In Sherman, et al. v. Shub, et al., SUCV2007-02547BLS1 (Lauriat, J.), in an issue of first impression in Massachusetts, the Massachusetts Superior Court rejected a Chapter 93A claim by plaintiffs alleging their trust attorneys and financial advisors drafted their life insurance trusts in a manner that would result in significantly higher future tax liabilities because the relief requested – damages based on future tax liability – was too speculative. The plaintiffs also asserted various common law claims, including professional negligence, against the defendants. The Court previously had dismissed those claims because they were time-barred by the statute of limitations. But, had the Court not previously dismissed plaintiffs’ professional negligence claim against the defendants, based on the Court’s reasoning in its decision, that claim likewise would have failed for the same reason – damages based on future tax liability are too speculative.
The plaintiffs, brothers who are both cardiologists, each purchased life insurance policies, which were to become assets of irrevocable life insurance trusts. Various family members are beneficiaries of the trusts. Both trusts were executed in September 1992. The trusts were identical in all material respects, as was the insurance coverage purchased for the trusts. In 2004, the plaintiffs reviewed their estate planning and discovered what they claim to be defects in the trust documents that could result in increased estate and gift tax liability in the future. In June 2007, the plaintiffs sued the defendants, a group of trust attorneys and financial advisors who were involved in drafting their estate plan, to recover this alleged increased future gift and estate tax liability.
The defendants moved for summary judgment arguing that the damages sought by the plaintiffs are too speculative because such damages are only subject to calculation at the time of the plaintiffs’ deaths and would be subject to numerous, currently unknown and unknowable variables, including: the value of the decedent’s estate; the nature and amount of any deductions, credits and exemptions that may be available in each estate; the state or jurisdiction in which each asset is located; the applicable federal and state estate tax laws in force at that time; the decedent’s marital status; and, the identity of the beneficiaries of each estate. The plaintiffs, on the other hand, argued through their expert that: “damages may be reasonably calculated by estimating estimating the additional estate taxes for which the parties can be held liable on account of additional, but initially avoidable, cumulative gifts made by them on account of the deficiencies.” Plaintiffs argued the assumptions that their expert asks the Court to make when calculating damages on plaintiffs’ future tax liability is no different than those assumptions a court makes when calculating lost profits for a business tort claim or the value of a person’s life in a wrongful death or personal injury claim.
The Court disagreed with the plaintiffs’ argument and entered summary judgment in favor of the defendants. The Court stated “[i]t is not uncertainty as to the amount of damages that precludes recovery, but rather the uncertainty as to the existence of damages.” When determining lost profits in business tort claims and the value of a person’s life in personal injury and wrongful death claims, the Court stated there is an established or predictable factual record in the form of past earnings or past income which can be used to project future earnings or future profits. There is, however, no established or predictable record for determining the future tax liability of an estate. Even assuming there were no changes in the plaintiffs’ personal circumstances and the size of their estate at the time of their deaths, a court can make no such assumption with respect to federal and state statutes that may then be in effect. As an example, the Court referenced the fact there is currently no federal estate tax. The Court “is not in a position to divine the future intent and/or actions of Congress or to make such a prognostication.” Although this issue was one of first impression in Massachusetts, the Court noted its holding has support in several other jurisdictions, including the Eleventh Circuit and the Court of Appeals of New York.
As the Court’s holding is based on sound reasoning, and finds support in other jurisdictions addressing this issue, claimants bringing similar claims against their attorneys and financial advisers to recover future unknown estate tax liability would be wise to seek other, non-monetary avenues of relief, such as judicial reformation of the trust.