In deciding whether litigating fiduciaries should be reimbursed legal fees and disbursements from the estate for which they are acting, Judge Goeke reminds us that the key question is, ‘Is the estate a player or a spectator?’ Is the fiduciary fighting for the estate, or is the estate a mere stakeholder while the fiduciaries fight with one another or with someone else? To see an in-depth analysis, look at Estate of Raymond J. Gill, Deceased, Sabal Trust Company, Personal Representative, 2012 T.C. Mem. 7, filed 1/9/12.

Famous Ray was a man of means. He and his wife Joan had an elaborate estate plan, with credit shelter trusts, marital trusts, living trusts, and springing trusts for the children and grandchildren of the said Famous Ray and Joan.

Joan dies first, and that’s the problem, because Famous Ray takes a business trip to Germany, and brings back a souvenir costing ten years of litigation and $830K in legal fees and disbursements, namely, the Beautiful Valerie, who becomes Mrs Famous Ray II (hereinafter “MFR”). MFR causes Famous Ray to restructure the estate plan, oust his children (Mark and Mrs. Alabaster) as fiduciaries, and install MFR and SunTrust in their place and stead, and give MFR all kinds of goodies.

Mrs. Alabaster, on getting the news, gleams, but not, as Katherine Lee Bates suggests in her immortal hymn “America, the Beautiful”, “undimm’d by human tears.” No, Mrs. A springs to the attack as soon as Famous Ray is in the cold, cold ground and she gets wind of MFR’s shenanigans.

Enter the lawyers. Lawsuit follows, then mediation follows, then comes a stipulation that MFR immediately breaches. More lawsuits, more mediation, and a new stipulation. Mrs. A ousts MFR and recoups some cash (which goes to her and Mark). Finally, Sabal Trust Company succeeds SunTrust, who aided and abetted MFR throughout their ten-year odyssey through the Florida courts.

Emerging bloodied but victorious, and installed as fiduciary, Mrs A seeks, inter alia as my high-priced colleagues say, to get paid back for the $830K she and Mark ponied up for the legal talent.

Now Judge Goeke gets down to business. But first, “(W)e have corrected minor mathematical errors made by the parties in their calculations. Those corrections have reduced the total administration expense deductions sought by $6.” 2012 T. C. Mem. 7, at p. 15, footnote 3. Ya gotta love a court that, faced with a claim for $830K, has time to do the arithmetic and find $6, which is less than one minute of a white shoe second-year associate’s billable time.

Next, IRS left off disbursements in reckoning the $2.8 million deficiency slapped on Famous Ray’s estate. Judge Goeke: “In his calculations, respondent [IRS] took only attorney’s fees into account and failed to include related court costs (such as those for transcripts and depositions) incurred by the estate’s lawyers. Such costs are deductible under section 20.2053-3(d), Estate Tax Regs.” 2012 T. C. Mem. 7, at p. 16.

But whether fees or disbursements, these must be chargeable to the estate under local law. Canvassing Florida law, Judge Goeke finds some part of the legal fees claimed to be allowable as charges to the estate.

But are they reasonable? Whether allowable or not by State law, to pass muster for deductibility for Federal estate tax purposes these fees must be reasonable. Judge Geoke finds they are: “Because Fla. Stat. Ann. sec. 733.106(3) allows attorneys to be awarded reasonable attorney’s fees only for services to an estate, and the legal fees comprised mostly attorney’s fees, we find this is strong evidence of the reasonableness of the fees. In addition, the estate introduced into evidence voluminous records of legal fees incurred by the Gill children over the years in which litigation was ongoing. Considering these records as a whole, we see nothing unreasonable about those fees. We also consider the fact that the Gill children were reimbursed less than their actual legal fees. Respondent offered no evidence of his own that the legal fees were unreasonable.” 2012 T.C. Mem. 7, at p. 21. No evidence from IRS? On what then did IRS base its deficiency?

Final fence before the finish line: were the legal fees in question “essential to the proper settlement of the estate”? If not, no deduction. And State law is not dispositive on this point. See Reg. 20.2053-3(c)(3).

Here comes the test: is this a dispute between beneficiaries as to who gets what, with the estate uninvolved as it only has to pay one or the other; or is this a question of who is a fiduciary and are they acting as such? If the former, in the immortal words of Humphrey Bogart in the 1948 classic “Treasure of the Sierra Madre”, “why don’t everybody smoke their own?” But if acting as a fiduciary, even with a personal interest in the outcome, and even if the end result of the legal process puts money in the fiduciary’s own pocket, the legal fees and disbursements are proper deductions. Judge Goeke canvasses the caselaw, and finds that, as to some of the fees, Mrs A was acting as fiduciary, so she gets some of the fees, even though the outcome of the litigation enriched her personally.

Some deductions the estate doesn’t get, largely because of poor recordkeeping.  Each litigation stands on its own, and Judge Goeke goes through the who, what, where and when of each, and if the paperwork isn’t clear, Mrs A loses, as she has the burden of proof. And even MFR’s and SunTrust’s legal fees, for which they were reimbursed by the estate for the time they were fiduciaries, are deductible, to the extent allowable, reasonable and essential.

The accountants’ fees are disallowed, again for poor recordkeeping. Shame on the accountants. But the lawyers weren’t all that much better, either.

Takeaway–Document, document, document. Have the lawyers do their bills to show exactly which clients they represented, in what capacity (individual or fiduciary), and what they did and when they did it. And the accountants likewise.