provide printed (paper) “working copies” to the Court (despite the existence of e-filing) be reduced or eliminated.

Why there are so many letters in favor of e-filing, but at the same time the real lack of universal e-filing in our courts in New York?  I think that there is a reason for this apparent inconsistency:  The Courts and practicing lawyers want e-filing, but the Courts do not have the resources, nor the legal profession the power, to force the State Legislature to come up with the money that will fully implement and fund e-filing (especially a program of mandatory e-filing).

New York’s so-called “Unified Court System” is the product of custom, and centuries of (State) Constitutional practice (the Judiciary Article of the New York State Constitution covers fully one-third of the massive document, and covers in detail seemingly minor matters such as the staffing of particular Courts.  The State Court budget exceeds $2 billion, and a budget this size is necessarily the subject of politics.  We have 11 separate trial courts, some set-up dozens, if not hundreds of years ago (for good reasons then, but have they outlived their usefulness as separate courts?)  Each has  separate judges and often overlapping jurisdictions.  But all these Courts are part of the political process, and members of the Legislative and Executive (the Governor’s office) – – and the judges themselves – – like to play with the court system.  Our Judges are nearly all elected, and one of the things many rising young lawyers want to be is a New York Supreme Court Judge or Surrogate Judge (salary nearly $200,000 plus most generous vacation, sick leave, and retirement pension benefits).  While the State’s court system could be greatly streamlined, and committees have studied and made recommendations on this matter for many years, little or nothing is getting done.  Again, I am not attributing sinister or cynical motions to the parties:  what we have here is the practical realities of politics, unfortunately played out on an epic scale, because the Legislature and the Governor appear to like the current highly balkanized and politicized system too much to change it.*

Just as this report was being submitted, the New York State Bar Association, which has 75,000 lawyer-members, came out in favor of a Constitutional Convention for the purpose of revising the New York State Constitution.  A principal reason for doing so was the wish on the part of attorneys to revise the State Constitution to consolidate the New York court system, so that it would be truly unified and made more efficient.*

PART IV:
OUR FIRM’S EXPERIENCE WITH E-FILING

In my law office, my colleagues and I must do e-filings in Supreme Court (basic trial Court in our county) as well as the Surrogate’s Court.

A.    SUPREME COURT E-FILINGS

Susan Corman, the legal assistant who handles e-filing in Supreme Court for the attorney responsible for Richard Cantor, our senior lawyer handling Commercial Law, Real Estate Conveyancing, Zoning, Planning and Land Use law (and litigation concerning these area.)  Mrs. Corman has been using the NYSCEF since December, 2015 and offers this input about consensual filing in the Supreme Court:

“If you are commencing a lawsuit in New York Supreme Court and want to take advantage of electronic filing one must be careful to follow Uniform Rule 202.5-b. Under the rule filing and service of papers by electronic means cannot be made by a party, nor can electronic service be made upon a party unless that party has consented to use of the system for the case in question. A written notice must be served on each party to the lawsuit and each party should indicate whether or not he or she consents to electronic case filing and service through the New York State Courts Electronic Case Filing System (“NYSCEF”).  Electronic case filing offers significant benefits for attorneys and litigants as it permits documents to be filed with the county clerk and the court and served between or among consenting parties. The documents can be posted online 24/7, 7 days a week. There is no fee to use the NYSCEF system whether for filing, service, or to consult the docket in the case. There is no fee to print documents from the docket. The normal filing fees required for all civil litigation matters must be paid however and this can be done electronically by credit or debit card.

If you are receiving the Notice detailing the availability of electronic case filing in New York Supreme Court it means that the plaintiffs and/or the plaintiffs attorney consent to e-filing and that he or she  intends to use the New York State Courts Electronic Filing. Within 10 days after service of the Notice, the party served can consent to e-filing by filing with the court and serving on all parties of record a consent to e-filing, or if the party or attorney of record is an authorized e-filing user they can file the consent electronically in the manner provided at the NYSCEF site. If one of the parties, or fewer then all of the parties consent then the consenting parties can  use NYSECF by and between those parties and everyone else can file and serve their documents through the Civil Practice Law & Rules.

My overall experience with the efiling system has been good.  I have been using this system since December of  2015.  My only complaint with the system is that if you make a mistake with the PDFs and you do not realize it until the end (when you are about to efile your documents are dropped off – or does not load to the e-file system), you have to start over.  This is the only drawback with the system.  I also find the “Help Desk” very helpful if you should have any questions regarding the filing of documents.”

B.    SURROGATE’S COURT E-FILINGS

We were notified in late 2016 that Dutchess County (my home office county) was on the list of counties to begin e-filing of Surrogate’s Court petitions (only Probate, Administration and Small Estates) .  My paralegal, Natalie S. Jackson and I attended the training session on January 4, 2017 with wide-eyed optimism,  as we both like to learn new things.  The process, however, has not gone as smoothly or quickly as we had hoped.*

Mrs. Jackson offers the following report:

“In the past, once we obtained the necessary signatures and notary on the Petition (and accompanying documents), executed the few related instruments as the attorneys for the estate, we would then assemble the original Petition along with original death certificate and original Last Will and Testament (with Affidavit of Attesting Witnesses), pick up a check for the filing fee from our bookkeeper, and then head to court to file the Petition.  The Surrogate’s Court Clerk would provide a cursory review of the petition and documents.  If anything was amiss, the court clerk (or the Chief Clerk, if he/she is available) would give immediate feedback and return the Petition and related documents for correction.  At times, we were able to make on-the-spot corrections on the papers, initial the changes and hand the documents back to the court clerk.  If a detailed explanation were needed, the attorney would be able to file an Affirmation Amending the Petition.  This would enable to action to continue to move forward.

With the move to e-filing, the only steps that remain the same are obtaining the necessary signatures and notary on the Petition (and accompanying documents) execution of the few documents as the attorneys for the estate and obtaining the filing fee from our bookkeeper.  Now, in addition to these steps, we must scan ALL documents (which we have done for internal office purposes as a practice for a number of years) as separate PDF files.  This means one PDF file for each instrument that makes up the entire Probate Petition packet, including but not limited to the following:

• Request for Surrogate’s Court Action
• Probate Petition (up to the Combined Verification, Oath and Designation instrument);
• Combined Verification, Oath and Designation;
• Waiver of Process; Consent to Probate (if more than one is executed, all must be scanned as one PDF document);
• Probate Citation (if an interested party did not execute a Waiver of Process; Consent to Probate instrument; or the New York State Attorney General or New York State of Department of Taxation and Finance, if applicable);
• Notice of Probate (notice to person or charity that they will receive a legacy under the Will; notice to person(s) nominated a successor executors, trustees and/or guardians);
• Affidavit of Comparison (that the copy of the Will offered for probate is the same in all respects as the original Will);
• Attorney’s Certification in Proceeding (that forms and all supporting documents prepared by the attorneys office are the same as the court’s official forms and that the substantive text has not been altered); and
• Certification Rule 130 (that the proceeding is not frivolous)

Separately, we would have already scanned the death certificate and the Last Will and Testament.

Converting all documents to a PDF is crucial.  NYSCEF does not accept word processing (.docx, .docs, .rft or .wpd) documents.  One missing document can lead the court to reject the entire filing or at the very least delay the processing of the Petition.

Now, once, the documents have been assembled and scanned, instead of racing out to the courthouse, we can sit down at the computer to e-file the probate petition. (Please click here to see a video clip of the e-filing of a probate petition.)

After we e-file the Petition, some courts will send you an email confirming receipt of the documents.* This does not mean that the Petition has been accepted for filing.  On the contrary, the documents still have to be downloaded from the NYSCEF’s mainframe and then uploaded to the appropriate county’s Surrogate’s Court.  Then, the file marked for filing…wait, not so fast!  The Court still needs an original death certificate, original Last Will and Testament and a filing fee check (if you chose not to pay the filing fee online with a credit card.  My personal preference is to by via attorney check.  Our bookkeeper immediately provides our office client billing assistant with a copy of the disbursement check.  This means I do not have to perform monthly credit card reconciliations.  Besides, my “presence” in Surrogate’s Court is of paramount importance to having the court act on the Petition.)  We have two days to get an original death certificate, original Last Will and Testament and a filing fee check to Surrogate’s Court.  If not marked received within two days, the Court can close the file and you have to start over – – from the beginning.

Once the documents (e-filed and personally delivered) are received, the Court will review the file and advise if any further documents are still needed.  Unlike filing in person, this is not immediate; this takes a few days.  If anything is amiss, the Court rejects the Petition and, again, unlike the in-person filing of paper described above, the lawyer cannot fix it with an Affirmation Amending Petition.  We must start over, and this may require the client to sign a new Petition.*

When the documents have been accepted for filing, we will receive an email from the Surrogate’s Court confirming this fact.*

While the move to e-filing means less physical paperwork delivered to the court, it does not mean less paperwork for the attorney’s office.  Once the file number has been received, the attorney’s office must complete additional Surrogate’s Court e-filing forms, with up to five being mandatory (as needed) to be mailed to appropriate parties.*

Now, after providing the above condensed overview, let me tell you about my office’s first experience with e-filing – – which did not go very well.  And this was with a relatively simple probate petition.

The testator died in February, 2017.  The probate petition was executed by the nominated executor.  The testator’s children executed Waivers of Process; Consent to Probate instruments.  The lawyer executed the necessary accompanying Certification and other papers.  We scanned all the executed documents and filed the Petition using NYSCEF.  The petition was filed in May, 2017.

And then I waited…and waited…and waited.  As the paralegal, I telephoned the Court to obtain a status report.  The court clerk could not find the file.  I loaded the file using the NYSCEF system.  Again, we waited.  This sparked another telephone call for a status report.  The court clerk advised me that a notarized Attorney’s Certification in Proceeding was needed.  This was never the case in the past, but maybe this was a new procedure. I had the attorney execute another Attorney’s Certification in Proceeding instrument which I notarized.  I scanned the document and uploaded it to the NYSCEF system.  Later, I received another call from the Court advising the instrument did not need to be notarized and to upload the first instrument (the non-notarized instrument).  This time, however, I could not find the electronic file.

I called the clerk court to report that I could not find the e-file on the NYSCEF system – – not by last name or using the court file number.  The court clerk tried to find the file and was just as unsuccessful as I was. A few minutes later, the court clerk advised me that, in error, instead of deleting the one file, the entire electronic file was deleted.   I re-loaded the electronic file a second time.

After much delay, the court issued a Decision and Decree Admitting the Will to Probate in July, 2017.

By contrast, I recently filed the paper version of an Administration Petition with the Court, a basic simple petition.  The Petition was personally filed in court on a Friday afternoon.  Four business days later, I received a telephone call advising that the Decision and Decree Granting Administration had been issued.

This addresses my secondary issue about electronic filing – – it takes too long to get a Decision and Decree from the Court.  The old-fashioned paper method, with a trip the Court House to file documents, is, at least so far, much faster than e-filing.  The initial issue which was concerning the rejection of documents was mentioned previously.

Despite our limited experience with electronic filing, we remain optimistic that NYSCEF is making strides to improve our local Surrogate’s Court filing.  The most recent Probate Petition we submitted using NYSCEF was promptly processed.  I loaded the Petition (and accompanying documents) to the e-file server on July 26, 2017.  The Court issued a Decision and Decree Admitting the Will to Probate on August 10, 2017.”

Mrs. Jackson and I stress that the staff of our local Dutchess County Surrogate’s Court has specialized expertise and is extremely helpful and courteous to us.  The greater level of problems encountered in Surrogate’s Court (as discussed by Mrs. Jackson) compared to Supreme Court (as discussed by Mrs. Corman) is probably attributable to the fact that a Surrogate’s Court petition contains many required statutory elements which must be checked by Surrogate’s Court Staff.  After all, we are asking a judge to do sign a binding Decree, and the Court staff has to protect the judge by making sure everything is correct.  Papers filed in Supreme Court actions don’t undergo this level of scrutiny by Court staff — because opposing counsel can object.

As we see it, the difficulties we point out are a matter of the Court’s (and lawyers’) getting used to the NYSCEF system while the Court staff have to cope with a huge case load.

Even the Courts that use mandatory e-filings can’t often manage.  Mrs. Jackson reports, as follows:

“While Dutchess County improves its processing of e-file Petitions, I note that another local County may not be so fortunate.  This neighboring county, unlike Dutchess, is a mandatory e-filing Court.   I office submitted a Petition for Letters of Administration on July 25, 2017 and as of today’s date, September 17, 2017, we have received neither a Decision and Decree Granting Administration from the Court, nor a rejection of the petition.   To date, all we have received is a confirmation of the filing.”

Based on the inconsistency of the e-filing system, we now are determining (at least one consensual jurisdiction) which petitions we should file in person using paper vs. which petitions we can e-file, based on the timing needs of the executor.  The main factor is how quickly the executor needs to be appointed and get the estate administration moving (i.e., pending sale of a property, continuing a business, payment of obligations such as debts and taxes or to liquidate assets to protect asset values and/or to raise capital quickly for payment of administrative expenses).  If the need is pressing, we will continue to bring the Petition to Court – – in person.  If not, we will to use the NYSCEF system – – as one day we expect it will be the only way to operate.  So, we must get used to the process now and trust that NYSECF will continue to improve.

EXHIBITS, REPORTS AND ARTICLES

Exhibits

EXHIBIT A:

• Sample Petition for Letters Testamentary (as filed)

EXHIBIT B:

• Sample Probate Citation (as would be issued by Surrogate’s Court)

EXHIBIT C:

• Sample Decision and Sample Decree Granting Probate (as would be issued by  Surrogate’s Court)

EXHIBIT D:

• Sample Letters Testamentary (as would be issued by Surrogate’s Court)

EXHIBIT E:

• Sample Petition for Letters of Administration (as filed) and Sample Letters of Administration (as would be issued by Surrogate’s Court)

EXHIBIT F:

• Sample Waiver of Process; Consent to Probate (as filed)

EXHIBIT G:

• Sample Notice of Appearance

EXHIBIT H:

• Sample Affidavits of Service:

1. Via personal service on a New York State resident
2. Via certified mail, return receipt request on a non-New York State resident

EXHIBIT I:

• An email confirmation from Westchester County Surrogate’s Court

EXHIBIT J:

• An email confirmation from Dutchess County Surrogate’s Court

EXHIBIT K:

• Surrogate’s Court E-filing Forms

EXHIBIT L:

• Surrogate’s Court Mandatory E-filing Forms

Reports

“Report to the Legislature, the Governor and the Chief Judge of the State of New York on the Electronic Filing Program of the New York State Courts”, dated March, 2015

“The Electronic Filing Program of the New York Courts”, dated June 1, 2016.

Article

“The Judiciary Article of the New York State Constitution–Opportunities to Restructure and Modernize the New York Courts”, approved by the House of Delegates on January 27, 2017.

posted by Natalie Jackson on Uncategorized

Petition for Guardianship

posted by Natalie Jackson on Uncategorized

Notice of Article 81 Guardianship Proceedings and Order to Show Cause

posted by Natalie Jackson on Uncategorized

ARTICLE 81 GUARDIANSHIP PROCEEDINGS:
Overview and Background; Pre-Hearing Procedural Issues
by Vincent L. Teahan, Esq.¤

OVERVIEW AND BACKGROUND

§ 81.01 Prior law; Legislative Findings and Purpose

Before we delve into the statutory analysis of Article 81, we should first go over a few details about legal background that gave rise to the enactment of Article 81 in 1993. Only then will the reasons for New York’s creation of such a vast and unwieldy law became clear to us – – the end users of the law – – on behalf of our clients and as offices of the Court in Article 81 proceedings.

Before Article 81, the only legal remedy that could be used to deal with the affairs of an incompetent person was Article 78 of the Mental Hygiene Law. This required a finding of complete incompetence. As such, it cast a stigma upon the committed person as it amounted to a complete deprivation of his or her civil rights. Courts became reluctant to appoint committees.

The conservator statute passed in 1972 in the form of Article 77 of the Mental Hygiene Law. It was designed to provide a “less restrictive alternative to the committee procedure.” But this was a solution for an incapacitated person’s property and financial issues only.

A gap arose between the relief provided under Articles 77 and 78. What could be done to help a person who was not completely incompetent but who still needed assistance for both financial and personal needs? There were legislative attempts at filling the gap, but in 1991, the New York Court of Appeals, in the Matter of Grinker (Rose), 77 N.Y.2d 703 (1991) ruled that an attempt by the New York Department of Social Services to use Article 77 to commit an Alleged Incapacitated Person (“AIP”) to a nursing home went beyond the “central property and incidental personal borders” of Mental Hygiene Law Section 77.19. Effectively, the Court of Appeals ended attempts to stretch the conservatorship provisions of Article 77 beyond its property management limits. Unlike some of our US Supreme Court Constitutional decisions, there were no emanations and penumbras allowed.

Soon thereafter, the New York State Law Revision Commission began drafting a statute with a standard for appointment of a guardian focusing on the needs of the individual, and permitting the appointment of a guardian who can make decisions regarding either the person or the property of the person, or both, if appropriate. New Article 81 was enacted in 1992 and became effective in 1993, Former Articles 77 and 78 were repealed.

Article 81’s standard for appointment of a guardian focused on the decisional capacity and functional limitations of the AIP – – the person for whom the appointment was sought. Rather than making determination that person’s condition (i.e., some underlying mental and physical disability, the proving of which would constitute the basis for a finding that a guardian was needed – – like a binary “on/off” or “black/white” determination) that would force a person into a conservatorship (Article 77) or committeeship (Article 78), new Article 81 had as its central concept the appointment of a guardian whose powers are tailored specifically to the particular needs of a person with respect to personal care, property management or both.

NYS Office of Children and Family Services recites:

“the legislature declares that the purpose of this act is to promote public welfare by establishing a guardianship system which is appropriate to satisfy either personal or property management needs of an incapacitated person in a manner tailored to their individual needs of that person, which takes in account the personal wishes, preferences and desires of the person, and which affords the person the greatest amount of independence and self-determination and participation in all the decisions affecting such person’s life.”¤

§ 81.02 Power to appoint a guardian of the person and/or property;standard for appointment

Under Section 81.02(a)(1)-(2) “the Court has power to appoint a Guardian if it determines:

“1. that the appointment is necessary to provide for the personal needs of that person, including food, clothing, shelter, health care, or safety and/or to manage the property and financial affairs of that person; and

2. that the person agrees to the appointment, or that the person is incapacitated as defined in subdivision (b) of this section.”

NOTE: The standard of “clear and convincing evidence” is an intermediate one between the usual civil “preponderance of the evidence standard” and the criminal laws “beyond a reasonable doubt” standard. The appointment of a guardian necessarily involves the restriction of a person’s liberty and rights which requires this higher standard of proof. It has been found, however, by the Courts that the standard of “beyond a reasonable doubt” is not so required.

Turning to the definition of ‘incapacitated” under Section 81.02 (b), the Court must find that the person “is unable to provide for personal needs and/or property management; and; the person cannot adequately understand or appreciate the nature or consequences of such inability. Section 81.02 (b)(1)-(2).

The standard of Section 81.02 (b) sheds the former labels of “substantial impairment” or “incompetency” under former Articles 77 and 78 and their requirement that the incapacitated person suffer from some underlying illness or condition. Instead, Section 81.02 (c) requires the Court to give:

“1. management of the activities of daily living, as defined in subdivision (h) of section 81.03 of this article;

2. understanding and appreciation of the nature and consequences of any inability to manage the activities of daily living;

3. preferences, wishes, and values with regard to managing the activities of daily living; and

4. the nature and extent of the person’s property and financial affairs and his or her ability to manage them.”

NOTE: In sum, Article 81 has put the Court into the position where it is forced to make an extensive evaluation of a person’s ability to function before the Court may exercise its power to appoint a guardian. All this makes admirable constitutional sense. It respects the dignity of the individual, particularly insofar as the statute is designated to interfere with the AIP’s life, through the appointment of a guardian, as little as possible. At the same time, my experience with Article 81 is that it necessarily involves a huge use of judicial and legal resources on an expedited basis. Though commentators have noted that the legislators designed the appointment of a Court evaluator to ease the burden on the Court as a way to ease the burden on the Courts, the Court evaluator system itself has evolved (at least in my opinion) into something of an unfunded mandate imposed on members of the Bar. One could ask whether forcing the Courts to perform so many evaluations leading to a customized appointment of a Guardian under Article 81 really needs to be done judicially or whether there could be some administrative way to accomplish the same goals and still satisfy constitutional requirements of due process.

A guardian will be appointed if the court determines the AIP is unable to care for himself or herself.

The assessment will also consider the AIP’s physical illness, mental disability (including substance abuse) and any medical treatments which will effect the AIP’s cognitive behavior.

The AIP can also agree to have a guardian appointed on his or her behalf.

§ 81.03 Definitions (including “Least Restrictive Form of Intervention”)

A review of the definition of terms under Article 81 Guardianship:

“(a) “guardian” means a person who is eighteen years of age or older, a corporation, or a public agency, including a local department of social services, appointed in accordance with terms of this article by the supreme court, the surrogate’s court, or the county court to act on behalf of an incapacitated person in providing for personal needs and/or for property management.

(b) “functional level” means the ability to provide for personal needs and/or the ability with respect to property management.

(c) “functional limitations” means behavior or conditions of a person which impair the ability to provide for personal needs and/or property management.

(d) “least restrictive form of intervention” means that the powers granted by the court to the guardian with respect to the incapacitated person represent only those powers which are necessary to provide for that person’s personal needs and/or property management and which are consistent with affording that person he greatest amount of independence and self-determination in light of that person’s understanding and appreciation of the nature and consequences of his or her functional limitations.

(e) “available resources” means resources such as, but not limited to, visiting nurses, homemakers, home health aides, adult day care and multipurpose senior citizen centers, powers of attorney, health care proxies, trusts, representative and protective payees, and residential care facilities.

(f) “personal needs” means needs such as, but not limited to, food, clothing, shelter, health care, and safety.

(g) “property management” means taking actions to obtain, administer, protect, and dispose of real and personal property, intangible property, business property, benefits, and income and to deal with financial affairs.

(h) “activities of daily living” means activities such as, but not limited to, mobility, eating, toileting, dressing, grooming, housekeeping, cooking, shopping, money management, banking, driving or using public transportation, and other activities related to personal needs and to property management.

(i) “major medical or dental treatment” means a medical, surgical or diagnostic intervention or procedure where a general anesthetic is used or which involves any significant risk or any significant invasion of bodily integrity requiring an incision or producing substantial pain, discomfort, debilitation, or having a significant recovery period, or which involves the administration of psychotropic medication or electroconvulsive therapy; it does not include any routine diagnosis or treatment such as the administration of medications other than chemotherapy for non-psychiatric conditions or nutrition or the extraction of bodily fluids for analysis; dental care performed with a local anesthetic; and any procedures which are provided under emergency circumstances, pursuant to section two thousand five hundred four of the public health law.

(j) “life sustaining treatment” means medical treatment which is sustaining life functions and without which, according to reasonable medical judgment, the patient will die within a relatively short time period.

(k) “facility” means a facility, hospital, or school, or an alcoholism facility in this state as such terms are defined in section 1.03 of this chapter, a substance abuse program as such term is defined in article nineteen of this chapter, an adult care facility as such term is defined in section two of the social services law, or a residential health care facility or a general hospital as such terms are defined in section two thousand eight hundred one of the public health law.

(l) “mental hygiene facility” means a facility, hospital, or school, or an alcoholism facility in this state as such terms are defined in section 1.03 of this chapter.”

• Least Restrictive Form of Intervention

The provisions of Section 81.03(d) “least restrictive form of intervention” go to the heart of the statute. The Court will only give to the Guardian those powers which the AIP truly needs, based on the Court’s assessment, through a functional needs test, of what powers are to be granted. This contrasts with prior law (Articles 77 and 78) which prescribed powers to conservators or committees. All powers not granted by the Court to the AIP are retained by the AIP.

Importantly, lawyers should realize that the “least restrictive form of intervention” may in fact mean no Article 81 relief is needed at all. If, for example, the AIP has previously executed a broad statutory power of attorney for financial management purposes (meaning, for example, not one just limited to banking or real estate matters), coupled with a statutory gifts rider and has also executed a health care proxy/living will with HIPAA authorization, there may be no need to have an Article 81 guardianship proceeding because the “least restrictive form of intervention” is no intervention.

It follows that whenever possible, you, as attorney, should if possible get your own clients to sign the broadest form power of attorney with statutory gifts rider naming agents, successor agents and if necessary alternate successor agents, and similarly, a health care proxy/living wills, HIPAA authorization, also naming an agent, back-up agent and if necessary alternate successor agent. (Query as to whether a lawyer’s failure to counsel clients to execute these instruments and to store multiple copies of them) could leave the lawyer open to criticism given the expense and trouble caused by an Article 81 proceeding that your client’s execution of these relative simple instruments could have avoided.

PRE-HEARING PROCEDURAL ISSUES

§ 81.04 Jurisdiction and § 81.05 Venue

The Article 81 Guardianship petition should be filed in the Supreme Court (or County Court). Relief is sought:

1. for a resident of the state;

2. for a nonresident of the state present in the state;

What if the AIP resides in a facility outside New York? Then jurisdiction is based on the domicile of the AIP. New York State borders Connecticut (in our part of the county, this often involves AIPs residing in facilities in Sharon or Canaan, Connecticut), Massachusetts, New Jersey and Pennsylvania. A person domiciled in New York can be placed in a health care facility in any one of these surrounding states. The Article 81 Guardianship proceeding will be brought in the county in which the AIP is a domiciliary resident. (You may have to bring the proceedings in the state in which the facility is located.)

The proceeding may be brought in:

• the county where the person resides.
• the county where the AIP is physically located.
• in the Surrogate’s Court where an estate proceeding, in which the AIP, has an interest.
• if the AIP resides in a in-care medical facility, in the state and county where the facility is located

§ 81.06 Who may commence a proceeding

Seven persons can initiate an Article 81 Guardianship proceeding:

“1. the person alleged to be incapacitated;

2. a presumptive distributee of the person alleged to be incapacitated, as that term is defined in subdivision forty-two of section one hundred three of the surrogate’s court procedure act;

3. an executor or administrator of an estate when the alleged incapacitated person is or may be the beneficiary of that estate;

4. a trustee of a trust when the alleged incapacitated person is or may be the grantor or a beneficiary of that trust;

5. the person with whom the person alleged to be incapacitated resides;

6. a person otherwise concerned with the welfare of the person alleged to be incapacitated. For purposes of this section a person otherwise concerned with the welfare of the person alleged to be incapacitated may include a corporation, or a public agency, including the department of social services in the county where the person alleged to be incapacitated resides regardless of whether the person alleged to be incapacitated is a recipient of public assistance;

7. the chief executive officer, or the designee of the chief executive officer, of a facility in which the person alleged to be incapacitated is a patient or resident.”

§ 81.07 Notice

Once it is determined who will initiate the Article 81 Guardianship, the next step is to determine what is to be served, who will be served and the method of service.
Service of the following documents are necessary:

• Notice of Article 81 Guardianship Proceedings
• Order to Show Cause
• Petition for Guardianship

The following individuals are to be served ALL documents filed in this proceeding:

• The AIP
• The AIP’s attorney
• The Court Evaluator

All other interested parties in this proceeding are limited in the documents they are to receive. They will receive a copy of the Notice of Article 81 Proceedings. They will not receive a copy of the Order to Show Cause or Petition for Guardianship as it may contain personal and confidential information. Remember, the AIP’s right to confidentiality needs to be protected. The AIP’s dignity needs to remain intact.

• Notice of Article 81 Guardianship Proceedings

The notice must contain basic information regarding the AIP, the petitioner and the time and place where the court proceedings will be held:

“1. The name and address of the alleged incapacitated person to whom the guardianship proceeding relates;

2. The name and address of the petitioner;

3. The names of all persons to be given notice of the proceeding;

4. The time when and the place where the order to show cause shall be heard;

5. The object of the proceeding and the relief sought in the petition;

6. The name, address and telephone number of the petitioner’s attorney.”

• Order to Show Cause

An Order to Show Cause is to accompany the Notice of Article 81 Guardianship Proceedings. The Order should contain:

“1. date, time, and place of the hearing of the petition;

2. a clear and easily readable statement of the rights of the person alleged to be incapacitated that are set forth in section 81.11 of this article;

3. the name, address, and telephone number of the person appointed as court evaluator pursuant to section 81.09 of this article;

4. the name, address, and telephone number of the attorney if one has been appointed for the person alleged to be incapacitated pursuant to section 81.10 of this article; and

5. a list of the powers which the guardian would have the authority to exercise on behalf of the person alleged to be incapacitated if the relief sought in the petition is granted.”

The type face for the Order to Show Cause is to be a size twelve font or larger. Also, the Order to Show Cause is to be doubled spaced. The Exhibits contain examples of these, and the website permits downloading of the materials in MS Word (.docx) format.

The court will affix the name of the Clerk of the Court, appointed Court Evaluator, return date of the proceeding, the date of the Preliminary Court office (to appoint a temporary guardian) on the Order to Show Cause.

Unless there is just cause, the hearing date is within 28 days from the signing of the Order to Show Cause. Of course this date has to be adjourned if there are problems with the timeliness of service of the relevant papers. The Court has to get jurisdiction over the person of the AIP.

Once issued, the Notice of Article 81 Guardianship Proceeding and Order to Show Cause are to be served on the AIP, attorneys and the Court Evaluator, the following individuals are entitled to Notice under Section 81.07(g):

• the AIP’s spouse, if any
• the AIP’s adult children, if any
• the AIP’s parents, if living
• the AIP’s siblings, if any
• any persons with whom the AIP resides
• the AIP’s power of attorney agent or health care proxy agent;
• if the AIP is receiving public assistance or protective services, the local Department of Community and Family Service;
• the Chief Executor Officer of the healthcare facility where the AIP resides; and
• the Mental Hygiene Legal Services of the judicial department if the AIP resides in a mental hygiene facility.

If the AIP does not have a spouse, adult children, parents or siblings, notice is to be given to the nearest next of kin who are known to the petitioner. Furthermore:

“(iii) any person or persons designated by the alleged incapacitated person with authority pursuant to sections 5-1501, 5-1505, and 5-1506 of the general obligations law, or sections two thousand nine hundred five and two thousand nine hundred eighty-one of the public health law, if known to the petitioner; and

(iv) if known to the petitioner, any person, whether or not a relative of the person alleged to be incapacitated, or organization that has demonstrated a genuine interest in promoting the best interests of the person alleged to be incapacitated such as by having a personal relationship with the person, regularly visiting the person, or regularly communicating with the person; and

(v) if it is known to the petitioner that the person alleged to be incapacitated receives public assistance or protective services under article nine-B of the social services law, the local department of social services; and

(vi) if the person alleged to be incapacitated resides in a facility, the chief executive officer in charge of the facility; and

(vii) if the person alleged to be incapacitated resides in a mental hygiene facility, the mental hygiene legal service of the judicial department in which the residence is located; and

(viii) such other persons as the court may direct based on the recommendation of the court evaluator in accordance with subparagraph (xvii) of paragraph five of subdivision (c) of section 81.09 of this article.”

A sample Notice of Article 81 Guardianship Proceedings and Order to Show Cause is attached as Exhibit “A.”

§ 81.08 Petition

The petition for guardianship should be as detailed as possible. (See sample Petition for Guardianship attached as Exhibit B.) The petitioner must be specific in the relief and powers requested. The statute provides the verified petition contain:

“1. the name, age, address, and telephone number of the person alleged to be incapacitated;

2. the name, address, and telephone number of the person or persons with whom the person alleged to be incapacitated resides, if any, and the name, address and telephone number of any persons that the petitioner intends to serve with the order to show cause and the nature of their relationship to the alleged incapacitated person;

3. a description of the alleged incapacitated person’s functional level including that person’s ability to manage the activities of daily living, behavior, and understanding and appreciation of the nature and consequences of any inability to manage the activities of daily living;

4. if powers are sought with respect to the personal needs of the alleged incapacitated person, specific factual allegations as to the personal actions or other actual occurrences involving the person alleged to be incapacitated which are claimed to demonstrate that the person is likely to suffer harm because he or she cannot adequately understand and appreciate the nature and consequences of his or her inability to provide for personal needs;

5. if powers are sought with respect to property management for the alleged incapacitated person, specific factual allegations as to the financial transactions or other actual occurrences involving the person alleged to be incapacitated which are claimed to demonstrate that the person is likely to suffer harm because he or she cannot adequately understand and appreciate the nature and consequences of his or her inability to provide for property management; if powers are sought to transfer a part of the alleged incapacitated person’s property or assets to or for the benefit of another person, including the petitioner or guardian, the petition shall include the information required by subdivision (b) of section 81.21 of this article;

6. the particular powers being sought and their relationship to the functional level and needs of the person alleged to be incapacitated;

7. the duration of the powers being sought;

8. the approximate value and description of the financial resources of the person alleged to be incapacitated and whether, to the best of the petitioner’s knowledge, the person is a recipient of public assistance;

9. the nature and amount of any claim, debt, or obligations of the person alleged to be incapacitated, to the best of the petitioner’s knowledge;

10. the names, addresses, and telephone numbers of presumptive distributees of the person alleged to be incapacitated as that term is defined in subdivision forty-two of section one hundred three of the surrogate’s court procedure act unless they are unknown and cannot be reasonably ascertained;

11. the name, address, and telephone number of the petitioner;

12. the name, address, and telephone number of the person or persons, if any, proposed as guardian and standby guardian, the relationship of the proposed guardian or standby guardian to the person alleged to be incapacitated, and the reasons why the proposed guardian or standby guardian is suitable to exercise the powers necessary to assist the person alleged to be incapacitated;

13. any relief sought pursuant to section 81.23 of this article;

14. the available resources, if any, that have been considered by the petitioner and the petitioner’s opinion as to their sufficiency and reliability;

15. any other information which in the petitioner’s opinion will assist the court evaluator in completing the investigation and report in accordance with section 81.09 of this article.”

Supporting documentation, such as medical records, are not required to be included as supporting documents unless the AIP has called attention to his or her his medical condition or has waived his or his rights to have this information included in court record. Despite this, I note that medical information is creeping into court papers and leaking out, which is the topic of some controversy for guardianship and patient privacy advocates.

As previously stated, the petitioner must be specific in the relief and powers requested. This includes, but is not limited to: a description of the AIP’s functionality, the powers sought, the duration of the power being sought and available resources of the AIP.

• Service of the Notice of Article 81 Guardianship Proceedings, Order to Show Cause and Petition for Guardianship on the AIP

Service on the AIP is via personal service not less than 14 days prior to the hearing date of the Order to Show Cause. If the AIP refuses to accept service or evades service, the Court can direct service of the Notice, Order to Show Cause and Petition using an alternative means.

• Service of the Notice of Article 81 Guardianship Proceedings, Order to Show Cause and Petition for Guardianship on the AIP’s attorney and the Court Evaluator

Service on the AIP’s attorney and Court Evaluator can be made via personal delivery, overnight mail or fax within three business days following the appointment of the court evaluator and the attorney appointed for the AIP.

• Service of the Notice of Proceedings and Order to Show Cause on other interested parties

Notice of the proceeding and the Order to Show Cause will be mailed within 14 days to the AIP’s spouse, the AIP’s adult children, the AIP’s parents, the AIP’s siblings and any persons with whom the AIP resides.

Notice of the proceedings will be mailed to the other parties within a time period as designated by the court.

• Affidavit of Service

The Court Evaluator will need copies of the Affidavit of Service of the Notice and Order to Show Cause. The Affidavit of Service is needed to prove jurisdiction and will be referenced in the Court Evaluator’s Report.

§ 81.23 Provisional remedies

• Temporary Guardian

If the AIP presents an imminent harm to himself or herself, or the AIP’s health, well being are in danger or there is fear of misappropriation of the AIP’s finances or property are on danger, the petitioner can request to be appointed temporary guardian by indicating so on the Order to Show Cause and the Petition for Guardianship.

The Court will conduct a hearing and may require a bond.

Additionally, under New York Mental Hygiene Law Section 81.10(c)5, if a Temporary Guardian is requested, the Court shall appoint an attorney for the AIP, if the AIP does not already have one.

§ 81.24 Notice of Pendency

If the AIP owns property that needs to be protected, the petitioner should file a Notice of Pendency. The Notice of Pendency should be filed prior to the judgment or when the Commission to Guardians is filed.

LIST OF EXHIBITS

Exhibit A

• A sample Notice of Article 81 Guardianship Proceedings and Order to Show Cause (PDF Format)
• A sample Notice of Article 81 Guardianship Proceedings and Order to Show Cause (MS Word Format)

Exhibit B

• A sample Petition for Guardianship (PDF Format)
•  A sample Petition for Guardianship (MS Word Format)

|| Read more

posted by Natalie Jackson on Uncategorized

TRUST AND ESTATE ACCOUNTING BASICS
FOR SURROGATE’S COURT PRACTICE♦

OUTLINE

ESTATE ACCOUNTING

A.  TYPES OF ACCOUNTINGS

1.  Informal (non-judicial) settlements. Why do them? To avoid the cost, expense and publicity of a judicial account.

a.  Receipt and Release Agreements, coupled with Indemnities and Waivers of Process:

Two approaches:

i. Receipt and Release Agreements with formal accounting schedules in judicial form. (See Receipt and Release in the John Case Estate attached as Exhibit 5A); and

ii. Receipt and Release Agreements with alternative financial reporting backup (e.g. copies of brokerage firm account for estate with cash management account showing receipts and disbursements, but no schedules). (See Receipt and Release in the Thomas A. Jackson Estate attached as Exhibit 5B.)

Q. Why does a Receipt and Release work, legally, to protect the accounting executor (or trustee) without a court proceeding?

A. Because it’s a binding contract, with consideration (the Executor’s willingness to accept a contractual settlement of his account in lieu of his right to a judicial settlement).

Considerations in using Receipts and Releases:

• There has to be sufficient disclosure to the releasing parties so that they can give up their rights to an accounting and their discharge of the Executor/Trustee is essentially an “informed consent.”
• It helps if all parties are adult and competent. If not, adult parties can agree to use their best efforts to get their minor children to sign when they reach age 18.
• Indemnities as a way around the need to get approval from minor or incapacitated beneficiaries.
• Who can indemnify? Typically an adult party – often a parent of a minor. Remember that an indemnity is only as good as the indemnitor. It helps here to have adult family members with financial “heft.” If you are trying to protect against a minor who will grow up to complain about the account, getting his/her parent to block for him/her by an indemnity is a good approach.
• Other considerations: What if you have a 16 year old residuary legatee of an estate? If you account judicially you have a guardian ad litem. If you can wait, you can account to an 18 year old in 2 years.

b.  Receipts, Releases and Waivers [SCPA § 2202]. An informal accounting can be filed as part of RRW.

c.   Affidavit of Completion of Estate Proceedings.

d.   Judicially approved informal accounting [SCPA § 2203].

2.  Formal accounting (Erica DeTraglia, Esq.)

a.  Voluntary [SCPA § 2208]

Voluntary doesn’t really mean “voluntary.” Fiduciaries have a duty to account and should not wait too long to do so. (Example of Trustee’s accounts for 50-80 year. Risk of loss of records.)

b.  Compulsory [SCPA §§2205/2206]

Highly useful as offensive weapon for aggrieved beneficiaries of estates and trusts to “smoke out” issues such as self-dealing, imprudence, incapacity, or failure timely to close estate administration. See Petition to Compel Account in Howard Jackson Estate attached as Exhibit 5C.

B.  ACCOUNTANT’S POINT OF VIEW (Tammy Kirshon, CPA, CVA)

1.   Decide What Resources To Use for  preparing the Accounting
2.   Obtaining Necessary Information and Organizing Documents
3.   Perform Due Diligence
4.   Techniques for Requesting Documents

C.  THE ACCOUNTING (Panel)

1.  Petition, Citation and Waivers. Use official forms as guideline. All forms can be found at: www.nycourts.gov

a.  Are all interested parties accounted for in the petition?

i.   Minor beneficiary(ies)?

ii.  Has any beneficiary died?

iii.  Whereabouts of the beneficiary are now unknown?

iv.    Has any beneficiary become incapacitated?

b.  Is the fiduciary’s appointment still active?

c.  Have any claims been filed against the Estate/Trust?

d.  Will all bequests be satisfied?

e.  Is the Attorney General Charties Bureau required to be cited?

2.  Review Will or Trust Instrument

3.  The Schedules

a.      Schedule A          Principal Received

b.      Schedule A-1      Realized Increases

c.      Schedule A-2      Income Collected

d.     Schedule B          Realized Decreases

e.     Schedule C           Funeral and Administration expenses and taxes; Funeral and Administration expenses and taxes charged to principal

f.       Schedule C-1      Unpaid Administration Expenses

g.      Schedule C-2      Administration expenses chargeable to income

h.      Schedule D        Creditor’s Claims

i.      Schedule E          Distributions of Principal; Distributions Made (Receipt, Release and Waivers must be filed)

j.       Schedule E-1    Distributions of Income

k.      Schedule F        New Investments, Exchanges and Stock Distributions

m.     Schedule G       Principal Remaining on Hand; Personal Property Remaining in Hand

n.      Schedule G-1    Income Remaining on Hand

o.      Schedule H       Interested parties and proposed Distribution

p.      Schedule I        Computation of Commissions [SCPA § 2307]

   (i)     Executor’s commissions [SCPA § 2307]

   (ii)    Trustee’s commissions [SCPA § 2308 and 2309]

q.     Schedule J       Other Pertinent Facts and Cash Reconciliation

r.     Schedule K      Estate Taxes Paid and Allocation of Estate taxes

ATTORNEY’S FEES AND ATTORNEY-FIDUCIARY (Vincent Teahan, Esq.)

A.  REVIEW LEGAL FEES REQUESTED

• An Attorney Affirmation of Legal Services is required for the Court’s consideration in all accounting proceedings.

• Must institute proceeding [SCPA § 2110]

1.   Must include affidavits of legal services [22 NYCRR§ 207.45]

2.   Elements for consideration. [Matter of Potts, 241 NY 593; Matter of Freeman, 34 NY2d 1]

3.   May be disallowed for failure to file a report of estates not fully distributed. [22 NYCRR § 207.42]

4.   Some disbursements may be disallowed as being attributable to “office overhead.”

5.   See Affirmation of Legal Services in the Dorothy Decedent Estate, attached as Exhibit 6.

B.  ATTORNEY-FIDUCIARY [SCPA §2307-A & 22NYCRR §207.16(E)]

1.  An attorney-fiduciary should file an Affirmation of Legal Services (w/ copy of retainer if engaged other counsel).

2.  Disclosure.

i.  207.16(e). If a person requesting letters to administer an estate as sole executor or administrator is also an attorney admitted in this State, he or she shall file with the petition requesting letters a statement disclosing:

(a)  that the fiduciary is an attorney;

(b)  whether the fiduciary or the law firm with which he or she is affiliated will act as counsel; and

(c)  if applicable, that the fiduciary was the draftsperson of a will offered for probate with respect to that estate.

ii.   SCPA 2307-a. When an attorney prepares a will to be proved in the courts of this state and such attorney, a then affiliated attorney, or an employee of such attorney or a then affiliated attorney is therein an executor-designee, the testator shall be informed prior to the execution of the will that:

(a)  subject to limited statutory exceptions, any person, including the testator’s spouse, child, friend or associate, or an attorney, is eligible to serve as an executor;

(b)  absent an agreement to the contrary, any person, including an attorney, who serves as an executor is entitled to receive an executor’s statutory commissions;

(c)   absent execution of a disclosure acknowledgment, the attorney who prepared the will, a then affiliated attorney, or an employee of such attorney or a then affiliated attorney, who serves as an executor shall be entitled to one-half the commissions he or she would otherwise be entitled to receive; and

(d)   if such attorney or an affiliated attorney renders legal services in connection with the executor’s official duties, such attorney or a then affiliated attorney is entitled to receive just and reasonable compensation for such legal services, in addition to the executor’s statutory commissions.

posted by Natalie Jackson on Uncategorized

Dutchess County Bar Association
Guardian Ad Litem Training Program
April 27, 2016

ACCOUNTING PROCEEDINGS⇒

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.

10 THINGS A GUARDIAN SHOULD FIRST CHECK IN AN ACCOUNTING

1.   Jurisdiction

Has jurisdiction been obtained over all necessary parties (by citation or waiver and consent)? Were citations served within the time limits of SCPA 307 (10 or 20 or 30 days)? Were parents of minors served? Were infants 14 or older also served? Is required information about minors set forth in petition?

2.  The Will

Does the accounting party have it right? Are all bequests properly shown in the schedules? Are the necessary people cited? Does the will contain any special fiduciary powers or authorizations? Read the whole will and not just dispositive provisions?

3.  Numbers

Do numbers in Summary Statement match up with number totals in Schedules? Do numbers on the Summary Statement add up correctly? Do numbers in Schedules add up correctly? Is the cash reconciliation accurate? Zero sum: is every asset shown as received (e.g., Sch. A or A-1 [principal or income received] or F [new investment] shown as disposed of [Sch. A-1 or B-1] or on hand [G or G-1]?

4.  Losses on Investments (Realized or Unrealized)

As a general rule of thumb, if there is a loss of 25% or more on an investment, a GAL should make inquiry as to the circumstances, and report on the results of that inquiry.

5.  Proper Format

For estate accountings there are different formats for Estates without Trusts (Form JA-7) and Trusts and Estates (Form JA-4).

6.  Family Tree

Required if (i) there are no distributees, (ii) only one distributee, or (iii) “where the relationship to the decedent is grandparents, aunts, uncles, first cousins or first cousins once removed” (Uniform Rule 207.16). This becomes relevant for accountings for administrators of intestate estates.

7.  Due Diligence

Uniform Rule 207.16(d) requires that a petitioner exercise “due diligence” to find missing distributees. In some cases, the citation must be addressed to “unknown distributees” and the citation must be published. This becomes relevant for accountings for administrators of intestate estates.

8.  Proposed Schedule of Distributions

Does it accurately set forth the way the assets should be distributed?

9.  Commission Calculations

Are they accurate? E.g., are specific bequests and non-probate assets excluded from estate commissions? Are estate commissions properly separately applied to receiving and to paying? Are computations of interim annual commissions for trusts included?

10.  Debts and Expenses

As a general rule, debts and expenses are the source of a majority of the problems with an accounting. Principal and income charges: are they accurate (e.g., trust annual commissions 2/3 to principal and 1/3 to income)? Are debts and expenses on the correct schedules? Are expenses proper (e.g., are payments shown for cable TV for years after death? Are there beauty parlor expenses as debts of a male decedent? Do professional fees (e.g., legal and accounting) look appropriate? Should affidavits of services be required?

EXHIBITS

Exhibit A

• 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

To download a complete copy of the 2016 Guardian ad Litem Training Program – Accounting Proceedings outline and exhibits, please click here.

posted by Natalie Jackson on Uncategorized

THE CRITICAL YEAR

A Guide to Tax and Legal Planning For Persons Immediately Before Death and Shortly Thereafter♦

The period immediately before and shortly after a client’s death is crucially important for the client, the client’s family, and his or her professional advisors. Not much planning can be done (other than advanced planning) when a client’s death is sudden or unexpected. Increasingly, though, the progress of modern medicine has produced an extended twilight for many clients, and as a result, there is a longer period for planning – – often under stressful circumstances.

Though the client’s personal circumstances can be difficult, the planner, whether lawyer or other tax professional, can play a useful role for clients and their families here. Many opportunities present themselves for planners to unlock tax and other economic benefits during this period. Also, after the client has died, it is important to get the administration of client’s estate or now irrevocable trust off to a good start. There is enough trouble in the client’s family without having to worry about how the money is going to come in and go out or where the records are kept.

The purpose of this presentation is to give you, as tax professionals, a closer idea of what can be done during this critical period. We’ll touch on legal matters – – what I do – – but in a way that will involve numbers and tax approaches – – what you do – – so we can work more efficiently together. Where relevant, I will show you the legal papers behind some of the tax-driven measures connected with deathbed planning and estate administration, because law and tax are interrelated: tax and probate law drive the numbers, but the numbers also drive legal approaches that we undertake on behalf of our clients. I note at the outset that while I base my observations on nearly 40 years of law practice in the estates area, the materials in this outline aren’t meant to be exhaustive. You know tricks that I don’t know, and I’ll be interested in learning about them. That is why we are here.

In this presentation I’m going to handle things in three stages:

1. ADVANCE PLANNING meaning steps we can take with our clients – – possibly years in advance – – to get ready for end-game planning.
2. DEATH BED PLANNING meaning planning during the three-month period before death, which, while an arbitrary measure of time, could give planners and their clients an opportunity to rearrange matters in an advantageous way for the client’s family. Sometimes, of course, we will have only a month or less in which to help here.
3. POST-DEATH PLANNING for the first nine months of estate or (formerly) revocable trust administration. While I use the nine-month period to round out the “critical year,” my choice of nine months isn’t entirely arbitrary, as this is the ordinary due date for the filing of estate tax returns.

Now to look at these subjects more closely:

1.  ADVANCE PLANNING

Especially when clients get older, we should have a number of potential steps planned out in advance so that they don’t have to be taken on a rush basis. Also, it is a good way for us to work together productively for the sake of the client and his/her family. The reason why working together makes sense is that (for example) the lawyers might think that they is doing the best for the client, but acting on only partial information, which can only be provided the client’s tax professionals. We lawyers can be good at setting up legal structures, entities and providing the words of plans, but we do not often have access to the “music” of the client – the hard information that tax professionals know from their year-to year, if not day-to-day fingertip command of the client’s financial information (e.g., tax basis information). Zeroing in on some of these advance areas, let’s consider the following:

Power of Attorney/Statutory Gifts Riders
Clients, especially ones of substantial means, should give a trusted person or persons a power of attorney (POA). I view this as a mandatory step, because unpleasant and inefficient things happen in New York (in the form of an Article 81 proceeding to appoint a guardian under the Mental Hygiene Act) without a power of attorney – – if a client is incapacitated and unable to act on his own.

Let’s take a closer look at the New York statutory power of attorney carried below:

Changes to the New York General Obligations Law governing powers of attorney, enacted in 2001, allow a persons to supplement powers of attorney with a statutory gifts rider (SGR). With an SGR, the client’s agent can make annual exclusion gifts under the Internal Revenue Code — or even larger gifts – – especially where the client has become incapacitated. The agent can also be empowered to engage in a broader range of estate planning moves, including the creation and funding of revocable and irrevocable trusts.

POAs/SGRs work best if there is a pre-arranged plan for how to use them. So we have to consider what assets belonging to the client might be transferred for tax advantage, and how, mechanically, these transfers can be effected. It helps if the attorney and tax professional (and also possibly the investment advisor) can identify and possibly even segregate assets and accounts that would be the subject to future death bed gifts and have the agent, under the POA/SGR, primed to take action.

Of course, as part of planning for any end-game, we need to review the client’s estate plan, and gauge the client’s (or the agent’s) interest in carrying out tax planning – – the sooner the better. And our planning has to be in keeping with the client’s own personal, family and charitable objectives. After all, tax planning of the sort we are discussing isn’t the sole objective of estate planning, it’s just an aid to getting things done efficiently and economically, to accomplish the client’s goals. We have to pay at least periodic attention to the client’s plans, perhaps a lot more frequently than we do with clients who are 50, largely so that everyone can try to handle final planning well in advance. The more we help the client do sooner is the less we have to rush when the client’s time is short.

2.  DEATH BED OR 3 MONTH PLANNING

Let’s say that the client’s matters have not been planned in advance, and we are faced with a client is likely to die over a short period. We only have a few months or weeks to help the client and client’s family to make things easier and more efficient after the client’s death. And we will not just be called on to assist in bloodless, technical planning matters. We will by necessity have close, personal dealings with clients and their families under the most difficult circumstances, which we will have to handle with decency and humanity and a maximum respect for the client’s dignity – all while getting our technical job done. This is hard work. In some sense, the technical stuff of this presentation is the easy part.

A.  Review of Client’s Estate and Financial Plan

We should find out where the client’s original Will (or trust document) is kept and review a copy of all relevant papers. We have to check these instruments for “reality” – in terms of whether the legal document actually operates on the assets in question. For example, the creation of a testamentary trust won’t mean much if all of the client’s assets are held in a transfer on death account, and will pass automatically to named persons on the client’s death. If a power of attorney doesn’t turn up (and with it, a statutory gifts rider), we may have to take steps to help the client execute these instruments and to get them recognized by financial institutions, especially if the client immediately needs an agent to help him manage his affairs. In this connection, I note that while Powers of Attorney properly executed before 2010 under the “old” law can still be valid, these powers by definition cannot enable a SGR. So the client may have to execute and updated POA/SGR.

Once we have gotten the relevant estate planning instrument in hand, and are familiar with the client’s personal assets, we have to think about some of the matters listed below as potentially useful ways to use the tax laws to benefit the client.

B.  Estate Tax Considerations

Unless the client has more than $5,250,000 in taxable assets ($10,500,000 for married clients), dealing with the federal estate tax has largely been removed as a planning imperative, thanks to the American Taxpayer Relief Act of 2012 (ironically but perhaps fittingly enacted in 2013). And unless Congress takes back this exemption, there is going to be an inflation adjuster that keeps boosting the federal estate tax exemption on an annual basis. (Do I think that the exemption will be rolled back? Not likely, but I do think there will be a backdoor attempt to boost tax by limiting the amount of step-up in basis at a client’s death, and this will show up within the next few years.)

C.  Other Tax-Related Measures

(i)  Charitable Dispositions

If a client’s plan contains charitable bequests, think about the following measures:

(a) Use IRAs, and not Will or trust bequests, to make charitable bequests. The charities involved won’t pay income taxes on them, as opposed to individual beneficiaries. Take, for example, the client whose Will leaves $100,000 to charity and the balance of his estate to his son and daughter. If the client has an IRA, he should strike the bequest to charity from the Will, and instead designate the charity as beneficiary to receive the first $100,000 of IRA proceeds. Under this approach, an added $100,000 will pass to the son and daughter ($50,000 each) on an income tax paid basis instead of getting IRD. The charity getting the IRA isn’t affected by the income tax.

(b) Consider the case of a client whose estate will not be subject to federal estate tax, and who wants to make charitable bequests. If he has spouse (or children) who will likely survive and who can be trusted to honor the client’s wishes, think about restructuring the client’s will or trust plan to leave the spouse/children the bequest originally bequeathed to charity, while indicating that the legatees are encouraged (morally bound) to use the bequest to make charitable gifts. Such a provision must of course not be legally binding.

Why is this a good idea? Because quite frequently, where a client is survived by a spouse, charitable bequests produce no or little estate tax savings – – there’s either no Federal estate tax, or at worst New York estate taxes levied at fairly low marginal rates. By contrast, a charitable income tax deduction is worth obtaining for the client’s surviving spouse or children. Their gift of their bequest from the client produces far better after-tax results than if the client simply names a charity to take a bequest in her will. Consider the following smart charitable bequest.

(c ) Where the client can’t make use of an IRA (or similar plan) beneficiary designation, he or she should try to use pre-residuary dollar bequests in Wills and trusts to “cash out” charities. If possible, the client should avoid residuary or balance-of-trust dispositions (especially of small percentages), because the New York State Attorney General’s office necessarily become a party to the settlement of the account of the client’s executor and trustee where there is a residuary bequest. To get around this, encourage the client to leave a pecuniary (fixed dollar denominated) bequest to charity instead. It’s much simpler. As an example of what not to do, consider this:  Article Five: Distributions after Death of Settlor.

(ii)  Securing a basis step-up

While some might find this ghoulish, gifts of highly appreciated property made to a person in poor health can produce big tax benefits. The reason for this, of course, is the step up in basis available under Section 1014 of the Internal Revenue Code for property passing through the taxable estate of a decedent. While Section 1014(e) of the Code denies a basis step up for property that is bequeathed back to the property’s donor within one year of the original gift, one can fairly easily avoid this trap if the donee bequeaths the property to non-charitable legatee who is not the original donor. Also, a bequest to a discretionary “sprinkle” trust for the original donor and other beneficiaries may work in avoiding the application of 1014(e), even if the donee’s death occurs within the year.

What sort of client can benefit from this type of planning? Consider a gravely ill client, who jointly owns her principal residence, with her husband. In this case, it’s a Manhattan co-op with a tax basis of $200,000 and current market value of $4,000,000. If the client’s husband survives her, and owns the property as a surviving joint tenant, his capital gains exclusion ($250,000), plus the step-up in basis to the property of $2,000,000 by reason of his wife’s death, will not provide a shelter from capital gains tax on a sale after the predeceasing wife’s death.

For an excellent discussion of section 1014(e) avoidance, see Mancini and Harris, “The Rest of the Story: Income Tax Issues Related to Transfer Tax Planning with Grantor and Non-Grantor Trusts” (pp 6-8)

(iii) Gifts to Reduce New York Estate Tax

New York clients holding significant wealth –- meaning ideally a federal taxable estate – – would do well to make lifetime gifts of cash or non-appreciated assets, especially if they are terminally ill and no longer need the assets for their support. Ideally, these gifts should sop up anything that remains of the client’s $5,250,000 in gift and estate tax exemption. New York of course has no gift tax, so its limited $1,000,000 exemption is irrelevant.

Take for example the agent who acted in 2012 under a statutory gifts rider and made a $4 million gift for a gravely ill person with $20 million in assets. The client was 100 years old and in poor health. Many of his assets were cash or cash equivalents (this is an important factor).

The additional $4 million death bed gift, while an “adjusted taxable gift” for federal estate tax purposes, did not enter into the calculation of New York estate tax after the donor’s death. The estate therefore realized sizable New York estate tax savings between a $16 million taxable estate (plus $4 million in adjusted taxable gifts) and a $20 million taxable estate (had no gifts been made):

A.  $20 million taxable estate (no deathbed gift)

$4,274,620    Federal estate taxes due
$2,666,800    NYS estate taxes due
$6,941,420 Total

B.  $16 million taxable estate with $4M in deathbed gift

$4,498,620    Federal estate taxes due
$2,026,800    NYS estate taxes due
$6,525,400 Total

Total savings produced by deathbed gift (A – B):

$416,000

Questions:

• Why does Federal estate tax increase, and New York estate tax decrease (though there is net savings) through deathbed gifts?
• Why should the deathbed gift approach only be used for cash or non-appreciated assets?

3.  POST-DEATH PLANNING

It’s most important to get things going shortly after the decedent’s death, both for family psychological reasons (the survivors don’t need financial confusion to add to their feelings of grief over the loss of their loved one) and financial reasons (drift and indecision are dangerous – and a decedent’s assets accounts are often frozen upon his death). Attorneys for the estate (or a trust that became irrevocable upon the client’s death) and the tax professional involved with the estate/trust administration should work quickly, and together, to help deal with this situation.

If the deceased client had concentrated holdings of highly appreciated assets (which she could not sell during life because of the lock-in effect), the executor has to act fast
to free up these assets, so they can be sold (finally!) at no capital gains cost. I cannot overemphasize the importance of diversification and asset protection here.

I’ve been asked to give you a summary of the probate process, from a legal standpoint, and a glimpse at legal papers that are frequently relevant. So here one is, with a timeline for both “legal” and “tax” steps we need to coordinate:

LEGAL MATTERS (for us laywers)

During the First Month After Death:

• Take the Will to Surrogate’s Court for Probate, and if the Petition cannot be quickly granted, because of delays in serving citation upon nearest family members, get “preliminary letters testamentary”, which will allow the administration of the estate to go forward.
• Here are some probate papers, including an interesting “Affidavit of Heirship” that may be necessary if the client has a small family.
• Prepare table of assets and cash requirements for estate, including tax projections.

Four Months After Death:

• See Waiver of Commissions

Six or Seven Months After Death:

• Petition for Advance Payment of Executor’s Commission to split receipt of commission into more than one year.
• This proceeding often not and entertained until the end of the year. Calendar filing on November 1st at latest.
• Make sure that Order is followed and that executors are actually paid before the end of the year.
• Executors can only get partial commissions with leave of court. Here are specimen court papers.
• File estate inventory in Surrogate’s Court within six months♦ of letters testamentary or preliminary letters, whichever is earlier. This period may be extended if estate tax returns are to be filed – which will be likely in many cases.
• Here is the statutory Inventory of Assets.
• Surviving spouse’s right of election must be filed within six months of issuance of plenary (not preliminary) letters to executor or administrator.
• Pay cash legacies against Receipt/Refunding agreements (unless there is insufficient cash to pay estate taxes and administration expenses).

Nine Months After Date of Death:

• Prepare and file Renunciation and Disclaimer Surrogate’s Court within nine months of decedent’s death and obtain stamped receipt.
• Here are Renunciation and Disclaimer court papers.

TAX MATTERS (For tax professionals)

During the First Month After Death:

• Consider estimated tax payments for surviving spouse. Find out whether surviving spouse is US citizen and obtain proof of same.
• File notice of fiduciary relationship, IRS Form 56.
• Obtain taxpayer identification number through IRS Form SS-4.
• Get the attorney and tax Professional on Federal and New York State income and Estate tax powers of attorney (Form 2848 and Form ET-14).

Four Months After Death:

• Consider whether the estate should be on fiscal year or calendar year. Strategic choice of fiscal year. 645 Election.
• Consider execution of waiver of commissions by executor.

Six to Seven Months After Death:

• Computation of commissions. Prepare to send Form 1099 to Executor who has taken advance.
• Consider extension of time to File Federal return (Form 4768).
• Consider deferred payment of Estate tax because of closely held business assets under Section 6166 (Federal and State).
• Consider extension of time for filing/payment federal estate Tax (Form 4768).
• Consider additional time for filing/Payment of New York estate tax Return(Form ET-133).
• Consider use of alternate valuation date under Section 2032 (up to six months after date of death if aggregate estate values are lowered and estate tax can be reduced thereby).
• Consider Disclaimers/Renunciations under IRC Section 2518 and New York EPTL 2-1.11. Do legatees really need their legacies? Is there strategic gift tax purpose to disclaiming legacies?

Nine Months After Date of Death

• File estate tax returns (Federal and state) make tax payments or otherwise obtain extensions.

posted by Natalie Jackson on Uncategorized

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

Exhibit A

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

********************************************************************************************************************

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.

posted by Natalie Jackson on Uncategorized

Last month, Governor Cuomo proposed certain important tax changes in his 2014 budget.  You may find the one dealing with  gift tax (described immediately below) to be of interest, in which case you may wish to consider prompt action to deal with it.

Re-institution of Indirect Gift Tax:  The most important proposed change concerns inclusion of lifetime gifts made after March 31, 2014, by New York resident decedents in the New York estate tax base.  This amounts to a indirect re-institution of the New York gift tax, which had been abolished in years after 1999.

The Governor’s proposal, if it became law, would undo a favored planning strategy of ours for older clients who own a large amount of surplus cash or bonds which they do not need for their support.  Currently, gifts of up to $5,340,000 may be sheltered under the Federal gift and estate tax exemption and are not, as stated above, subject to New York estate tax.  A New York taxpayer who makes large lifetime gifts can therefore avoid New York estate tax by a program of taxable gifts  – – even ones made shortly before death.   Savings here can be significant: a gift of $2,500,000 can save roughly $250,000 in eventual New York estate tax.

Persons who own appreciated assets (say Apple stock bought in 1999) will not generally want to make gifts of such property because the loss of a tax basis step-up available for assets held at death (i.e., not given away during life) will cancel out any New York estate tax savings.

Changes to New York estate tax:  The Governor proposed gradually to increase the New York estate tax exemption  to $5,250,000 and to index the exemption for inflation.  Additionally, the New York estate tax rate would drop from its current maximum of 16 percent to 10 percent over the next 3 years.

Comments: Possible actions:   We have to let you know about the March 31 deadline for large gifts, even if it’s impossible to predict whether the Governor can cause his proposal to be enacted.  There is also a chance that any changes to estate taxes in New York will take a form much different from the one proposed.    We regret having to write this letter to you, because of the risk of a “false alarm,” but given the size of potential New York estate tax savings, we are constrained to do so.

Please feel free  to get in touch with us if you have any question about this memorandum.

Thank you.