It’s an old legal locution when the law is clear: “It is well-settled”. Well, Sheri Beersman settled with Reggie Lopez when they fought over her mom’s estate, but because Reggie was named beneficiary both in the will Sheri wanted probated and in the one Reggie wanted probated, no deduction for the $575K she had to pay Reggie to end the ensuing litigation.

Judge Foley shows us how well settled may not be well-settled in Estate of Sylvia E. Bates, Deceased, Sheri Beersman, Executor and Trustee, 2012 T. C. Memo. 314, filed 11/7/12.

The late Sylvia was a real estate tycoon. She executed a will, which poured whatever assets weren’t needed to pay her debts and taxes into a trust created by her late husband for the benefit of Sylvia’s grandkids, with Sheri as trustee, but included a bequest of $100K to Reggie, who helped Sylvia with various matters (and was fully paid for his services). Reggie lived in a house owned by Sylvia, but timely paid her rent.

Of course, Reggie produces a later will, which gives him half of everything, the other half going to grandson Scott, at the relevant time a guest of the Show Me state at Moberly Correctional Facility, and makes Reggie the executor.

It is well-settled that, in the words of Addison Mizner, “where there’s a will, there’s a lawsuit.” See my blogpost “Where There’s a Will”, 6/20/12. So it’s off to court, where Sheri wins at trial level, but the California Supremes reverse, and send Reggie and Sheri back to duke it out over undue influence and elder abuse, without the caregiver presumption (Sylvia had Alzheimer’s).

Sheri decides to buy peace and pays Reggie $575K to go away, $300 up front and $275 when he agrees not to sue Sheri and her brother Kenneth.

Sheri wants a deduction for what she paid Reggie. Negative, says Judge Foley: “Decedent had a longstanding and extremely close relationship with Mr. Lopez, expressly provided that he would receive estate assets, and memorialized her testamentary intent in both the First Trust and the Second Trust. In addition, the superior court resolved the amount of estate assets that Mr. Lopez was entitled to receive, and the settlement payment was paid in full satisfaction of any claim relating to the First Trust or the Second Trust. Furthermore, on the estate tax return, the estate reported that Mr. Lopez was a beneficiary and the settlement payment was paid to settle title to beneficiaries. During decedent’s lifetime Mr. Lopez was paid for the services he rendered, and no part of the settlement payment related to a claim for unpaid services. In short, Mr. Lopez’s claim represented a beneficiary’s claim to a distributive share of the estate rather than a creditor’s claim against the estate.” 2012 T. C. Memo. 314, at p. 9. (Citation omitted).

Reggie had been paid for his services by Sylvia while she lived. He was named beneficiary in both wills and both trusts. He wasn’t a stranger with a claim outside the will or trust. Therefore no deduction.

Sheri tried to deduct reimbursement to Scott for Mr. O’s fees; Mr O. was the private eye Scott hired to keep watch over the litigation and the estate assets while he sojourned at Moberly. No to that, says Judge Foley: “Scott testified that Mr O was paid to monitor the trust litigation and investigate decedent’s oil and gas investments. While Mr O, in a letter demanding payment for his services, stated that he and Scott had ‘discussed’ investigating decedent’s oil and gas investments, there is insufficient evidence to establish precisely what Mr O did. We are convinced, however, that Mr. O was paid to protect Scott’s interest in the estate and monitor the trust litigation. Therefore, the estate’s payment to Scott is not deductible.” 2012 T. C. memo. 314, at pp. 11-12 (Citations and footnote omitted). Payments to preserve a beneficiary’s interest in the estate are not deductible.

Finally, Sheri got confused advice about filing the Form 706. Her initial letters of administration only permitted her to find estate assets, not take possession of them. When her tax accountant said she had to file a Form 706 timely, her litigation attorney (who had no tax credentials) told her she couldn’t file a Form 706 as she lacked authority under the letters as issued.

But Sheri did petition the probate court to authorize her to reimburse herself for certain expenses from the estate, and was successful. IRS claims a late filing and late payment penalty when Sheri does get final letters post-litigation and files and pays late. Sheri says she relied on her litigation lawyer.

No, says Judge Foley, you never went to the probate court to get authority to file the Form 706. “Sheri testified that Mr. C [her litigation attorney] advised her that she lacked authority to file the estate tax return, but Mr. C was not a tax adviser and testified that he ‘never discussed taxes with her.’ Regardless of what advice Mr. C actually provided, the estate has failed to establish that any reliance on his advice relating to filing of the estate tax return was justified. Mr. G (the tax accountant) readily acknowledges that he told Sheri that ‘the estate tax return needed to be filed.’ After speaking with Mr. C, Mr. G and Sheri concluded that she lacked authority to file the estate tax return, but she did not petition the superior court for the authority to do so, seek additional advice, or otherwise attempt to resolve the issue. See Estate of Cavenaugh v. Commissioner, 100 T.C. at 427 (holding that an estate failed to establish reasonable cause where it did not timely petition the probate court for the appointment of an authorized representative to file an estate tax return).” 2012 T. C. Memo. 314, at pp 13-14 (Citations and footnote omitted).

Takeaway- A good example of How Not To Do It.