New York Law Review

Tag: estate tax

  • Schneider v. Finmann, 15 N.Y.3d 306 (2010): Estate’s Right to Sue Attorney for Negligent Tax Planning

    15 N.Y.3d 306 (2010)

    An estate’s personal representative can bring a legal malpractice claim against an attorney for negligent estate tax planning that financially harmed the estate.

    Summary

    This case addresses whether an estate can sue its attorney for negligence in estate tax planning. The New York Court of Appeals held that an estate’s personal representative has sufficient privity with the estate’s attorney to bring a legal malpractice claim when the attorney’s negligence in tax planning caused financial harm to the estate. The court reasoned that the personal representative “stands in the shoes” of the decedent and that minimizing the estate’s tax burden is a central task entrusted to the estate planning attorney. This ruling balances the need to protect attorneys from limitless liability with the estate’s right to recover losses caused by attorney negligence.

    Facts

    Saul Schneider retained the defendants as his attorneys for estate tax planning from 2000 until his death in 2006. In April 2000, Schneider purchased a $1 million life insurance policy. He transferred ownership of this policy multiple times between himself and entities he controlled. Ultimately, the policy was back in his name at the time of his death in October 2006. As a result, the insurance proceeds were included in his gross taxable estate.

    Procedural History

    Schneider’s estate sued the attorneys for legal malpractice, alleging their negligent advice regarding the life insurance policy transfers led to increased estate tax liability. The Supreme Court dismissed the complaint, and the Appellate Division affirmed, citing a lack of privity between the estate and the attorneys. The New York Court of Appeals reversed, reinstating the estate’s claim.

    Issue(s)

    Whether the personal representative of an estate can bring a legal malpractice claim against an attorney for negligent estate tax planning that resulted in increased estate tax liability, despite the traditional requirement of strict privity.

    Holding

    Yes, because privity, or a relationship sufficiently approaching privity, exists between the personal representative of an estate and the estate planning attorney when the alleged negligence directly caused financial harm to the estate.

    Court’s Reasoning

    The Court of Appeals departed from the strict privity requirement in this specific context. The court noted that strict privity is a minority rule and that several jurisdictions have relaxed this requirement to allow estates to bring malpractice claims. The court adopted the reasoning of the Texas Supreme Court, stating that the estate essentially “‘stands in the shoes’ of a decedent” and thus can pursue the claim on the estate’s behalf (Belt v Oppenheimer, Blend, Harrison & Tate, Inc., 192 SW3d 780, 787 [Tex 2006]). The court emphasized that estate planning attorneys know that minimizing the estate’s tax burden is a key part of their role. Permitting the estate to sue aligns with EPTL 11-3.2 (b), which allows a personal representative to maintain an action for “injury to person or property” after death. The court explicitly maintained the strict privity requirement for beneficiaries and other third parties to prevent “uncertainty and limitless liability.” The court distinguished between suits by the estate and suits by beneficiaries, quoting Estate of Spivey v Pulley, 138 AD2d 563, 564 (2d Dept 1988), clarifying that privity is required absent “fraud, collusion, malicious acts or other special circumstances”.

  • In re Estate of Havemeyer, 17 N.Y.2d 216 (1966): Partnership Law Determines Estate Tax on Out-of-State Real Property

    In re Estate of Havemeyer, 17 N.Y.2d 216 (1966)

    Under New York law, the Uniform Partnership Act dictates that partnership real estate is converted into personal property; therefore, it passes to the surviving partner(s) upon a partner’s death, regardless of the real estate’s physical location, and is subject to estate tax.

    Summary

    The New York State Tax Commission appealed a decision excluding Connecticut real property from the decedent’s gross estate. The decedent, a New York resident, and his son were partners under a New York partnership agreement. The agreement was subject to New York’s Partnership Law, which includes the Uniform Partnership Act. The core issue was whether the Connecticut real estate, owned by the partnership, should be considered real property (and thus exempt from New York estate tax) or personal property under the partnership agreement. The court held that New York’s Partnership Law converted the real estate into personal property, making it subject to New York estate tax. This decision emphasized that the law of the state where the partnership agreement was made governs the nature of partnership assets for estate tax purposes.

    Facts

    The decedent and his son were partners under an agreement made in New York State, both being residents of New York.
    The partnership owned real property located in Connecticut.
    Upon the decedent’s death, the estate sought to exclude the Connecticut real property from the New York gross estate, arguing it was real property situated outside New York.
    The State Tax Commission argued that the real property should be included because New York partnership law converted it into personal property.

    Procedural History

    The Surrogate’s Court initially excluded the Connecticut real estate from the gross estate.
    The State Tax Commission appealed this decision.
    The appellate court reviewed the Surrogate’s decision, focusing on the applicability of New York partnership law.

    Issue(s)

    Whether, under New York law, real property owned by a partnership is considered personal property for estate tax purposes when the partnership agreement was made in New York.

    Holding

    Yes, because New York’s Partnership Law, specifically the Uniform Partnership Act, dictates that partnership real estate is converted into personal property, thereby making it subject to estate tax regardless of its physical location.

    Court’s Reasoning

    The court reasoned that the New York Partnership Law, which includes the Uniform Partnership Act, is integral to the partnership agreement. Section 12 and sections 51-52 of the New York Partnership Law stipulate that partnership property is co-owned, and upon a partner’s death, their right vests in the surviving partner. This effectively converts real property into personal property for partnership purposes.

    The court emphasized that the law of the state where the contract was made (New York) governs its interpretation and validity. Citing Strauss v. Union Cent. Life Ins. Co., the court stated: “All contracts are made subject to any law prescribing their effect, or the conditions to be observed in their performance; and, hence, the statute is as much a part of the contract in question as if it had been actually written into it, or made a part of the stipulations.”

    While acknowledging that Connecticut law (where the real property was located) might treat the property differently, the court prioritized the partnership agreement’s governing law (New York). They noted that intent is key but that the New York partnership law effectively dictates that intent, superseding common law principles that might have otherwise applied.

    The court distinguished this case from scenarios where the partnership agreement explicitly outlines a different treatment of real property. Since the agreement was silent on this matter, the default provisions of New York’s Partnership Law applied.

    The court cited Blodgett v. Silberman, highlighting that a state can tax intangible personal property (like a partnership interest) even if the underlying assets are located elsewhere and potentially subject to taxation in another jurisdiction. The possibility of double taxation was not a bar to New York’s right to tax the partnership interest.