Summary of a Recent
Judicial Development in
Estate Planning

Special Use Valuation for Taxation of Eligible Real Property

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In First Farmers Bank and Trust Co. v. Whorley, 891 N.E.2d 604 (Ind. Ct. App. 2008), the Indiana Court of Appeals held that the guardian of a legally incompetent man's estate had a fiduciary duty to consider tax consequences arising after his passing, that the heir of his estate had standing to bring the action against the guardian, and that the two-year statute of limitations period for tort claims was applicable and had not expired, but reversed the trial court's partial summary judgment order because a genuine issue of material fact remained concerning whether the guardian's inattentiveness amounted to harmless error.

Background

First Farmers Bank and Trust (First Farmers) was appointed as guardian over the estate of Franklin Zehring, consisting of approximately 2,700 acres of farmland worth over $5 million. Id. at 606. Approximately 90% of the farmland was incorporated in a modified share crop arrangement with Roger Greeson, under which Zehring remained the owner-operator and Greeson acted as the farmland manager. Id. This arrangement allowed the farmland to be eligible for Special Use Valuation for taxation purposes under § 2032A(b)(2) of the Internal Revenue Code, which allows real property used for a qualified use by the decedent, or by a family member of the decedent at the time of the decedent's death, to receive a favorable tax rate. Id. Bank officials were concerned that the arrangement would require hands-on participation and result in high guardianship fees and convinced Zehring and his daughter Whorley (his personal guardian) to cash rent the farmland, but did not advise them that it would render the estate ineligible for Special Use Valuation. Id. at 606-07. When Zehring passed away, First Farmers was appointed executor and personal representative of his probate estate and sought to elect Special Use Valuation. Id. at 607. The IRS denied Special Use Valuation, which resulted in $573,474 of additional tax liability. Id. Whorley then filed a complaint against First Farmers, asserting breach of fiduciary duty for failure to evaluate the tax consequences of converting the farmland to a cash rent farm. Id. The trial court granted her motion for partial summary judgment regarding liability for the additional taxes, and First Farmers appealed. Id.

Arguments

Whorley argued that First Farmers had breached its fiduciary duty by failing to evaluate the effect of converting the farmland from the modified crop share agreement to a cash rent farm, thereby resulting in a significant tax liability to the estate. Id.

First Farmers argued that Whorley's claim was time-barred because the claim was subject to the one-year statutory limitation embedded in the guardianship statute rather than the two-year limitation period for tort claims, and also that she did not have standing to bring her cause of action because the claim was founded solely upon duties that First Farmers owed to Zehring, rather than to Whorley. Id. at 608. First Farmers also argued that it only had a duty to consider the tax considerations that affected Zehring's property during his lifetime, and denied liability for damages because it acted in good faith. Id. at 612-13.

Analysis and Holdings

The court first held that because Whorley's fiduciary duty claim was separate and distinct from First Farmers' final accounting as a guardian, the one-year limitation for guardianship claims was not applicable; rather, since she "molded her complaint as a tort claim for injury to personal property," the claim was subject to a two-year statute of limitation and that period had not yet expired. Id. at 609-10. The court initially agreed with First Farmers that Whorley, as an expectant heir, did not have standing to file a claim in her own name based on First Farmers' duties as guardian of Zehring's estate. Id. at 610. The court reasoned, however, that since the probate estate had closed prior to accrual of the cause of action, Whorley was no longer "an expectant heir [who] cannot maintain an action for the enforcement or adjudication of a right in the property the heir may subsequently inherit," but was instead the primary beneficiary of Zehring's estate, and as such would suffer any damages resulting from the cause of action. Id. at 611-12. The court thus concluded that Whorley had suffered a direct injury as a result of First Farmers' alleged breach of fiduciary duty, as the claim had passed to her upon closing of the probate estate, and therefore had standing to bring the suit. Id. at 612.

The court rejected First Farmers' argument that it only had a duty to consider tax consequences affecting the decedent's property during his lifetime, because "a guardian's duties include estate planning for its protected person, while mindful of the best interests of his ward, spouse or family." Id. at 613. The court found that there was a genuine issue of material fact, however, concerning whether First Farmers had breached its duty as guardian because it was possible that the farmland was ineligible for Special Use Valuation to begin with, in which case First Farmers' inattentiveness would be harmless error. Id. at 614. On the other hand, if the property was originally eligible for Special Use Valuation, the additional tax liability would have to be balanced with the increased guardianship fees that would have been incurred if the farmland had remained with the modified crop share agreement, to determine which method would have been in the decedent's best interests. Id. at 615. Because of these issues of material fact, the court reversed and remanded for further proceedings. Id.

The case was decided on August 5, 2008.