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."

The judge ruled that the accounting firm had a duty to administer the trust correctly and properly pay out income for all beneficiaries and that all beneficiaries had the right to sue the accountant. "There was a fortune involved and they didn't pay out income," Goldberg said. "This case opens up a can of worms throughout the nation. It puts the accounting profession on alert."

If one of the beneficiaries of this particular trust dies before the case is settled, the IRS will force his heirs to include the income they should have received as part of his estate. For example, if the deceased was entitled to $1 million in income last year, the heir "has to pay $450,000 in estate taxes," even if he didn't receive it.

"The average accountant has a problem," Goldberg says. "First, they have to read the trust," which may have been drawn up 20 years ago. "Now, the person dies and [the accountant] has not kept up on the trust provision." A common error is that the accountant has computed commissions improperly, Goldberg says. "We find a lot of accounting and tax errors. One accountant reported the tax wrong for seven years." The bottom line, Goldberg says, is that "if an accountant files an improper tax return and it hurts the beneficiary, he will get sued."

Goldberg has written a couple of books on the subject. First came Can You Trust Your Trust? What Your Family Needs To Know (JKlasser.com, $9.95). That book, about 50 pages long, focuses on the consumer and what he needs to know about trusts, including the cost of administration and how to make sure the accountant or attorney who takes care of the administration is up to speed. He should be taking up-to-date education courses, yet very little continuing education for upgrading skills is available. "Grad law schools don't teach state-specific trust laws," Goldberg says. He adds that there are more than 200,000 lawyers in New York alone and he has trained only four or five of them.

Some bank trust departments, such as those at Wachovia and Wells Fargo, have retained Goldberg to train accountants in New York state, both in person and online, to tell them what they need to know about state laws. He's also done two-hour conference calls with CCH. "The thrust [of the book] is to make sure your accountant or lawyer who is untrained is keeping up on this stuff," Goldberg says. "This is a mess and a tremendous liability for accountants and attorneys."

In a longer version of the book, Goldberg added 80 pages for accountants and attorneys about how to keep up with state laws and how to administer the trust properly. Given the changes in beneficiary laws that followed Goldberg's work on IRAs, I think we can predict that adherence to state trust and estate laws will become a big topic for practitioners and their clients. Stay tuned. 

Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.