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How a CPA Helped the Family of a Late Millionaire

Nov 27th 2018
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Dealing with the loss is hard enough, but add in some complicated tax matters and overwhelm for the survivors sets in, which is why I was glad to be a CPA.

Some of the most interesting and satisfying projects of my time in public accounting have been helping out people when a family member passes away. I recall the case of when “Robert,” we’ll call him, came to our office after the death of his Aunt Dottie.

Robert and his four brothers had learned that they were the beneficiaries of her $10 million estate. Dottie hadn’t been in the greatest of health for some years and they weren’t even sure she was still alive at 99.

None of the brothers had any idea that they were Dottie’s beneficiaries until “Peter,” we will call him -- Dottie’s long-time personal attorney and executor of her estate -- ushered the brothers into a borrowed office at the funeral home and shared Dottie’s will with them. Peter, who was in his 80s, began the process of organizing the chaos of Peggy’s financial affairs.

He consolidated the bank accounts, gathered the many uncashed dividend checks found scattered in her home, and began selling her property – a stock portfolio, her late husband’s family estate on Long Island and a co-op apartment on Park Avenue. Peter also moved the majority of Dottie’s individually-owned stocks into an account with a broker to begin the process of selling them. Peter, who was not a CPA, also filed the 706 for her estate, her final 1040 and the first 1041 for her estate.  But, before he could complete the process, Peter himself had a fatal heart attack, which left the estate in limbo.

The backup executor named in Dottie’s will was in his 90s and declined the duty, so Robert – the youngest of the brothers and a retired art professor – was chosen by family consensus. The brothers found a law firm in New York to take on the legal aspects of the estate and Robert was assigned the task of finding an accounting firm to help with the tax and accounting issues, which is where we came in.

To begin with, the IRS had found problems with Peter’s tax work. The first page of Dottie’s 706, which Peter filled out using a typewriter, had a typo in her Social Security number, which delayed the IRS in processing the return.

The IRS auditor also determined that Peter had undervalued Dottie’s estate by $768,000. Peter had missed some of the stocks in Dottie’s extensive portfolio and the Long Island property had sold just a few months after her death for more than the appraised value. So the IRS wanted an additional $413,000 in tax plus $69.000 in penalties.

By the time we started working with Robert he had agreed to the additional tax and penalties. I reviewed the IRS auditor’s report and found that she had dealt fairly with the estate. She even allowed for additional estate expenses which had been left off the original 706, so there was no reason to challenge her findings or the additional tax due.

Then there was Dottie’s final 1040, also filled out by typewriter. Peter had allocated income between Dottie’s final 1040 and her first 1041, but had not shown the reconciliation between her 1099s and the amounts reported on her 1040, so the IRS wanted an additional $43,000 in tax and penalties.

Robert then brought us a pile of documents from Peter’s work on his Aunt Dottie’s estate. Peter really was old school, so nothing was computerized. We had the typed list of Dottie’s stock holdings, which included:

  • hand-written and basically illegible ledgers detailing the quarterly dividend checks received
  • an incomplete set of bank statements from multiple accounts
  • scribbled notes of Peter’s time spent on various tasks
  • a smattering of 1099s for the year of Dottie’s death
  • account transcripts and notices from the IRS

What we didn’t receive were any kind of workpapers for Peter’s tax work. Starting with the list of Dottie’s investments from her 706, plus the additional stocks the IRS auditor found in the 706 audit and others I discovered, I began the task of reconciling the income on Dottie’s IRS transcripts with what was reported on the tax returns.

To make it more challenging, Peter didn’t break out the income by source on her returns, but reported all of her income in aggregate. So, instead of reporting Pfizer dividends of $8,000 and Exxon dividends of $1,200 and so on, Dottie’s final 1040 reported total dividends of something like $250,000.

The handwritten ledger pages helped some, but I found it easier to calculate the dividend income Dottie would have received prior to her death by looking up dividend payment amounts and dates for each stock online, multiplied by the number of shares listed on the 706.

Using that process, I was able to get within a few hundred dollars of the total income Peter reported on Dottie’s 1040 and 1041. Using that detailed information, I prepared an amended final 1040 for Dottie.

Peter had left off some miscellaneous income Dottie received, so there was a small amount of additional tax due, but the $1,500 liability I came up with was a whole lot better than the $43,000 bill Robert had received. Given the chaos and complexity of Dottie’s financial affairs, and Peter’s old school typewriter method of tax return preparation, it wasn’t surprising he missed a few things.

Even the IRS auditor missed a few things. About three years after Dottie’s death, Robert received a notice from one of those organizations that public companies hire to track down shareholders they can’t find. According to that notice, there was about $100,000 worth of stock waiting for Dottie or her representative to claim them.

Another one of my tasks was to account for the liquidation of the assets in Dottie’s estate. This meant tracing assets from the listing on the estate tax return through sales documents, brokerage statements and bank accounts to their eventual distribution as cash to the beneficiaries. In the end, everything was accounted for.

After seeing all the errors that Peter made during his time as executor of Dottie’s estate, Robert was wary about the details of financial transactions. Plus, while Robert had experience in dealing with large bureaucratic organizations from his years in academia, he knew little about taxes and the legal issues of settling an estate, nor was he prepared for the responsibility of dealing with such a large estate and his duties to his brothers and their families.

My ability to explain the transactions and the tax issues helped Robert “get a good night’s sleep” after we took over. It took a team effort between the attorneys in New York, the stockbroker who sold the stocks, customer service at Dottie’s banks (the least helpful of all), Robert and his brothers, myself and others at the firm to get everything in the estate sorted out and distributed to the right people.

The most gratifying part of the process was hearing Robert’s reports of how Dottie’s generosity had changed the lives of Robert and his brothers and their families. One of the brothers had lost his life savings in the economic crash and was considering a return to work at age 71.

The last I heard from Robert, he had just bought himself a cottage on Martha’s Vineyard and was in the process of transforming it into his dream home.

Do you have any stories about how you, as an accounting professional, helped change a client’s life?

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