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Thursday, June 28, 2018

Part II of IV Parts: Five Keys CPA’s Should Know to Avoid Probate (and Trust) Problems & Litigation

Careful Asset Review

CPAs are generally very good at identifying a client’s assets and categorizing them according to criteria that is important to the CPA, which typically means understanding the income tax issues with regard to the decedent’s assets.  In this instance, the review of the estate’s assets should focus on transfer issues that arise in estate administrations as well as identifying issues regarding income tax and capital gains and losses. Some examples of important questions in this regard: Are there securities in the estate; Were they titled in the name of the decedent?; Was there a designation of beneficiary or an “In Trust For” or “Pay on Death” on the account?; Were they titled jointly with rights of survivorship?;  If there are marketable securities, how were they titled at the date of death?; and  How will basis be determined (stepped-up at date of death or not)?; Will there be long term capital gains, or short-term losses or the counterpoint to each of those?; Before securities are sold or liquidated, the fiduciary should make a careful analysis as to who may bear a tax penalty and who may obtain a tax favorable treatment.  In some cases, depending on the assets, the titling, or the terms of a trust, one beneficiary may obtain a significantly more favorable treatment than another.  The really important point here is to simply consider this prior to making any changes in positions.  It is also important to consider all these factors before allowing too much time to pass.  How much time is too much time?  Generally, the test will be whether it was reasonable under the circumstances for the fiduciary to act or not. We’ll discuss in more detail below.

Is there real property in the estate? Is the real property the homestead of the decedent? Are there homestead issues that need to be resolved?  Does the executor or Personal representative even have the authority to sell or transfer the homestead? Should there be a court determination of homestead?

What about business assets? Was there a closely held business? Did the decedent have partners?  What was the status of business? If it was active, are there loans that need prompt attention? Are there steps that must be taken to preserve the viability of the business?  Are there bank loans that may be impacted by the death of the decedent? What was the status of the capital accounts at the date of death? Was the business organized as an S corp or a C corp, or partnership? If there was a partner or partners, are they “reasonably ascertainable creditors” under the Florida probate rules?  Is there life insurance? Are there retirement accounts? If there are retirement accounts like IRAs do, we have copies of the designation of beneficiary forms?  Are there issues regarding the named beneficiary on the IRA or life insurance? Are there assets outside of Florida? Assets outside of the US?

As you can probably see, as you work through these common questions, issue arises that must be overlaid on top of the inquiries that we discussed under #1 above.  For example, homestead may become a more critical issue if there are creditors or if the estate is illiquid. Homestead can also become a critical question depending on other facts, such as whether there is a surviving spouse and/or minor children, the existence of a nuptial agreement, etc. The homestead issue must be reviewed by the attorney to determine if the will or trust properly conveyed the homestead interest or if there was a “blown homestead devise” which will impact the estate and beneficiaries in different ways.

Each asset class also carries with it certain specific issues and potential concerns. For example, on securities, the fiduciary needs to review the current positions of the securities investments.  Perhaps the portfolio was well balanced for the decedent (frequently but not always an older male or female) but now, the fiduciary should be mindful of the portfolio’s investment balance with regard to appropriateness for the  current beneficiaries and qualified beneficiaries (like remaindermen). The proper balancing or re-balancing of the portfolio can be complicated when some beneficiaries are primarily focused on income and the other beneficiaries are primarily focused on growth.  The CPA, attorney and investment advisor should coordinate their advice and counsel the executor on the appropriate steps in this regard.  The executor should be informed of the various considerations such as harvesting losses or implications of capital gains, consideration of basis, etc. Which beneficiary’s interests should have priority over another? How should the fiduciary resolve this challenging dilemma? Before any changes are made to investment portfolios, the fiduciary, the CPA, the investment advisors and the attorney must all speak and make sure good communication is being maintained between all these key players, and the competing interests, as each professional advisor has a different focus and unique concerns within their own realms of expertise.

In instances where the fiduciary will be in a position of responsibility and under a duty of loyalty to the beneficiaries where investments are involved, it will be a good idea for the fiduciary to meet with the investment advisor and review the investment portfolio for risk mitigation and various investment considerations such as growth, yield, diversification, etc., all with a focus on the various beneficiaries that are interested in the estate’s or trust’s assets.  Fiduciaries should look to Florida Statute 518.11, Florida’s version of the Uniform Prudent Investor Act as to the standards the fiduciary should follow. Next, a plan should be developed so that certain metrics can be utilized to maintain the proper balance of risk, growth, yield, etc., across the spectrum of unique beneficiary needs and concerns.  Once the initial investment review stages are complete, the fiduciary and the investment professional should review the investment portfolio at least once a quarter.  In this regard, keep in mind, the fiduciary can reasonably rely upon the advice of licensed professional advisors, like investment advisors, CPAs, banking trust officers, lawyers, etc.  However, the fiduciary cannot simply abandon his or her duties and responsibilities under the premise of turning the work over to the professional. In other words, the executor or Trustee can rely on advice but that means the fiduciary is actively monitoring and making decisions in real time, not simply turning this entire element of administration over to the hands of the advisor.  This can be summed up as follows: generally, it is a good to have an investment plan, consider all the key metrics about the goals and needs of the beneficiaries, the portfolio should be considered as a whole, and the fiduciary should regularly review all aspects of the plan and adjust as necessary.

In trust administrations, the fiduciary should carefully consider the use of disclosure documents and limitations notices.  Limitation notices are permitted under Florida law and they can be quite simple and if done properly very effective tools to utilize. The fiduciary must simply send an adequate disclosure document (such as a monthly brokerage statement or accounting statement) to a beneficiary along with a limitation notice and in many cases, this triggers a deadline for which to raise an issue or complaint regarding any action or omission of the Trustee with respect to information properly disclosed in the document.  This will result in the beneficiary being limited to no more than six months to raise any issues which are adequately disclosed in the documents sent with the notice.  In order to see the utility of this practice, consider that in many instances, substantial losses in the investment markets transpire over time.  Of course, there can be big fluctuations on a daily or weekly basis.  But the types of market moves that often lead to lawsuits frequently result over a period of time of as much as a year, or sometimes more.  In some cases, beneficiaries (plaintiffs) unfairly use hindsight to judge fiduciary decisions on investments. By limiting the time period in which to file objections, in many cases (although certainly not all) the exposure of the fiduciary is greatly reduced.  In addition, if there is a significant movement within the six month window, the result will be to at least limit the potential amount of damages due to market moves within the abbreviated timeframe.  Perhaps the optimal result of utilizing the limitation notice, is that a beneficiary may well raise their objection in real time which may allow the Trustee to address the beneficiary’s concerns and perhaps even change positions and avoid litigation in this area altogether.

Real property held in the estate needs careful review as well.  In the case of a residence, the property needs to be secured, steps need to be taken to make sure a home is maintained in a secure and safe condition and that there are no potential liability issues, like leaking roofs, mold, or pools without required fencing, etc.  Also attention to issues such as liability and hazard insurance are handled, and homeowners’ associations are aware of the status of the administration, etc.  Commercial properties need to be reviewed to make sure there is active management in place, that there are no known issues of code violations, safety issues, or environmental issues.  If tenants are occupying the property, the tenants’ situations should be reviewed as well, leases must be scrutinized and again, all stakeholders must be informed as to the administration and what everyone should expect with regard to the estate administration. Steps need to be taken for real property located out of state as well, the assistance of local professionals may be required such as local attorneys to draft legal documents like deeds. Again, the CPA can play a crucial role in the decision process as to recognition of gain, how to mitigate or avoid adverse tax consequences, and much more.

#3 Accountings and Waiver of Accountings

In all probate administrations in Florida the beneficiaries of the estate are entitled to an accounting.  In trust administrations, the qualified beneficiaries in the trust are entitled to annual accountings. In both types of administrations, the beneficiaries can waive their rights to an accounting. In many smaller estate administrations where the beneficiaries are limited to one or two individuals with the same or similar interests or in some administrations and where there are no conflicts between the beneficiaries, the waiver of accounting is fairly common. This may result because the beneficiaries are in agreement with how they see the estate being handled during the administration.  Or, in other cases, this may result because the children of the decedent are also children of the surviving spouse/fiduciary and the beneficiaries may not want to alienate the surviving spouse by requiring an accounting.  In most cases where the beneficiaries and the fiduciary feel like they are all on the “same page” there doesn’t seem to be good reason to add the expense of a formal accounting.  Also, if the fiduciary was proactive, and provided bank and brokerage statements, disclosed real property appraisals, etc., and provided regular and robust communication, there may not seem to be any utility in having the estate incur additional costs or complications in preparing accountings.

Nonetheless, as a rule of thumb, we recommend to our clients that all the information required for the formal accounting be maintained by the CPA from the outset of the administration. Once the CPA reviews the assets, and establishes the format for tracking the necessary information, an accountant or a paralegal may collect and maintain the data necessary to produce the accounting, which lowers the costs of data collection and maintenance if an accounting is necessary.  At the end of the administration, a decision may be made by the beneficiaries to waive the accounting, but if the accounting requirement is not waived, the fiduciary is then in a good position and well prepared to provide the accounting.  In these circumstances it doesn’t take a great deal of effort or costs for the CPA to assemble the formal accounting.  In addition, the discipline of the maintaining the proper information necessary to assemble a formal accounting is itself a useful organizing practice for the fiduciary and the advisors. 

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