Passing of Accounts: A Math Problem Explained

In a recent blog post entitled “Things Lawyers Know,” I laughed out loud when I read #13:  “Lawyers are word, not number people.  If their fee went up 10%, few lawyers would know how much extra they received.”

Math often comes into play in an estates litigation practice, particularly in the context of a contested passing of accounts.  In the recently released endorsement, In the Estate of Norma Baer, the Court grappled with a contested passing of accounts in the face of an admitted breach of fiduciary duty by the estate trustees.

Norma Baer left her estate to her five children equally.  Two of the five children, Howard and Jeanette, were named as estate trustees.  Howard and Jeanette acted improperly, the Court found, when they agreed to sell the estate’s principal asset (the family farm) to their brother Frank for $300,000, despite an appraisal which placed the fair market value at $450,000. (Quick experiment: If you are a lawyer reading this blog, can you calculate the percentage below FMV of the sale?)  Upon learning of the below-market sale to Frank, the two other beneficiaries, Nancy and Karen, complained.

The estate trustees took steps to repair the damage caused by their breach.  Frank agreed to cooperate by listing the farm for sale on MLS and re-selling it to an arms’ length party.  The farm was sold for $450,000, with the result that the estate trustees escaped liability for potential damages of $150,000.

On the passing of accounts, however, there was still some dispute about what expenses the estate trustees should bear personally as a consequence of their breach.

The court agreed with the objectors that certain expenditures were not for the benefit of the estate (legal fees paid out of the estate for the aborted first sale to the brother, for example), and therefore should be repaid by the estate trustees.  The objectors argued that those wasted expenses should be deducted from the estate trustees’ entitlements as beneficiaries.  However, the judge (a clear exception to the rule that legal minds can’t do math) pointed out that “this ignores the fact that, in their personal capacity as estate beneficiaries, Howard and Jeanette would be entitled in due course to a portion of any funds returned by them to the estate, whereas a charge for the same amount against their inheritance would deprive them unfairly of that benefit.”

To illustrate:  If the estate had $500,000.00 available for distribution to the five beneficiaries, and $10,000 in wasted expenses were to be deducted from each of Howard and Jeanette’s share, then Howard and Jeanette would each receive $90,000.  But if they each paid $10,000 back to the estate, that would increase the amount available for distribution to $520,000.  Divided 5 ways, this would provide $104,000 to each beneficiary.  After taking into consideration the $10,000 each had to re-pay to the estate, Howard and Jeanette would net $94,000 (instead of $90,000).

Depending on the size of the impugned expenses, this could amount to a material difference.  This mathematical distinction between a repayment to the estate versus simply deducting questionable expenses from the “guilty” estate trustee’s share as beneficiary is one that I have seen overlooked in a number of cases over the years.

Happy calculating!

P.S. – An interesting article in the New York Times looked at some cases involving dire consequences of bad math by lawyers and judges in trials.  Here’s the link.