Estate Beneficiaries Sue E&Y For Faulty Tax Advice

Big Four firm Ernst & Young faces a court battle in the Circuit Court of Jackson County, Missouri, where beneficiaries and trustees of an estate claim the firm cost them millions due to a miscalculation of potential estate tax.

At issue in the estate of the late Kansas City banker John J. Sullivan Jr. is the valuation of bank stock owned by the decedent. The estate was valued at approximately $23 million at the time of Mr. Sullivan's death in 1999. Nearly 80% of the estate was in Mercantile Bank stock.

Ernst & Young and the estate's law firm, Elder & Disability, advised estate trustees to hold the Mercantile Bank stock for six months after Mr. Sullivan's death and then sell, thus enabling the stock to qualify for an alternate valuation date for purposes of determining the value of the estate. Approximately 2/3 of the Mercantile Bank stock was held in the estate and not sold right away in order to take advantage of the alternate valuation date.

The purpose of the alternate valuation date is to protect estates from a sharp decline in the value of estate holdings. If the stock drops considerably in value after the date of death, instead of using the stepped up basis for valuing the stock as of the date of death, the stock can be valued at its market value six months after the date of death.

By using the lower value for the stock, the estate can pay less in estate taxes than it would by using the value at the time of death.

This was the plan in the case of Mr. Sullivan's estate. Unfortunately, while the stock did as expected and dropped in value from $28.37 per share in November 1999 to $17.50 per share in March 2000, E&Y advised the estate's trustees that the stock did not qualify under the alternate valuation date rule and thus estate taxes would have to be paid using the stock value at the time of death. Meanwhile, the stock had decreased in value so that when it was sold there was much less money available to pay the estate taxes and the residual amount distributed to heirs was depleted.

E&Y and the Elder & Disability law affirm both deny any wrongdoing in the case. E&Y claims the trustees lost money from investment decisions they made.


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