How to Conduct 2103 Inquiry Stage Examination

Frank W. Streng, Surrogate’s Court Lawyers

by Frank W. Streng on 09/21/2011

Westchester County Bar Association – Trusts & Estates Section

September 21, 2011

“Everything you Wanted to Know about Property Turnover Proceedings in the Surrogate’s Court”

Frank W. Streng, Esq.

McCarthy Fingar LLP

11 Martine Avenue

12^th Floor

White Plains, NY 10606

Phone: 914-385-1022

Email: fstreng@mccarthyfingar.com

How to Conduct 2103 Inquiry Stage Examination

Strategies for Conducting 2103 examination

Preparation, preparation, preparation

Preparation of topics/questions for examination
Collecting exhibits for examination
Interview clients to obtain facts, anecdotes and documents

Limitations of 2103 examination

Unlike normal EBT, where you serve DNI production demand prior to EBT, you can’t get documents prior to inquiry stage of 2103 examination

What is a “topical” examination?

Developing topics and subtopics for examination

Identify a comprehensive list of subjects for the examination
Hone in on your facts and available documents
With few exceptions, do not write out questions; the danger of developing questions for EBT is that the questioner limits the examination; topical examination requires questioner to develop questions from both topics/subject matter and answers to questions

Possible disadvantages of topical examination

Requires questioner to be comfortable on his/her feet
EBTs are “direct” examinations; yet there are times when precise questions need to be asked. A good EBT will have at least a couple “gotcha” moments

Outline of topical examination for Garrett Studds

Facts

Eileen Diamond Smith died on 6/1/2011 in Scarsdale of brain cancer at the age of 70. She was diagnosed with brain cancer in 10/2009. At her death, Eileen was divorced for 10 years from her first husband, John Smith, in which they had 3 children, our clients, James Smith, Kyle Smith and Lynn Smith. Eileen also had a boyfriend and fiancée, Garrett Studds, who was named as executor under her Will and was 30% beneficiary of tangible personal property and residuary estate under Eileen’s Will. Our clients are 70% beneficiaries of such TPP and residuary estate. Eileen’s financial advisor, Josephine Studds Jones (Garrett’s cousin), was named as alternate executor.

In addition to family inheritance, Eileen was a well known and respected art dealer and collector. Prior to her death, Eileen’s art dealership, located in Manhattan and held in corporate form (Eileen’s Diamond Art, Inc.), was netting annual profits of about $500,000. In addition, her private art collection had an approximate value of $5 million. Eileen’s fiancée, Garrett Studs, who was a former male model, was being groomed in the art dealership by Eileen and has, by all accounts, grown the business and was poised to take over the business after Eileen’s expected death. Eileen met Garrett 3 years ago through a mutual friend, at a time when Garrett’s career as a male model had ended and his sole source of income was as a male escort. Garrett started worked in the art dealership about 2 years ago, and was making a sizable salary. After their engagement (9/2009), our clients provided us with many anecdotes in which Garrett appeared to be isolating Eileen from our clients; and our clients are concerned that their mother was being improperly influenced to do things to help Garrett.

Eileen’s affairs at the time of her death were complicated by several things: first, when Eileen and John Smith were divorced, Eileen and John agreed to the following provision in their separation agreement (dated 6/1/2001) was incorporated in their divorce decree:

9. John and Eileen agree that they shall make wills or other documents in which each of them give at least 70% of the assets owned by each of them at their death to their children, James, Kyle and Lynn, and not to make nontestamentary transfers inconsistent with this provision.

Eileen did two things during her lifetime that could be argued to be inconsistent with paragraph 9 of the separation agreement. On 1/1/2010, she made a gift, in cash and public securities to Garrett Studds in the amount of $500,000, and a gift of 3 works of art that Eileen had purchased years earlier and had a book value on her company’s records of $500,000. On the same date, she also “sold” to Garrett a 50% shareholder interest in Eileen’s Diamond Art, Inc. for $500,000. Our clients tell us that in December, they had found out that Garrett had threatened to end the relationship with their mother, if she did not make the gifts and sale. Our clients had obtained emails from their mother’s computer, without Garrett’s knowledge, and have provided us with such emails. It appears that the gifts and sale was handled by Garrett’s friend and attorney, Jeff Bush, but we don’t have any documents on the gift and sale or Jeff’s involvement.

Second, when Eileen was in a final illness, 3 months before she died, she appointed Garrett Studds as an agent under a power of attorney form dated 3/1/2011, in which under a major gifts rider, she authorized Garrett to make gifts to himself and to Eileen’s 3 children. The form was prepared by Eileen’s long-standing attorney, Steven Bonano. On 5/1/2011, a month before she died and when Eileen was in a coma, Garrett made two gifts: a gift, valued at $500,000, of the remaining shares in Eileen’s Diamond Art, Inc. (making Garrett the 100% shareholder); and a $500,000 gift, in cash, in equal shares to Eileen’s 3 children. Steven Bonano was not involved in these transactions, and, apparently, Jeff Bush was advising Garrett as to such matters.

After Eileen’s death, her will, dated 5/5/2011 (prepared by Steven Bonano), was admitted to probate, with waiver and consents signed by Eileen’s 3 children. However, Mr. Bonano was not retained to handle the probate proceeding and the administration of the estate by Garrett. Instead, Garrett’s friend and attorney, Jeff Bush, has handled all matters, including failed effort to oppose our clients’ application for limited letters. After a vigorous battle, in which virtually no new facts and documents surfaced, our clients were granted limited letters and moved forward with a 2103 inquiry stage proceeding against Garrett Studds. Prior to the examination, Garrett, as executor, had filed Federal and New York estate tax returns, and Federal gift tax returns.

Documents for 2103 Examination

Will dated 5/5/11
Petition for preliminary letters, including schedule of assets
Power of attorney form dated 3/1/2011
Corporate Tax Return for Eileen’s Diamond Art, Inc. – 2009
Financial statements for Eileen’s Diamond Art, Inc. – 2009
Photographs of Garrett Studded
Separation Agreement dated 6/1/2001
Photographs of Eileen Diamond Smith
Various medical records

10. Various letters written to Garrett or Garrett’s lawyers (re demand for information/documents, etc.)

11. Email from Garrett to Eileen in 12/2009 re threat to end relationship

12. Federal Estate Tax Return

13. New York Estate Tax Return

14. Federal Gift Tax Return

Background

Education (high school onward)
Social security number
Family relationships
Employment
- Male model (scope problem)
- Male escort (scope problem)
- Eileen’s Diamond Art, Inc.
  - Salary history on employment

Eileen Diamond Smith (died on 6/1/2011 in Scarsdale of brain cancer at the age of 70. She was diagnosed with brain cancer in 10/2009)

First meeting
- Source of relationship: male escort (scope problem)
- Relationship with Eileen
  - It is fair to say that sex was a motivating factor in the relationship for Eileen? (scope problem)
  - Engagement
  - Relationship with Eileen’s children, James Smith, Kyle Smith and Lynn Smith
  - Eileen’s illness
    - Description
    - Eileen’s ability to make decisions
    - When, in fact, did Eileen’s illness reached the point when she could no longer make decisions
      - Coma
      - Capacity before coma
      - Did you, at some point, decide that you wanted to end the relationship?

Eileen’s Diamond Art, Inc.

Description of business
- netting annual profits of about $500,000
- When you first worked in business
  - groomed in the art dealership by Eileen and has, by all accounts, grown the business
    - things you have done to grow the business
    - Show 2009 tax returns
    - Seek 2010 and 2011 tax returns (DNI request problem)

Eileen’s Will and Estate Planning

Will
- Show; when you are first aware of will and Eileen’s estate plan (scope)
- Garrett’s involvement in will (scope)
- Involvement of Eileen’s financial advisor, Josephine Studds Jones (Garrett’s cousin), on will (scope)
- You are executor
  - Show Federal & NY estate tax return
  - Show Federal Gift Tax return
  - Relationship with Eileen’s lawyer, Steven Bonano
    - Was Mr. Bonano ever your lawyer?
    - Separation Agreement dated 6/1/2001
      - Show; when you are first aware
      - Discussions with Eileen on obligations to give her children 70% of her assets
      - Discuss provisions of agreement:

Discussion of agreement with your lawyer, Jeff Bush (attorney client issue)
Discussion of agreement with Steven Bonano (attorney client issue)
- Didn’t Mr. Bonano tell you that the agreement would be violated by any gifting?

Gifts and “gift” sale on 1/1/2010 (cash and public securities; 3 works; “sale” of 50% shareholder interest in Eileen’s Diamond Art, Inc. for $500,000)

Describe gifts
- Cash and securities
  - Documents executed
  - Seek documents (scope)
  - 3 items of art work
    - Full description
    - Seek evidence as to gift
      - Donative intent
      - Delivery
      - Acceptance
      - Location of art work at time of gift
        
        Isn’t it true that these 3 works of art were located at the art gallery at the time of gift and that their location never changed
        
        Seek documents (scope)

Circumstances of gift
- Whose idea was the gift?
  - Seek full description of discussions between Eileen and Garrett
  - Emails of December, 2009
    - Our clients tell us that in December, they had found out that Garrett had threatened to end the relationship with their mother, if she did not make the gifts and sale. Our clients had obtained emails from their mother’s computer, without Garrett’s knowledge, and have provided us with such emails.
    - Inquire about Garrett’s threats
    - Eileen’s physical and mental condition at time of gifts
    - Show medical records
      - Do you see the reference in the records that Eileen was disoriented
      - What evidence do you have that she was not disoriented at the time of gift.

Discussion of gifts with attorneys and other advisors
- Steven Bonano?
- Jeff Bush?
- Others?

Show Gift Tax return

Sale of ½ stock for $500,000

Whose idea was this?
Seek full description of conversation between Eileen and Garrett
Seek contract of sale (DNI Request Issue)
- Seek full description of contract and terms
- Attorney for transaction
  - Jeff Bush.
  - Show gift tax return and inquire why stock sale not described as gift
    - Valuation problem
    - Discuss current operation of art gallery business (scope)

Gifts pursuant to Power of Attorney dtd. 3/1/11

power of attorney form dated 3/1/2011
- major gifts rider
  - authorized Garrett to make gifts to himself and to Eileen’s 3 children.
  - form was prepared by Eileen’s long-standing attorney, Steven Bonano
  - Discussions with Mr. Bonano on circumstances in which gifts could be made to you?
    - Discussion on separation agreement (attorney client privilege)
    - Gifts made on 5/1/2011 (a month before she died and when Eileen was in a coma)

Garrett made two gifts
- a gift, valued at $500,000, of the remaining shares in Eileen’s Diamond Art, Inc. (making Garrett the 100% shareholder)
- a $500,000 gift, in cash, in equal shares to Eileen’s 3 children.
- Circumstances surrounding the gift
  - Discretion exercised in making gift to yourself
  - Legal and tax advice on gifts
    - Steven Bonano was not involved in these transactions
    - Jeff Bush was advising Garrett as to such matters

Discussions with others on today’s examination

Review of documents to prepare for today’s examination