Mr. Jones (not his real name), in the course of our typical estate planning process (the same as yours, namely, gathering data on assets, family, and objectives first), had just completed our estate planning questionnaire — let’s call it the "Naked Data Sheet". It requested and Mr. Jones furnished information of the type necessary for any estate planning professional to assess the situation and make some initial recommendations.
In that part of the questionnaire dealing with assets, Mr. Jones said he owned a business (Sub S Corporation) with a value of about $5 million in his own name, all voting stock. Limiting my brief comment here to the business alone for an important point to be made later, we made some typical recommendations, like using voting stock and non-voting stock and giving away the non-voting stock with discounts, of course, to trusts for his children and the like. In view, by the way, of laws in existence today (but probably not then), we would pay close attention to the premium issues with his retained voting stock, even if he did not have control of the voting stock (see the Simplot case).
I did not even question the $5 million value revealed on the data sheet by the client. I did not see business financials other than those which reflected the $5 million value. The bomb dropped when he died about two years later.
The Internal Revenue Service agent placed on my desk during the audit of the client’s estate an Offering Circular prepared and issued by my client (but never shared with me), contemporaneously with the planning we did for his business (in addition to extensive other planning as well), which requested $50 million for his company. That is, the company that he told me was worth $5 million. I planned his estate accordingly.
The agent finally settled on a value for federal estate tax purposes of roughly $38 million for the company, leading to liquidity problems and distortion of all other planning. Because of large additional wealth in the estate, installment payment of his taxes related to his business was inapplicable because his estate did not meet the required tests.
What does this tell us about hidden dangers in gathering estate planning data? Answer — a lot! The family was very upset with the audit results, notwithstanding the incorrect information furnished to us on value. I will not speak about that ugly side of the story.
Our data sheets now (and I hope after reading this column, yours as well), require that the client sign the data sheet at the end, and verify that the information is correct.
We further state in bold letters:
"The information you have furnished will be relied upon by us in making recommendations for the revision of your estate plan (financial plan, if relevant), and if the information given is either incorrect or incomplete, our recommendations may be inappropriate, or worse, harmful. We, therefore, rely upon you, as we must, to take the necessary time and diligence to place into our hands data which can and will be used by us with competence in helping you meet your objectives. We obviously cannot be responsible for recommendations made or conclusions reached which later prove to be erroneous because of incorrect or incomplete data."
Use the language you prefer, but the adoption of the principle is the key.
It has always been and remains the purpose of this column not just to entertain (Wit), and offer insight and information (Wisdom, but to protect all estate planning professionals who turn to this column from malpractice or ethical claims, or just the inconvenience or difficulties which can develop with clients under the most innocent of circumstances, like gathering data for estate or financial planning. I do not think there is a trust officer, private banker, insurance agent, broker, accountant, attorney, financial planner, or investment advisor who does not gather data before giving advice, and the wisdom contained herein of certain protective measures in the process will serve each of us well, without offending the client or customer.
The logic to the client or customer should be compelling (the computer analogy) "junk-in — junk-out". The message is obvious. Dispense with the "Naked Data Form", which furnishes information without verification and/or certification. These steps are taken to protect you, and just as important, better serve your client or customer. Any estate planning professional (not just attorneys), assumes this hidden risk if he or she doesn’t heed the precautions stated, or their equivalent, like a gentle letter containing the same theme.