Pennsylvania Fiduciary Litigation

Federal Jurisdiction - Probate Exception

Patti Spencer — Wed, 24 Apr 2013 13:29:57 -0500

Recommended reading: Stripping Away the Mystery of the Probate Exception By John T. Brooks and Samantha E. Weissbluth

Federal court can hear breach of fiduciary duty claim against trustees.

We looked at this issue before in our post Make a Federal Case Out of It.

Midwest City estate planner sentenced to 10 years in prison for role in Ponzi scheme

Patti Spencer — Thu, 28 Mar 2013 11:54:28 -0500

I always say 99% of the lawyers give the rest of us a bad name.

Brianna Bailey writes for News OK:

"A federal judge has sentenced a Midwest City man who conned seniors out of their savings to serve nearly 10 years in prison and pay $4.6 million in restitution for his role in the Ponzi scheme.

Joe Don Johnson, 43, was an estate planner who drew up wills for his elder clients. He would convince the seniors to invest their life savings with the now-defunct Oklahoma City-based company Global West Funding Ltd., operated by Brian McKye.

Johnson promised his clients returns as high as 20 percent, but the bulk of the money went to pay off earlier investors, commissions to Johnson and other salesmen, as well as McKye's personal expenses, according to court documents."

Read rest of storyhere.

The Continuing Problem of Cy Pres

Patti Spencer — Sun, 17 Feb 2013 17:47:56 -0500

Thank you to WIlls, Trusts and Estates Prof Blog for the post regarding Fisk University, Cy Pres and Georgia O'Keefe's Art Collection.

Melanie B. Leslie (Professor of Law, Benjamin N. Cardozo School of Law) recently published her article entitled Time to sever the dead hand: Fisk University and the cost of the cy pres doctrine, 31 Cardozo Arts & Ent. L.J. 1-18 (2012). The introduction to the article is available below:

In 1949, painter Georgia O'Keeffe donated 101 valuable paintings and photographs to Fisk University, a prominent and historically important African-American university in Nashville, Tennessee. The donated art was part of a larger collection amassed by her late husband, Alfred Stieglitz, a prominent artist and collector.  Stieglitz's will gave O'Keeffe a life estate in his collection, which included works by Picasso, Cezanne, Renoir, Toulouse-Lautrec, O'Keeffe, Demuth, Hartley, Dove and Walkowitz.  Stieglitz's will also gave O'Keeffe the discretion to distribute the collection to nonprofit organizations of her choosing for the purpose of ensuring public access to the paintings to promote the study of art.  At O'Keeffe's death, any pieces in his collection that she had not donated were to be distributed to nonprofit organizations "under such arrangements as will assure to the public ... access thereto to promote the study of art."

O'Keeffe divided Stieglitz's collection among six institutions: the Metropolitan Museum of Art, the Philadelphia Museum of Art, the National Gallery of Art in Washington, the Art Institute of Chicago, the Library of Congress, and Fisk University.  The donation to Fisk, a small university with no museum experience, was unusual. In choosing Fisk, O'Keeffe was making a strong social statement - the South was racially segregated at that time, and O'Keeffe wanted to ensure that the art would be displayed in a place that welcomed both black and white members of the public.

But although she wanted to benefit Fisk, O'Keeffe - like many donors before and after - could not bring herself to relinquish complete control to the donee. Instead, she imposed a series of restrictions designed to ensure both the proper display and care of the art work and the creation of a perpetual memorial to Alfred Stieglitz. To achieve those ends, O'Keeffe stipulated in a series of letters to Fisk's President that the donated art must always be displayed together as one collection titled the Alfred Stieglitz Collection ("the Collection"), and that Fisk could never sell any piece in the Collection.  She also required that the Collection be housed in as safe a building as possible and kept under surveillance at all times when the room was not locked.  O'Keeffe severely limited the University's ability to loan the artwork, directed that no other art work could be shown in the same room as the Collection without her consent, prohibited the removal or change of any mounting or matting of photographs, and required that the walls of the room where the Collection was displayed be painted white or some other very light color chosen by O'Keeffe. Several years later, O'Keeffe donated four paintings from her own collection, including one of her own paintings, Radiator Building - Night, New York ("Radiator Building"), to Fisk, with the stipulation that the paintings be added to the Collection.

O'Keeffe appears to have given little, if any, consideration to the impact the perpetual restrictions might have decades down the line. Like many donors who make restricted gifts, she failed to imagine how life might change in the years following her death. For example, she does not appear to have contemplated that Fisk might cease to exist; that the University might one day lack funds to maintain the Collection; that the matting on the photographs might deteriorate; or that she might not be around to approve the paint color of the walls. She gave no guidance as to how Fisk should respond to changed circumstances or as to which of her objectives - benefitting Fisk, creating a perpetual memorial in honor of Stieglitz, keeping the Collection together, prohibiting sale of the Collection, and ensuring the Collection remained in the South - should be given priority in the event that changed circumstances should cause them to come into conflict.

What happened sixty years later was predictable - changed circumstances, unforeseen by O'Keeffe, rendered it impossible for Fisk to comply with all of the restrictions. Fisk was on the brink of insolvency, and had to choose whether to close the University and relinquish the Collection, or find a way to replenish its endowment and properly care for the Collection.  Fisk decided to sell two paintings - including Radiator Building. The Tennessee Attorney General approved of the sale, subject to certain conditions, and Fisk, seeking court approval, filed an action for a declaratory judgment.  The O'Keeffe Museum of Santa Fe, New Mexico ("the Museum"), and later, the Attorney General of Tennessee, intervened to enforce the sale prohibition.  After six years of litigation and two appeals, a chancery court granted Fisk permission to sell a fifty percent interest in the Collection to the Crystal Bridges Museum in Arkansas for thirty million dollars. The deal allows Fisk to exhibit the Collection six months of every year.  The payment of thirty million dollars will ensure both that Fisk will survive and that it will be able to afford to properly care for and exhibit the artwork.

Why did resolution of this conflict require six years of litigation and the expenditure of enormous amounts of charitable and public dollars? The blame lies with the law itself: the centuries-old doctrine of cy pres, which requires courts to determine how the donor would have responded to the changed circumstances, combined with the law's lack of clarity about who has standing to speak for the donor, practically guarantee that years of litigation will ensue when a charity finds itself unable to comply with a gift restriction. In the Fisk case, the law's fuzziness allowed the Museum - an unrelated third party - to make a grab for the Collection under the guise of effectuating donor's intent. The fact-specific cy pres standard also enabled the Tennessee Attorney General to make it extraordinarily difficult for Fisk to craft a solution involving entities located outside the state of Tennessee.  Although the court ultimately approved Fisk's contract with the Crystal Bridges Museum, that approval came at an extraordinarily high cost.

The doctrine of cy pres holds that donor's intent is of paramount value. Courts must therefore prioritize effectuation of intent over other concerns, such as donees' present needs or the inefficient use of charitable dollars.  This preoccupation with perpetual enforcement of donor intent is justified as necessary to encourage charitable bequests and protect donors' property rights.  Yet what the law giveth, it taketh away: the law's commitment to donor intent stops short at granting to donors standing to enforce the restrictions they create.  Instead, enforcement power is given to the attorneys general of each state.

The Fisk litigation is just one of several recent epic battles over restricted charitable gifts and changed circumstances, but it is important because it neatly illustrates the problems that the law creates and highlights the need for legal reform. After elaborating on this point, I examine the Uniform Trust Code ("UTC"), which changes cy pres law in significant ways. I show how application of certain UTC provisions to the Fisk case would have reduced the length of the litigation and the corresponding waste of charitable assets, to some degree. I then argue that further reforms are necessary. I suggest that perhaps the time has come to consider limiting the duration of restrictions on charitable gifts. To offset any chilling effect that such a time limit might have on charitable giving, we might allow donors and their heirs to enforce restrictions during the period of enforceability.

Father's Will Dictates Sham Marriage

Patti Spencer — Wed, 26 Dec 2012 14:27:55 -0500

This from Samantha E. Weissbluth writing for Wealth Management:

Gay son must marry woman to get inheritance

In a recent New York case, a father, in his will, dictated that his gay son’s child get nothing unless his son married the child’s mother. Manhattan resident Frank Mandelbaum founded the ID verification company, Inteli-Check, and passed away in 2007 at the age of 73. His son, Robert, a Manhattan Criminal Court Judge, is now arguing in a court battle that his longtime partner, Jonathan, is the only “mother” their infant, Cooper, has ever known. Robert and Jonathan married shortly after the baby’s birth via surrogate. The child is entitled to a share in a $180,000 trust established for Frank’s three grandchildren.

The Manhattan Surrogate’s Court is pondering whether to approve a settlement to ignore Frank’s requirement as contrary to New York law. Robert claims that Frank’s restriction “imposes a general restraint on marriage by compelling Robert Mandelbaum to enter into a sham marriage.” He alleges that this violates state law supporting marriage equality. The guardian ad litem appointed for Cooper agrees and stated “Requiring a gay man to marry a woman…to ensure his child’s bequest is tantamount to expecting him either to live in celibacy or to engage in extramarital activity with another man, and is therefore contrary to public policy.”

Frank’s wife is contesting Robert’s allegations claiming that Frank’s will “specifically prohibited [Cooper] from becoming a beneficiary. Robert counters that Frank knew Robert was gay and his partner was welcomed at family gatherings.

Given New York’s passage of the Marriage Equality Act, in July of 2011, I think the odds are in Robert’s favor, but stay tuned!

Brooke Astor's Son Tries to Get out of Prison Sentence

Patti Spencer — Tue, 18 Dec 2012 20:43:14 -0500

In May 2012, we wrote about the final settlement of Brooke Astor's Estate. Her son, Anthony Marshall, was sentenced in December 2009 to one to three years in prison. He was convicted of 13 felonies and one misdemeanor.

Now - that would be December 2012 - 3 years after the sentencing, his lawyer is arguing he shouldn't have to go to prison.

So after 3 years he's still not in jail. I guess there really are different laws for the rich.

Stephen Rex Brown writing for The Daily News:

"THE DISGRACED son of Brooke Astor pleaded for mercy in appeals court Thursday, arguing he didn’t deserve to die behind bars.

Anthony Marshall, who was convicted in 2009 of taking advantage of his mother’s dementia and plundering millions from her $200 million fortune, watched from a wheelchair as his lawyers argued prison amounted to a death sentence.

Lawyer John Cuti noted Marshall, 88, suffered a ministroke during his trial and had already paid back $12 million.

“You want to send this man to prison, after he’s already paid back the money, so he can die there?” Cuti asked.

Prosecutors countered Marshall should serve his sentence of one to three years as a sign the state will stick up for the mentally fragile.

“Society will understand (when) we defend our most vulnerable citizens,” prosecutor Gina Mignola said. “This was a very long and concerted effort to loot his mother’s estate.”

Astor, the grande dame of New York society, died in 2007 at 105.

A ruling is expected next year."

Rauschenberg's "Canyon" now belongs to MoMA

Patti Spencer — Mon, 03 Dec 2012 10:18:00 -0500

A couple of months ago we wrote about the IRS' s ridiculous position on the estate tax value of this piece of art featuring an "illegal eagle."

The case has been setlled - finally. A charitable contribution was made to the Museum of Modern Art where it joins others of its ilk. It spent the last few decades on loan at the Metropllitan Museum of Art.

Eric Gibson writes fo the Wall Street Journal:

"On Wednesday last week, New York's Museum of Modern Art unveiled its most recent gift, and one of the most significant in its history: Robert Rauschenberg's "Canyon" (1959). Rauschenberg was among the leading American artists of the post-World War II era, and "Canyon" is a "combine," a kind of large-scale, three-dimensional collage that includes photographs, pieces of wood, a mirror, a pillow and a stuffed bald eagle.

The arrival of "Canyon" at MoMA is the culmination of a five-year absurdist farce—one tinged more by Kafka than Feydeau—that involved the IRS, the U.S. Fish and Wildlife Service and the heirs of art dealer Ileana Sonnabend. It might have been laughable, except that the stakes were so high. "

Read the rest of his article.

P.S. For you arty types - check out this blogpost and compare "Canyon" to Rembrant's "Rape of Ganymede."

Federally Indicted Estate Planning Attorney Pleads Guilty

Patti Spencer — Wed, 21 Nov 2012 10:21:10 -0500

Attorney Jospeh Caramadre and his associate Raymour Radhakrishnan were to be tried for a scheme of defaruding dying individuals and make more than $15 million. On November 20, 2012 they admitted in the U.S. District Court in Rhode Island that they had committed wire fraud and conspiracy. The guilty pleas were entered as part of a packaged agreement.

In exchange for the pleas, the U.S. Attorney's Office will recommend that the court give the two men prison terms of no longer than 10 years. Each faced a maximum sentence of 25 years in prison and $500,000 in fines.

As reported by Darla Mercado for InvestmentNews:

" From 1995 through 2010, Mr. Caramadre created a strategy for investors that involved using variable annuities and naming a terminally ill person as the annuitant. Once the annuitant died, the investor received the death benefits, as well as a guaranteed return of the principal and other enhancements.

“The insurance companies collectively lost millions of dollars from defendants' submission of variable annuities utilizing terminally-ill annuitants,” authorities noted in a court document stating the facts of the case. Some 20 carriers were involved, including Metropolitan Life Insurance Co., Western Reserve Life Insurance Co. and Transamerica Life Insurance Co.

The lawyer also offered “death put bond” strategies. Those involved assigning a sick person as a co-owner on the bond, along with an investor, who then profited when the co-owner died.

Federal authorities said that from July 2007 to August 2010, Mr. Caramadre and Mr. Radhakrishnan conspired to commit mail, wire and identity fraud.

The pair “concealed from the terminally-ill individuals and their family members that their identities would be used on annuities and bonds that were purchased by Caramadre and others,” authorities said. "

Here is the FBI's new release: click here

The FBI says: "According to court documents, Caramadre located terminally ill individuals in various ways, including by visiting AIDS patients at a House of Compassion in Cumberland, Rhode Island, by locating family members and associates who were terminally ill, and by soliciting individuals who were terminally ill to purchase small life insurance policies.

According to court documents, Caramadre placed an advertisement in a local Catholic newspaper that provided that there was a compassionate organization that would immediately give $2,000 in cash to terminally ill individuals. Dozens of terminally ill responded to the ad. Caramadre gave Raymour Radhakrishnan, who began working for Caramadre in July 2007, the job of meeting with the people who responded to the ad for the purpose of obtaining their identity information and using that information on annuities and brokerage accounts.

According to court documents, Caramadre and Radhakrishnan made misrepresentations to terminally ill and elderly patients and their family members in order to obtain their personal identity information. They used the information, including names, dates of birth, and Social Security numbers, to obtain more than 200 variable annuities and to open more than 75 brokerage accounts in order to purchase death-put bonds in the victims’ names without their knowledge and consent. Caramadre and Radhakrishnan either forged the signatures of terminally ill people on account documents or obtained the signatures by means of misrepresentations. When the terminally ill person died, Caramadre and others reaped substantial profits by exercising death benefits associated with the investments."

Is a Divorce Agreement That Promises an Inheritance to Kids Enforceable?

Patti Spencer — Mon, 29 Oct 2012 14:24:10 -0500

Let’s say you got a divorce. As part of the divorce agreement your ex agreed to leave half of his estate to your kids. He dies. He leaves a will that doesn’t comply with the agreement - leaving 90% of his estate to his second wife. What happens? Enforce the contract you say, the kids get half. That’s what you and I think the answer should be. Maybe you have a divorce settlement with a similar provision. Will it hold up? That is the issue that has been tying up the Oleg Cassini estate for years.

Oleg Cassini, the fashion designer who made first lady Jackie Kennedy's style the "single biggest fashion influence in history" died in 2006. Jackie had chosen Oleg Cassini as her exclusive couturier and called him her "Secretary of Style."

Cassini married film star Gene Tierney in 1941. Tierney, a very successful actress, was nominated for an Academy Award for her performance in "Leave Her to Heaven." (The story is the basis for the plot in Agatha Christie's murder mystery, Mirror Crack'd.) Tierney and Cassini had two daughters, Christina Belmont and Daria Cassini. When Tierney was in her first trimester of pregnancy carrying Daria, a fan with German measles broke her quarantine to shake hands with her favorite star, and Tierney unknowingly contracted the disease. Daria was born deaf, severely retarded and nearly blind.

When Cassini and Tierney divorced in 1952, the marriage termination agreement mandated that half of Mr. Cassini's estate be split equally between the couple's two daughters upon his death.

Marianne Nestor married Cassini in 1971, and remained his wife until his death in 2006 at age 92. Their marriage was a secret for over 30 years. Cassini's own daughter did not know he was married until she went to see him on his death bed, to discover he had already passed and that his "wife" - news to the daughter - had left orders forbidding the daughter from viewing the body or informing her as to where the body was removed.

Cassini's will provided $500,000 in trust for his daughter Daria and $1 million to his daughter Christina. The rest, estimated at $50 million, went to the widow, Marianne Nestor.

Christina sued the estate in February 2007, demanding 25 percent of her father's estate based on the agreement reached with her mother when they divorce in 1952. The Cassini/Tierney divorce agreement provided: "Husband agrees that he will by testamentary disposition leave not less than one-half of his net estate, after payment of debts and taxes, to Daria and Christina in equal proportions."

Marianne claimed that the provision is unenforceable, having been made more than 60 years ago. (Does that matter? Isn't a contract a contract?) Marianne claimed that the provision giving half of Cassini's estate to his two daughters was unenforceable or at least limited to the amount of his estate at the time of the 1952 divorce. Christina argued she was still entitled to 25 per cent of her father's estate under the divorce agreement and filed a claim in Nassau County Surrogate's Court in 2007.

In May 2012, a New York appeals court finally awarded Christina her entitled $13 million - a quarter of her father's estate. She has received nothing since her father died and still gets nothing as the verdict is appealed. It would seem that, the other daughter, Daria, would also be entitled to 25 percent or $13 million. Daria died in 2010.

Unhappy with the award of $13 million to Cassini's daughter, Marianne Nestor has filed an appeal and another lawsuit. She is suing Putney Twombly Hall & Hirson, in New York, two of its attorneys, William Pollak and Philip Kalban, and also Nachsin & Weston, of Los Angeles. Her new lawyers say that her old lawyers (the ones being sued) should have challenged Christina's 2007 claim under the statute of limitations. Their failure to do so was an act of "negligence and malpractice." She is seeking $13 million. According to Condé Nast, the lawsuit remains unresolved.

In the suit against the old lawyers Marianne Cassini is represented by Douglas Eisenstein, with Carroll McNulty & Kull. (Could they be defendants in the next lawsuit?)

Andrew W. Mayoras, an estate litigation attorney and co-author of Trial & Heirs: Famous Fortune Fights, is reported by ABC News as saying that he doubts Marianne Nestor will win. "In this case, it appears that Marianne Nestor Cassini, having failed in both New York and California -- both in the initial courts and the courts of appeal in each state -- now seeks to lay blame on the only target left," he said. "She feels they should have attacked Christina Cassini's claim on the basis that it was filed it too late. But, it appears that she filed it approximately one year after her father died. Until he died, the divorce judgment provision was not breached because he could have created a will that complied with it. So Christina's claim likely will be determined to be timely and it is very unlikely that Nestor's claim will prevail."

The moral of the story: Don’t be so sure that a contract signed by your divorcing spouse will be enforced later. And if you’re a lawyer - be prepared to get sued if your client, the second wife, doesn’t get what she wants.

Vanity Fair, a Condé Nast publication, ran a feature in 2010 titled "Cassini Royale" about the battle over the estate. Many details of the dispute and of Cassini's and Marianne's lives were revealed. In August 2011, Marianne Nestor countered by suing the magazine and Maureen Orth, the article author, for $10 million in damages for libel and slander. According to the Atlantic Wire, Vanity Fair declined to comment, citing pending litigation. In the article, Orth notes that Marianne has been involved in "at least 15 lawsuits. . . in the last two decades, including one brought by her neighbor, Neil Diamond over an obstructed view.

Executor of Estate Sues Baker Botts

Patti Spencer — Tue, 23 Oct 2012 14:27:24 -0500

The executor of the estate of a Houston man who died in September 2010 filed a negligence and negligent misrepresentation suit against Baker Botts on Oct. 10, alleging the firm made an estate-planning error that will cost the estate more than $1 million.

$80 Million in Gold Coins Seized from Estate

Patti Spencer — Wed, 19 Sep 2012 15:17:56 -0500

Philadelphia coin dealer Israel Switt died in 1990. In 2003, 13 years after Switt died, his daughter and grandsons drilled open a safe deposit box in Switt’s name and found 10 rare gold coins.

The coins were 1933 Saint-Gaudens double eagle $20 gold coins and were valued at approximately $80 million. The coin is named after its designer, the sculptor Augustus Saint-Gaudens. The Philadelphia Mint struck 445,500 double eagles at the height of the Great Depression, but it pulled them back weeks later as President Franklin D. Roosevelt ordered U.S. banks to abandon the gold standard. Not only were no more gold coins to be issued for circulation, people had to turn in the ones they had.

It became illegal for private citizens to own gold coins unless they clearly had a collectible value. This law was enacted during desperate times to prevent the hoarding of gold currency. Since there would be no more gold currency issued in the U.S., the Mint melted down the 1933 run of Gold Double Eagles and converted them to gold bullion bars by 1937.

Numismatic historians speculate that Philadelphia Mint cashier George McCann somehow sold or gave the coins to local coin dealer Israel Switt, our decedent. We may never know for certain how these coins left the Mint, but there is a general consensus among scholars that George McCann exchanged about 20 of the 1933 Double Eagles headed for melt down and replaced them with earlier dated Double Eagles.

Apparently Switt had 19 of the coins at one time, and one of them found its way to the collection of King Farouk of Egypt. King Farouk had legally exported his coin before the theft was discovered, and the Secret Service was unable to recover his specimen through diplomatic channels.

After King Farouk was deposed in 1952, his 1933 Double Eagle briefly appeared on the market, but when it became clear that U.S. authorities still wanted to confiscate it, it vanished again! More than 40 years later, British coin dealer Stephen Fenton showed up with it in New York, and the Secret Service finally seized it during a sting operation during which they purportedly negotiated to purchase the coin. Fenton fought a long legal battle during which the coin was stored in the Treasury Vaults at the World Trade Center. Only 2 months before the terrorist attacks of September 11, 2001, the litigation was settled and the famous coin was moved to Fort Knox. Fenton and the U.S. Mint compromised: the coin would be sold at auction, the proceeds to be split 50/50 between the Fenton and the Mint.

When Israel Switt’s children drilled open the safe deposit box, they found the coins in a gray paper Wanamaker’s department store bag. Switt’s daughter, Joan Langbord, gave the coins to the Philadelphia Mint to be authenticated and identified. What happened? The government seized the coins with no compensation to the estate.

The government said it was government property stolen in the 1930s from the U.S. Mint; and, therefore, they had a right to take it.

According to Adam Klasfeld writing for Courthouse News Service, in July 2011, the Langbords tried to convince a federal jury that the coins could have escaped the Mint legitimately through a "window of opportunity" between March 15 and April 5, 1933. The government's star expert, David Tripp, acknowledged gold coins could have left the Mint during that window, but he added that there were no records that 1933 Double Eagles did.

Last week, Judge Legrome Davis of the Eastern District Court of Pennsylvania, stated that, "the coins in question were not lawfully removed from the United States Mint." He wrote further in his decision: "The Mint meticulously tracked the ’33 Double Eagles, and the records show that no (legal) transaction occurred… What’s more, this absence of a paper trail speaks to criminal intent. If whoever took or exchanged the coins thought he was doing no wrong, we would expect to see some sort of documentation reflecting the transaction, especially considering how carefully and methodically the Mint accounted for the ’33 Double Eagles."

The Langbord family will be filing an appeal to address the issue in the 3rd Circuit.

The decedent’s estate held contraband coins valued at $80 million. They were seized by the government. Sound familiar? It recalls the Rauschenberg "combine" work, "Canyon" valued at $65 million by the IRS for estate tax purposes even though it is illegal to possess or sell it.

To be consistent, shouldn’t the IRS be claiming estate tax on Israel Switt’s coins? And if they don’t, why should the Rauschenberg estate have to pay tax on artwork that is illegal to own or sell?

Patti Spencer Talks to Fox News on Art Valuation

Patti Spencer — Wed, 08 Aug 2012 17:11:07 -0500

What is the value of a piece of art that cannot be sold? In the case of "Canyon" by artist Robert Rauschenberg, the IRS claims it is worth $65 million. They also want to tax the heirs who now own the artwork over $29 million.

Last week I had the privilege of appearing on Fox News to discuss the dilemma that taxpayers can face when estate planning basics are overlooked. Click on the image below to watch.

Patti Spencer on Fox News

Fair Market Value and Estate Planning

All personal and business assets are subject to an estate tax based on fair market value at the date of death. In this case, deceased art owner Ileana Sonnabend knew that the Canyon artwork she held could not be sold because it prominently features a bald eagle. She had acquired a special permit to continue owning the artwork, but failed to transfer it out of her estate through a charitable donation prior to her death.

Read the New York Times Coverage

Here is an excerpt from a New York Times article on the story.

Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.

But the Internal Revenue Service takes a different view. It has appraised "Canyon" at $65 million and is demanding that the owners pay $29.2 million in taxes.

"It's hard for me to see how this could be valued this way because it's illegal to sell it," said Patti S. Spencer, a lawyer who specializes in trusts and estates but has no role in the case.

The family is now challenging the judgment in tax court and its lawyers are negotiating with the I.R.S. in the hope of finding a resolution.

Read the full New York Times story:
Art's Sale Value? Zero. The Tax Bill? $29 Million.

Who Says Wills are Boring?

Patti Spencer — Thu, 12 Jul 2012 10:23:54 -0500

How many of your clients get shot at?

Shooting over a Will

PBI Solo and Small Firm Conference

Patti Spencer — Sun, 08 Jul 2012 15:32:31 -0500

Don't miss this CLE on Tues. & Wed., July 17-18, 2012 at the Omni Bedford Springs Resort

This is the best CLE of the year and a HUGE bargain.

Here is the brochure: click here

Estate Tax Marital Deduction Allowed for Same Sex Couple

Patti Spencer — Thu, 28 Jun 2012 16:40:56 -0500

Read Charles Rubin's blogpost: click here

The U.S. District Court for the Southern District of New York "found the DOMA provisions unconstitutional under the lower “rational basis” standard which requires only that a law have a rational basis for its classifications to withstand an equal protection clause challenge. The court determined that the purposed bases of protection of the institution of marriage, protection of childrearing and procreation, consistentcy and uniformity of federal benefits, and conserving the public fisc were not rationally served by the DOMA provisions. The court thus ordered that the refund be paid."

Windsor v. U.S., 109 AFTR 2d ¶ 2012-870 (DC N.Y. 6/6/2012)

Exemptions from tax for non-profits: should an income exemption be enough?

Patti Spencer — Wed, 27 Jun 2012 14:38:29 -0500

Non-profit organizations that meet IRS guidelines are exempt from paying income tax. The tax policy behind the exemption is that these types of organizations benefit the community and therefore reduce the burden on government. A similar policy is behind giving individuals a charitable deduction on their income tax returns for making gifts to charity.

This sounds reasonable; but, as always, there are problems and issues when organization are testing the limits and trying to find exceptions. The degree to which an organization relieves government of its burdens is often open to dispute.

In addition to income tax exemption, most municipalities provide an exemption from property taxes. The higher the density of non-profits in a school district, the more the rest of the property owners must shoulder the load of education. Think of a map of an urban area, and think of property tax "holes" in the footprint of every property owned by a property tax-exempt organization. The more holes, the more the burden is shifted to the rest of the property owners.

Income tax exemption is a federal matter, while property tax is a state and local matter. Laws in some states have exempted all property owned by groups like the Boy Scouts, Girl Scouts, YMCA and YWCA, regardless of each property’s use. Those not in the exempted groups have to make their own case with the local municipality to persuade them that the property’s use is of such a benevolent nature that it should surely be exempt from property tax.

Take the case of the family park built by the Jewish Community Center (JCC) in Wisconsin. It contains an outdoor swimming pool, volleyball and basketball courts, a community room and snack bar. It was denied a property tax exemption.

Wisconsin starts with the presumption that all property is taxable and then proceeds to carve out exemptions, 45 to date. Some exemptions are to all property belonging to the Scouts and the Ys, while others are extremely specific, like a dormitory run by the Methodist Church near a Wisconsin college campus and a community theater in LaCrosse.

Alan Marcuvitz, an attorney for the JCC, argued "that what appears to be purely recreational activity ‘has religious and community-building purposes.’ At the park, members observe Shabbat, attend kosher barbecues and Jewish holiday events, and play Israeli games. All of the signs in the facility are in English and Hebrew." He argued that the park qualifies under an aggregate analysis of all the JCC activities at all its locations, which advance the JCC's mission of promoting its religious, cultural, education and social values. It was also argued that as a "benevolent association" this family park shouldn't be taxed; and if the exact same facility were owned and operated in the same way by the YMCA, property tax exemption would be granted by state law regardless of use.

John DeStefanis, attorney for the city, argued property tax exemption not granted by state law is granted (or not) by local government depending on use and regardless of what organization owns it.

County Circuit Judge Thomas Wolfgram sided with the county and denied property tax-exempt status.

A federal question arises. Why should a YMCA fitness center be exempt and not the JCC water park? Is the JCC being denied the equal protection of the law? That is the second part of the lawsuit that will be heard later this year in the Dane County Circuit Court. In the meantime, $30,000 per year is being paid in tax pending resolution of the constitutional matter.

Jack Norman, an opponent of current Wisconsin tax law and member of the Institute for Wisconsin’s Future, is of the opinion that it is indeed unfair, but his solution would be to grant fewer exemptions from property tax, not more. Furthermore, he feels the income tax break ought to be enough to compensate for the benevolent work of a non-profit and that property tax exemptions are for the most part just not a sound public policy.

In particular, he points out, many private and for-profit corporations do good things for the community but still pay property tax or make a contribution in lieu of taxes. Mr. Norman’s hope is that all the attention the issue is attracting might cause the state legislature to think about revamping the property tax law and its host of exemptions.

Can an Adult Child be Held Responsible for a Parent's Nursing Home Costs?

Patti Spencer — Mon, 18 Jun 2012 08:54:38 -0500

On May 7, 2012 the Pennsylvania Superior Court issued an opinion in the case of Healthcare Retirement Corporation of America v. Pittas. The court found a son liable for his mother’s $93,000 nursing home bill under Pennsylvania’s Filial Responsibility Law. This high-profile case raises concerns.

Currently 30 states have laws making adult children responsible for their parents if their parents can’t afford to pay for their own care. They have rarely been enforced. Since it has become more difficult to qualify for Medicaid and have long term care costs paid under that program, it looks like nursing homes are going to start enforcing the filial responsibility law to get paid.

Filial responsibility is the personal obligation or duty that adult children have for protecting, caring for, and supporting their aging parents. In England, the Elizabethan Act of 1601 for the Relief of the Poor, provided that "[T]he father and grandfather, and the mother and grandmother, and the children of every poor, old, blind, lame and incompetent person, or other poor person not able to work, being of a sufficient ability, shall, at their own charges, relieve and maintain every such poor person." These Elizabethan "poor laws" became the model for the United States’ legislation on the same subject.

In Pennsylvania, the first law imposing a duty of filial support is found in the Act of March 9, 1771, which required that children support their indigent parents if the children were of sufficient financial ability. The current Pennsylvania statute provides that certain relatives including a child have the "responsibility to care for and maintain or financially assist an indigent person." However, this responsibility does not apply if the "individual does not have sufficient financial ability to support the indigent person" or if a parent abandoned the child for 10 years during the child’s minority. Neither the terms "indigent" nor "sufficient financial ability" are clearly defined in the law.

An example of its enforcement is the 1994 Pennsylvania Superior Court case, Savoy v. Savoy which involved an elderly parent whose reasonable care and maintenance expenses exceeded her monthly Social Security income. The Superior Court found that she was indigent and affirmed the lower court’s order directing her son to pay $125 per month directly to her medical care providers.

In the case of Healthcare Retirement Corporation of America v. Pittas,

John Pittas' mother was injured in a car accident and spent 6 months in Liberty Nursing Home, a subsidiary of Health Care & Retirement Corporation of America. She left the nursing home and left the country, moving to Greece, leaving a large portion of her nursing home bill unpaid. The nursing home applied for Medicaid for Mr. Pittas' mother but the application is still pending.

The nursing home sued Mr. Pittas for $93,000 under Pennsylvania's Filial Responsibility Law, which requires a child to provide support for an indigent parent. The Lehigh County trial court ruled in favor of the nursing home, and Mr. Pittas appealed. Mr. Pittas argued, in part, that the court should have considered alternate forms of payment, such as Medicaid or going after his mother's husband and her two other adult children.

A three-judge panel of the Pennsylvania Superior Court agreed with the trial court that Mr. Pittas is liable for his mother's nursing home debt. The court held that the law does not require it to consider other sources of income or to wait until Mrs. Pittas’ Medicaid claim is resolved. It also said that the nursing home had every right to choose which family members to pursue for the money owed. The case is now the subject of an en banc reconsideration petition filed with the Pennsylvania Superior Court.

According to elder law expert Professor Katherine Pearson, in the last 30 years there have only been 3 cases discussing the Filial Support Law. What makes this case unique in Pennsylvania, said Pearson, is that "it is the first time substantial dollars have been awarded against an adult son to support his mother who is in a nursing home - almost $93,000. It's a game-changer in terms of the dollars and cents that we are talking about in terms of filial support."

If a parent enters a nursing home with insufficient funds to pay for his or her care, adult children should be vigilant about potential claims against their own assets to pay for that care. Remember, the statute goes both ways, it can also apply to a parent who has an adult child who is indigent. There have been numerous attempts in the Pennsylvania legislature to amend or repeal the Filial Support Law. Contact your representative and/or state senator if you are concerned about the Filial Support Law currently being enforced in Pennsylvania.

SCOTUS Rules on Social Security for Posthumous Children?

Patti Spencer — Mon, 11 Jun 2012 13:21:55 -0500

To be poor and independent is very nearly an impossibility.

William Cobbett, Advice to Young Men, 1829

On May 21, 2012, the Supreme Court decided the case of Astrue v. Capato. This case may have consequences beyond the question the Court decided based on its deferral to state law.

Karen Capato, widow of Robert Capato, was artificially inseminated nine months after her husband’s death. She delivered twins and applied for Social Security survivors benefits for them.

The Social Security Administrator, Michael Astrue, declined to pay, citing Florida intestate law that 1) declares a marriage is over at the death of one of the spouses and 2) that posthumously conceived children are not intestate heirs.

Mrs. Capato pointed to 42 U.S.C.S. 402(d) which states that "[e]very child (as defined in section 416(e) of this title" of a deceased insured individual "shall be entitled to a child’s insurance benefit." Section 416(e), in turn, defines "child" to mean: "(1) the child or legally adopted child of an individual, (2) a stepchild . . . and (3) . . . the grandchild or stepgrandchild of an individual or his spouse . . ."

Mrs. Capato prevailed at the Third Circuit Court of Appeals, but the Commissioner appealed to the Supreme Court.

At that point, it looked like Mrs. Capato would prevail. But wait, there’s more. Section 416(h)(2)(A) further addresses the term "child." "In determining whether an applicant is the child or parent of [an] insured individual for purposes of this subchapter, the Commissioner of Social Security shall apply [the intestacy law of the insured individual’s domiciliary State]."

Thus, there are two definitions of "child" in the Code, one loosely defined and one that defers to state law. One might see another 5-4 decision brewing but the decision was for the Commissioner 9-0. Unanimous!

Reasoning was that even though state intestacy laws vary from state to state, it was better to let a few more people qualify for benefits and leave the decision out of the federal government’s hands than to restrict benefits but increase the workload of determining who is a child in every single case.

Also considered was Congress’s intention to "provide dependent members of a [wage earner’s] family with protection against the hardship occasioned by the loss of [the insured’s] earnings." Since posthumously conceived children never were dependent on those earnings, it stands to reason that their income should not be insured unless state law happens to include them.

In the end, the Court observed: "The SSA’s interpretation of the relevant provisions, adhered to without deviation for many decades, is at least reasonable; the agency’s reading is therefore entitled to this Court’s deference . . . "

The possible fallout is that if the Supreme Court decided to refer to state law in this case even through state intestacy laws vary, it might be obliged to defer to state laws that define a marriage.

What if the Defense of Marriage Act is repealed as the President has requested? Does Capato open the door for recognition of some same-sex marriages depending on individual state law? Remember, this was a 9-0 decision. Some, and maybe all, of the Justices had to be aware of that possibility.

Alleged Conspiracy in Rosa Park's Estate

Patti Spencer — Mon, 21 May 2012 15:50:52 -0500

Please read this post at Nonprofit Law Prof Blog.

How very very sad indeed.

Brooke Astor's Estate Finally Settled

Patti Spencer — Sun, 20 May 2012 13:41:36 -0500

We wrote about Brooke Astor's Estate and the litigation involving her son and lawyer. A perfect example of financial abuse of the elderly.

Philip M. Bernstein of The New York Probate Litigation Blog reports on the final settlement here. Read the New York Times report here.

"Mrs. Astor’s storybook life took a nasty turn in her later years, when Philip Marshall accused his father of mistreating his grandmother in her dementia and sought to have a guardian appointed for her. The allegations that Mrs. Astor’s son had left her living in squalor in her multimillion-dollar Park Avenue apartment led to a trial that shocked a social stratosphere in which Mrs. Astor rubbed elbows with the likes of Henry A. Kissinger, David Rockefeller and Annette de la Renta. But a court evaluator found no validity to the abuse allegations.

Following months of testimony, Mr. Marshall and Mr. Morrissey were convicted of most of the counts they faced. The most serious conviction for Mr. Marshall was for first-degree grand larceny for giving himself a retroactive pay raise of $1 million for managing his mother’s finances. " NYT

Grandson Goes to Jail for Plundering Grandfather's Estate

Patti Spencer — Mon, 07 May 2012 06:00:00 -0500

"Power tends to corrupt, and absolute power corrupts absolutely."

– Baron Acton

Financial abuse of the elderly is a crime. Michael Ostrowski, a 42-year-old from New York, was appointed as temporary guardian for his grandfather who has dementia. While serving as guardian, he misappropriated over $300,000 and lied to the probate court (we call that perjury) and insurance companies. He took $250,000 from his grandfather’s bank account and did not file a 2006 federal income tax return.

This is an Al Capone story. Remember the notorious gangster in the Prohibition-Era Chicago? He is perhaps most infamous for his alleged involvement in the St. Valentine’s Day Massacre in which 7 victims were murdered, not to mention scores of other crimes. What did he go to jail for? Income tax evasion.

The thieving grandson in our story was charged by the U.S. attorney with mail fraud, conspiracy, interstate transportation of stolen property, receipt, possession, concealment and disposition of stolen property having crossed a state boundary; engaging in a monetary transaction in property derived from specified unlawful activity; and failure to file an income tax return. He pleaded guilty to all these items.

Michael was sentenced to two years in prison followed by 3 years of supervised release. He was ordered to pay restitution in the amount of $100,459 to MassHealth and $85,751 to the IRS. The Judge also ordered forfeiture of $179,000 and the things he had purchased with his ill-gotten gains: a Sony Bravia flat-panel television, a 39mm semi-automatic assault rifle; and a $37,000 GMC Sierra pickup truck.

Since the grandfather was in Massachusetts, and Ostrowski took the stolen money back to New York where he lived, the diversity of jurisdictions made it eligible to be a federal matter. Not filing an income tax return is also a federal charge. So the fed’s involvement was necessary. But there is no mention of state involvement for the mismanagement, amounting to fraud, by means of the Power of Attorney.

Financial abuse of the elderly is a huge problem. The National Center on Elder Abuse (NCEA) published a report and recommendations entitled "Forgotten Victims of Elder Financial Crime and Abuse." They describe many challenges. "Many elderly victims fail to report crimes or abuse to the police or even to their own families out of shame or embarrassment."

Law enforcement personnel sometimes fail to recognize crimes when they see them. When abuse involves the misuse of legal documents, (e.g. the forging of wills or powers of attorney, or inducing mentally incapacitated persons to transfer titles of their homes), it is often viewed as a "civil matter." Investigators may be well into cases before it occurs to them to find out if victims are being over medicated or under-medicated (homicide cases involving victims who are poisoned or starved for financial gain are becoming increasingly common).

Unless these patterns are recognized, victims may be dead and cremated before the investigator makes the connection."

Financial crimes are often very difficult to prove. Important documents may have been destroyed.. Many victims do not make good witnesses owing to the same dementia that rendered them susceptible to abuse in the first place.

Investigating and prosecuting financial crimes is very time-consuming and labor intensive. These property crimes are often viewed as "less serious" than violent crime.

What is the answer? Some commentators suggest that there needs to be more up-front monitoring, instead of punishing people after the fact. The durable power of attorney is popular technique for incapacity planning. But it comes with grave danger of abuse. However, the use of a power of attorney allows complete control of the principal’s assets. Special care should be given to granting the agent the authority to make gifts.

Here are some steps that could help: 1) require registration of powers of attorney in the same jurisdiction in which a guardianship action would be brought so there is notice of who is acting for whom; 2) once the principal becomes incapacitated, require the agent to file an annual accounting; 3) require an agent to produce an accounting on the death of the principal. The flexibility of the durable power of attorney and its usefulness in avoiding guardianship are very important. But the power is so broad and sweeping that abuse is rampant. What other fiduciary is permitted to act without providing accountings?

True, any of these steps make the duties of the honest agent more burdensome. It is ever so. Good people do not need laws to tell them to act responsibly. The law needs to prevent the bad people from abusing the elderly.