Trusts and Estates

Ca. Trs. & Estates Quarterly 2019, Volume 25, Issue 3


By Brian G. Fredkin, Esq.,* and Ryan J. Szczepanik, Esq.**

The merits of the claims typically drive the negotiations to resolve a trust or estate dispute. Tax issues often are a secondary focus. It is not uncommon for the litigator to wake up the morning after reaching a settlement wondering if she or he neglected to appreciate a significant tax issue. The purpose of this article is to help trust and estate litigators identify the tax issues most likely present in a trust or estate dispute, so they can be sensitive to these issues when guiding their clients through settlement.

The trust and estate litigator advising on a settlement strategy should always consider the impact that taxes may have on the value of a claim. If a property right or interest is transferred, modified, or terminated in a settlement, the client may be subject to unanticipated tax exposure. For example, the client may receive an IRS Form K-1 or 1099 in the year following a settlement requiring the client to report as taxable income all or part of the settlement payment. The IRS may notify the client who is the surviving spouse that a lump-sum payment he or she received in a settlement terminating the surviving spouse’s interest in the deceased spouse’s estate has triggered an estate or gift tax. The IRS may notify the client that the partition through settlement of a trust that was exempt from the generation-skipping transfer tax has caused the trust to lose its exempt status. The local county assessor may notify the client that real property received in the settlement will be reassessed for property tax purposes.

This article focuses on the relevant tax laws and techniques an attorney may employ to: (1) avoid an unexpected tax surprise when guiding the client through settlement of a trust or estate dispute; and (2) reach a settlement agreement that the IRS and federal courts are more likely to respect for federal tax purposes.

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