Estates & Wills & Trusts, Family, Legal Supplier, Tax

Outsource estates financials, advises accountant

By Rob Lamberti, AdvocateDaily.com Contributor

Unbiased estate and trust accounting for large estates, or those being disputed, should be handled by independent accountants rather than within law firms that don’t have an estate accounting and tax unit, says Avi Dahary, founder of AccounTrust.

“I’m sensing a trend for law firms big and small to keep the accounting for estates in-house,” he tells AdvocateDaily.com. “Big law firms may have the resources and an estate accounting and tax team on staff, but when it comes to boutique or small- to medium-sized law firms, it becomes a different issue.”

Dahary says smaller or speciality firms may not have estate accountants on staff. While simple estates most likely could be prepared in-house by a law firm that doesn’t have an accounting team, they risk doing a disservice to clients if the estates are large and complex, he says.

“It is advisable that the estate accounting is done by an accountant,” he says. “There are many prerequisites and expertise needed to prepare the estate accounting. It can be dangerous.

“I wouldn’t pretend to know how to prepare the applications to pass the accounts even though I prepare the accounting,” Dahary says. “There are a number of steps in preparing to pass the accounts in court, one is the preparation of estate accounts and the other is to prepare the application to pass the accounts.

“Law firms should be dealing with legal matters and accounting firms should be dealing with accounting,” he says. “There should be some sort of limitation in services offered by law firms when there is a dispute because an estate is being contested.”

Dahary says as law firms represent each side in a dispute, and if there is a need to prepare the accounts of an estate, an independent third-party accounting team is needed to ensure the parties can make informed decisions.

Normally, the lawyers would choose an accountant agreeable to all sides in a disputed estate, he says.

“The accounting needs to be free of bias,” no matter if the dispute is in mediation or headed for court, Dahary says. “If one of the law firms is preparing the accounts and is representing one party, obviously there will be some kind of perception of bias.”

He says bringing in an outside accounting firm in an estate dispute ensures expert analysis and neutrality in the accounting.

“There’s the issue of both sides needing to know that their interests are being protected,” says Dahary. “If one side prepares the accounts, it would be natural for the other to be questioning the objectivity of the exercise.

“When it comes to more complicated or bigger estates where there are many issues, whether accounting or taxation, it should be handled by someone skilled in those areas,” he says.

Estates with market values worth millions can be complicated because they could include intricate issues such as property rentals and ownership, art collections, stock accounts, and corporate ownership, Dahary explains.

“Taxation is another issue,” he says. “My firm handles taxation at the date of death and subsequent to that when it comes to the estate. It is highly advisable that the accountant preparing the estate or trust accounts should be the one also preparing the estate or trust tax return(s) and handling tax matters given that the estate accounts and tax return(s) are interrelated.

“But as far as estate accounting, one needs to know how to prepare the accounts for a sophisticated, complicated large estate because there may be issues of classification, how to record a transaction on account of capital, or on account of revenue, and how it affects compensation to the trustee,” Dahary says.

“All these issues come into play for each and every transaction.”

Those calculations require an accountant who is experienced in estate and trust accounting and taxation, he says. And using a third party can allay concerns of bias.

“What may happen if only one side of the equation prepares the accounts, they’re more likely than not to cause increased scrutiny. It wouldn’t be unreasonable for a judge to say they’re concerned about bias,” Dahary says.

That increased scrutiny could result in higher costs as the sides in a dispute challenge and object to the accounting, he suggests.

“It’s natural that the whole process will be dragged out,” he says. “The costs go up and who suffers in the end? The estate and the beneficiaries.

“You want to give a comfort level to all sides that this was done properly,” Dahary says.

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