FEBRUARY 26, 2001 VOLUME 8, NUMBER 35
Craig Fitzgerald was a successful accountant living in New Jersey; when he died he left three children and a wife. In the immediate aftermath of the unanticipated loss of her husband, Joan Fitzgerald did not realize that she had estate planning problems of her own to deal with.
Mr. and Mrs. Fitzgerald had originally hired their neighbor, attorney Francis Linnus, to prepare wills. Mr. Linnus had given them proposed drafts in 1988 but they had not actually signed their wills until 1995, just over a year before Mr. Fitzgerald’s death. Mr. Fitzgerald, who was not only an accountant but also held a law degree and an M.B.A., had instructed Mr. Linnus that the wills should not include tax planning considerations, as Mr. Fitzgerald intended to review the couple’s entire estate plan himself. As a consequence Mr. Fitzgerald’s will simply left his entire estate to his wife.
Mrs. Fitzgerald contacted lawyer Linnus immediately after her husband’s death. She retained him to represent her as executrix (personal representative) of her husband’s estate, and to help her collect life insurance proceeds from policies naming her as beneficiary.
Most of Craig Fitzgerald’s assets went to Joan automatically, so the probate process itself was quite simple. Although the couple’s assets totaled about $2 million, only $65,376 of that would ultimately go through probate. Another $2.2 million in life insurance would go directly to Mrs. Fitzgerald, and attorney Linnus completed and filed the applications for those benefits.
At first glance Mrs. Fitzgerald’s financial problems looked easy to solve. She would now have assets worth more than $4 million to take care of herself and her children. There is no estate tax due on money left to a spouse and life insurance proceeds are not subject to income taxes, so the tax liability as a result of Mr. Fitzgerald’s untimely death would be minimal.
Mrs. Fitzgerald’s tax problem will be apparent, however, to most estate planning professionals. Because no effort was made to preserve Mr. Fitzgerald’s estate tax exemption, Mrs. Fitzgerald’s estate will be subjected to much higher taxation on her death—assuming, of course, that the estate tax system remains unchanged.
Even with the failure to plan carefully all was not lost. Mrs. Fitzgerald could have disclaimed her right to receive life insurance proceeds and allowed those benefits to flow directly to her children. While she would not have benefited from the proceeds herself she could have reduced her own ultimate estate tax liability.
That, in fact, is exactly what lawyer and social friend Lisa Butler told Mrs. Fitzgerald a few weeks after she had received the life insurance proceeds. Disclaimers can usually be signed and delivered up to nine months after the death of the person from whom property would be received, and a disclaimer is not itself a gift of property. Unfortunately for Mrs. Fitzgerald there is one other requirement: a disclaimer must be executed and delivered before the proceeds have been received and used.
Mrs. Fitzgerald sued Mr. Linnus, her original lawyer, for failing to advise her about the availability and timing of disclaimers. Her children joined in the lawsuit, alleging that Mr. Linnus owed them a duty as well, and Mrs. Fitzgerald’s failure to know about and sign a timely disclaimer would ultimately cost them thousands of dollars in unnecessary estate taxes.
The Appellate Division of the New Jersey Superior Court decided that Mrs. Fitzgerald’s claim against Mr. Linnus could not stand. The problem, according to the appellate judges, was that Mrs. Fitzgerald was not actually injured by the lack of advice. In fact, she was several hundred thousand dollars better off for not having gotten—or taken—the disclaimer advice. Mr. Linnus owed no duty to the Fitzgerald children, according to the judges. In fact, the appellate judges were persuaded by the testimony of Mr. Linnus, corroborated by Mrs. Fitzgerald, that her primary concern when she first consulted with him was to get control of the estate and ensure her own financial security. The court dismissed all claims against the lawyer for failure to advise Mrs. Fitzgerald about a course of action she might have taken. Estate of Fitzgerald v. Linnus, January 22, 2001.
