Fraud and the Thieving Son

Family disputes are difficult enough in the best of times – but what is a professional advisor to do when wronged family members turn a blind eye to the actions of a crooked sibling?

Andrew D. Pappas, CPA

In the real world, the discovery of fraud generally triggers decisive action on the part of the victims in order to reclaim what they have lost. But in the Lewis Carroll scenario that unfolded in one of our recent engagements, the inexcusable acts of the perpetrator were ultimately met with a figurative shrugging of shoulders, despite the magnitude of the wrongdoing.

Background. Mrs. Smith was a wealthy widow. She lived in a multi-million-dollar home that was owned by a trust that she and her late husband had established. The Smiths’ marriage had produced four adult children:

• Dave, a salesman;

• Stephen, a teacher;

• Ned, a drug abuser who jumped from job to job and was frequently unemployed; and

• Rhonda, who was mentally incompetent and financially supported by her mother.

In addition to her home, Mrs. Smith’s wealth consisted of nearly a million dollars in liquid assets, including a number of stocks. Instead of keeping her stocks in a brokerage account, she held the certificates directly.

The three sons – Stephen, Dave and Ned – were co-trustees of their mother’s trust and were named as co-personal representatives (PRs) of Mrs. Smith’s estate.

Mrs. Smith began to experience poor health and was eventually found to be terminally ill. Her condition deteriorated to the point that she went into a coma from which she never emerged.

During her illness, her oldest son, Dave, gave up his sales job. He and his girlfriend moved in with his mother, and he opened a checking account jointly owned by him and his mother.

Our Investigation. Dave engaged us to prepare the estate tax returns. He indicated that he believed there would be no estate tax due.

In the process of preparing the returns, we compiled a gross estate that was significantly greater than Dave had described. His prediction of zero estate tax liability was based on his assumption that his mother’s home, being owned by the trust, would not be included in her gross estate. Unfortunately for Dave and his siblings, the home was includable in compiling the gross estate. Dave did not take this news well, and his attitude toward us quickly cooled.

Relations became chillier yet when, as we progressed in our work, we began to encounter other information that unfurled a number of red flags.

First, we found that, during the weeks leading up to Mrs. Smith’s death, her trust and will were amended to remove Ned (the drug-abusing, intermittently employed brother) as a co-trustee and co-PR. Despite being in a coma at the time the changes were made, Mrs. Smith was, remarkably, able to write her name, as all of the amended documents bore her signature.

Second, we found that Dave had raided his mother’s estate. Without his siblings’ knowledge, he had gone on a spending spree before and after her death, using more than $800,000 of her money for paying off personal debts, expensive meals, jewelry, antiques, and other purposes, including major dental work for his girlfriend. (When he testified in court, he stated that he was entitled to the use of his mother’s cash and securities as compensation for the sales job that he gave up when he and his girlfriend moved here from out of state.)

In his capacity as co-PR, Dave was responsible for paying the tax on his mother’s estate. He informed us that he would refuse to do so. By this time, paying the estate taxes was not a viable option, thanks to Dave’s looting of the estate.

Attempted Action. With the help of the estate attorney, we contacted Stephen, the second son and the remaining co-PR under Mrs. Smith’s amended will. When we first informed him of his brother’s plundering of their mother’s estate and his other actions, he appeared to be outraged. He was initially very cooperative and provided us with information and documentation regarding the estate.

However, Stephen proved to be a very passive, confrontation-averse, can’t-we-all-get-along, money’s-not-important-to-me type, and, after spending a weekend with Dave, he became less outraged with Dave and less cooperative with us. Ultimately, neither Stephen nor Dave complied with our requests for certain information necessary to complete the estate tax returns, and they refused to pay the estate tax estimate that we had calculated.

Further, Dave refused to fund two spendthrift trusts that, pursuant to Mrs. Smith’s trust, were established upon Mrs. Smith’s death for the benefit of Ned and Rhonda. Evidently intent on preserving whatever family harmony remained, Stephen chose to overlook Dave’s actions.
Because our client in this matter was not Dave per se but, rather, Mrs. Smith’s estate, I conferred with an attorney regarding our responsibility to the other beneficiaries. On the attorney’s advice, we contacted Ned and Rhonda in writing to inform them of their brothers’ actions. Then, having completed all of the services we were engaged to perform, we had no reasonable choice but to terminate the engagement.

Reminders. The fiasco that the Smith estate became serves as a reminder of the risks of having family members as the only fiduciaries of an estate or trust. These include:

• The potential lack of understanding by family members of the responsibilities and duties of acting as a fiduciary, including potentially not understanding the terms of the estate or trust documents.

• The lack of a professional fiduciary to provide oversight of the actions of the other fiduciaries, thus allowing “bad actions” to go undiscovered for longer than they should.

• The emotional and psychological barriers that inhibit one family member from challenging the actions of another family member. Having a professional fiduciary provides a “safe” way to challenge the actions of a runaway family member, lessening the likelihood of damaging family relationships.

In the end, an estate or trust document is only as good as the fiduciaries that are responsible for carrying out the wishes of the decedent/grantor.

While the preceding account is based on an actual case, the facts have been simplified and the names of all parties have been changed.

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