Attempted Disclosure of Confidential Financial Information

Many estate litigators are familiar with the fight for disclosure of personal income tax returns or financial documents.  Perhaps you have represented the beneficiary who insists upon the disclosure of a trustee's personal income tax returns because they are certain some "funny business" is going on, or it will make them cave to settlement demands.  It seems clients are always seeking disclosure of an adversary's personal finances.  Whether it is legitimate or simply curiosity, income tax returns are not discoverable absent a "strong showing that the information is indispensible to the claim and cannot be obtained from other sources."  Matter of Herscher, N.Y.L.J., Aug. 18, 2012, at 22 (Sur. Ct. New York County) (Glen, J.).

Matter of Herscher is an interesting analysis of this standard.  The trust at issue had been established by the parties' mother.  The children shared equally in the trust's remainder, but Son objected that the distribution was improperly delayed.  Son demanded disclosure of Daughter's tax returns to ensure that all trust assets were accounted for and there were no improper payments by the trustee.  Daughter sought Son's tax returns based upon an informal contention by Son that he may have suffered damages due to her tax accounting for the trust, even though the claim was not part of Son's formal objections.

The New York County Surrogate's Court looked at each claim separately and determined that Daughter's personal income tax returns were discoverable because of the significant allegation (supported by documentary evidence) of fiduciary misconduct, including commingling of trust assets with the trustee's personal assets.  Daughter's returns were initially provided for an in-camera review by the Court.  However, since no formal objections placed Son's income tax returns at issue, Daughter failed to meet even a relevance standard, much less the higher standard needed for disclosure.  A protective order was thus issued preventing disclosure of Son's returns.

A similar case, Matter of McClusky, N.Y.L.J., Oct. 19, 2012 (Sur. Ct. Nassau County), involved allegations of imprudent investing by the trustee of a testamentary trust.  The trustee requested objectant's personal investment portfolio to determine whether the objectant would have chosen to sell or retain the trust securities, had the trustee distributed the securities to the objectants on an earlier date.  Trustee hoped this would offset any damages resulting from his retention of the trust securities by showing the objectants would not have sold the securities during that time period, even if they had been able to do so.

In denying the request, the Court found that the trustee was positing false logic in arguing that an imprudent trustee can offset any losses resulting from his mistakes if he or she can show that the beneficiaries would have made the same mistakes.  This incorrectly implies that if the beneficiaries themselves failed to meet the investment standard set by the Prudent Investment Act, they are not entitled to recovery.  To the contrary, it is the trustee who owes the fiduciary duty to the beneficiaries, regardless of what the beneficiaries may or may not have done.

As illustrated by these recent cases, confidential financial information of parties is protected from disclosure absent the necessary strong showing that the information is indispensible.  Rather than a protracted disclosure battle, counsel should consider alternatives including stipulated facts or other less invasive disclosure.

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Jennifer F. Hillman is an attorney at Ruskin, Moscou Faltischek, P.C., Uniondale, New York where her practice focuses in the area of trust and estate litigation.  She can be reached at jhillman@rmfpc.com

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