I love to find out about obscure tax and estate planning details. That's how I got to know Seymour Goldberg, an attorney, CPA and MBA holder. Goldberg has just won a case that could set a precedent for allowing beneficiaries of a trust to sue the accounting firm that handled it if there has been malfeasance. Currently, the beneficiaries must sue the trustee.
In the early 1990s, Goldberg, who practices at Goldberg & Goldberg in Woodbury, N.Y., did pioneering work on the best way to choose beneficiaries for your IRA ([email protected]). Using his recommendations for setting IRA beneficiary designations, a taxpayer could save thousands-or even hundreds of thousands-of dollars in income taxes.
The laws have changed since then, and Goldberg has moved on to what he calls "forensic accounting," which is how he got involved in the various state laws on trusts. He tracks these state laws, particularly in New York, and teaches accountants and lawyers about their intricacies.
Many experts suggest that estate clients set up trusts to avoid probate, Goldberg says. But estate planners often overdo them, creating problems for both beneficiaries and ultimately for accountants if the trusts are set up improperly. "This is an area of tremendous liability for accountants and attorneys," Goldberg says. "The bottom line is if an accountant files an improper trust return and it hurts the beneficiary, they will get sued."
One problem is that trusts can be cumbersome and difficult to manage, as well as expensive for the taxpayer and his beneficiaries. Trust tax returns might cost $5,000 a year to prepare, Goldberg said. A second problem is that each state follows different trust laws. Many accountants don't understand all of the fine print in a state law and, as a result, often set up trusts that are flawed and open to legal challenge.
Goldberg studies the state laws to see if he might uncover some of these mistakes. Not long ago, an accountant friend brought Goldberg a trust that had named several of the accountant's clients as beneficiaries. The accountant didn't think the trust was up to snuff, though he wasn't sure what was wrong with it.
But Goldberg knew. In the many years of its existence, the trust had paid out no dividends to the beneficiaries. Under New York law, a trust can give the trustee discretion to pay out income or it can mandate that the trust pay out income. In this case, it was mandatory. The document said that the beneficiaries "shall receive income each year." But the trustee had paid no income and never told the beneficiaries they had the right to receive it.
Suppose, says Goldberg, that one of the beneficiaries had $1 million in income due from the trust last year. Rather than paying it, the accountant paid $400,000 for income tax out of the trust and kept the rest inside. What the accountant should have done was pay the $1 million to the beneficiary, who would then pay $350,000 in taxes and have $650,000 left. So the beneficiaries lost out on years of mandated trust income. Now, Goldberg said, "We're making them file amended returns."
This case offered an extra twist in that some of the beneficiaries were clients of another accounting firm whose partner was the trustee. So the accountant/trustee "hit" his clients with a double whammy: He did not tell them they were entitled to the trust income, and he did not report the mandatory income on their tax returns.
"We sued on behalf of all beneficiaries," Goldberg said, arguing that the accounting firm had never explained their rights nor provided the mandatory income. The accounting firm's insurance company filed a motion for dismissal on the basis that beneficiaries could not sue the accountants. Instead, the insurer said, beneficiaries must sue the trustee. But Goldberg argued that "some of the beneficiaries are clients of the accountant and [the accountant] did not report their income accurately on the returns he prepared. So, surely, they can sue the accountant."