Sunday, April 10, 2005

Family (Dis)Harmony

On Friday, the Court of Appeals handed down decisions in two separate cases involving estate administration questions. I will not comment on one of these cases, Piper Rudnick v. Hartz, because another attorney in this firm was involved in the case. The question before the Court in that case was the grounds that would support the approval by the Orphans' Court of attorneys' fees incurred by a personal representative.

The other case decided by the Court, Brewer v. Brewer, deals with so-called "family settlement agreements" (also referred to by the Court as "redistribution agreements") whereby members of a family agree to divide an estate differently than is prescribed by the decedent's will. The Court held that:
(1) redistribution agreements are permissible and, so long as they comply with the requirements of basic contract law, neither the personal representative nor the court has any authority to disapprove or veto them, but (2) if they are to be implemented as part of the Orphans' Court proceeding, through a deed from the personal representative pursuant to an approved administration account, they must be attached to that account or otherwise made part of the Orphans' Court record. The account must not simply show the distribution in accordance with the agreement but must identify the agreement, incorporate it by reference, and clearly reflect that the distribution is being made pursuant to the agreement rather than pursuant to the Will.
There are two major practical questions that were not addressed by the Court.

First, what does it mean to "comply with the requirements of basic contract law"? In the course of the opinion, the Court noted that "the existence of a dispute is not ordinarily a prerequisite" to the enforcement of such an agreement. However, absent a dispute which a redistribution agreement purports to settle, what is the consideration that supports the contract? Presumably, in certain cases there could be property swaps that would provide consideration (e.g., the will provides that legatees John and Mary will each receive a one-half interest in both Blackacre and Whiteacre, but John and Mary agree that John will receive a 100% interest in Blackacre and Mary will receive a 100% interest in Whiteacre). However, in other cases (e.g., John is rich and Mary is not, so he agrees to forego some or all of his inheritance) this would not necessarily be the case.

Second, there are potential tax implications that must be considered. Of course, these tax issues were not before the Court in Brewer, but should be taken into account when weighing a redistribution agreement. Specifically, if the agreement is entered into after the nine month disclaimer period, it would seem likely that it could be argued the parties to the agreement have created either a taxable event for income tax purposes (as could be the case in a Blackacre/Whiteacre swap illustrated in the first example) or a taxable gift (as could be the case if one sibling waived part or all of his or her inheritance, as might be the case in the second example).

Oddly, the outcome of the case did not turn on the substantive issue concerning the enforcement of redistribution agreements, but rather on whether the plaintiff could reopen the estate after it had been closed for 20 months. Judge Raker dissented, contending that since this issue had never been raised either below or in the petition for certioari, it was not before the Court.

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