On June 12, 2023, the Tennessee Court of Appeals (Knoxville) upheld a settlement agreement requiring the recipient of funds in an investment account to pay his share of capital gains taxes. The case, In re Hunt, E2022-00649-COA-R3-CV, arose during the probate of Dr. Robert McPhail Hunt, Jr.’s estate. Hunt purportedly married Zulkifli Atim in Canada in 2010, although the marriage was not disclosed to Hunt’s three children. In March of 2020, Atim opened a joint brokerage account, funding it with Hunt’s assets and naming the two as joint tenants with right of survivorship. Hunt died the following month and the parties disputed whether the account was created with Hunt’s knowledge and consent. Hunt’s Will named his children as his sole beneficiaries.
On April 29, 2020, Hunt’s son filed a petition to probate Hunt’s Will in Hamblen County Chancery Court, Probate Division. Atim filed a petition for elective share, years support, exempt property and homestead.
When the executor reviewed financial records, he “discovered a series of changes made to Decedent’s financial accounts. These changes spanned from 2019 until a few days before Decedent’s death and included the creation of the Account and the transfer of $2,700,000.00 from Decedent’s individual accounts into the Account.” The executor then filed an action against Atim in Chancery Court for conversion, undue influence and damages arising from the Tennessee Adult Protection Act. The executor sought to impose a constructive trust and requested an injunction to prevent Atim from spending or moving the funds.
After unsuccessful attempts at mediation, Atim’s attorney emailed the estate attorney a final settlement offer: “the offer provided that Mr. Atim would “receive $300,000[.00] from the Vanguard Roth IRA [(the “Roth IRA”)],” in addition to $1,800,000.00 “from Vanguard Brokerage Account,” i.e., the Account.” The parties executed a mutual release and settlement agreement five days latter. Notably, the agreement said nothing about taxes.
The probate Court confirmed the settlement agreement and the Chancery Court entered an order of compromise and dismissal, dismissing the claims against Atim with prejudice.
When it came time to divide up money, the brokerage account representative questioned how the funds were to be divided and offered suggestions. Atim simply wanted a check for $1,800,000 plus the Roth funds. The estate suggested created accounts, then distributing Atim’s funds and ‘[a]fter fully stepping up the basis of the accounts to the value as of the date of Robert M. Hunt, Jr.’s death, Zulkifii Atim shall be responsible for the capital gains taxes on this $1,800,000.[00].
Atim found the proposal unacceptable. His position was that he was entitled to after-tax dollars, not tax burdened dollars. Atim’s view was that if taxes were owed, the estate should pay them. This dispute continued until January of 2022, when the estate filed a petition for contempt. In their petition, they asked the Court to instruct the brokerage to “issue a check to Respondent for $1,800,000[.00], but only with a designation of securities to liquidate. Once that check is issued, Vanguard will also issue appropriate tax documentation to Respondent associated with the liquidation of the securities.” Atim filed his own petition for contempt, arguing he should be paid in “dollars” only, not stock positions or account holdings. After hearing the competing motions, the Probate Court held that the estate could allocate and sell certain securities and that Atim was to pay all applicable taxes arising from the sale. The estate was ordered to pay interest if Atim was not paid within thirty days. Atim filed a motion to alter or amend allowing him to roll over the Roth account. That motion was granted. Atim then appealed.
On appeal, the issues were:
1. Whether the Probate Court erred when it ordered Mr. Atim to pay all applicable taxes arising from the sale of securities from the Account.
2. Whether Mr. Atim was entitled to post-judgment interest on the assets awarded to him under the Settlement Agreement.
The appeal was reviewed de novo. A settlement agreement is a contract and matters of contract interpretation are lateal and are entitled to no presumption of correctness. The Court quoted Allstate Ins. Co. v. Watson, 195 S.W.3d 609 (Tenn. 2006), stating:
[a] cardinal rule of contract interpretation is to ascertain and give effect to the intent of the parties. Christenberry v. Tipton, 160 S.W.3d 487, 494 (Tenn. 2005). In interpreting contractual language, courts look to the plain meaning of the words in the document to ascertain the parties’ intent. Planters Gin Co. v. Fed. Compress & Warehouse Co., 78 S.W.3d 885, 889-90 (Tenn. 2002). [Our] initial task in construing the [Settlement Agreement] at issue is to determine whether the language is ambiguous. Id. at 890. If the language is clear and unambiguous, the literal meaning controls the outcome of the dispute. Id. If, however, the words in a contract are susceptible to more than one reasonable interpretation, the parties’ intent cannot be determined by a literal interpretation of the language. Id.
In addition to the settlement language above, the Court of Appeals noted the agreement provided that Atim “shall not inherit any other assets from the Estate, other than those specifically enumerated above.”
The Court found the agreement clear and unambiguous. There was nothing in the agreement requiring that Atim be paid in dollars. The plain and literal reading of the settlement agreement required that Atim be paid from the account. The Probate Court order gave effect to that language. Nonetheless, Atim, the Court said, was asking that a tax provision be added to the agreement where none exists. The Court declined to do so, concluding “that the Probate Court did not err when it ordered that Mr. Atim would bear the tax burden on the $1,800,000.00 in securities sold and distributed to him.”
The Court similarly held Atim was not entitled to post-judgment interest since his actions caused any delay in his payment.
There are a number of lessons here. First, probate litigation is difficult and an alleged marriage makes it more difficult, even where the spouse allegedly attempted to defraud a decedent’s children. This real-world consideration lead to a settlement even where Hunt’s children were convinced that Atim was attempting to steal their inheritance. Difficulty proving that an alleged, but undisclosed marriage took place in a foreign country tern years prior to Hunt’s death might have been a factor causing Atim to settle. Second, if there is a settlement, terms omitted from the settlement will not be added back by the courts to give one party an advantage he or she forgot to include while negotiating the deal. The agreement was rushed with documents being executed a mere five days after Atim’s attorney emailed a final proposal. Perhaps Atim should have slowed down and considered including tax language before signing on the dotted line. Third, if you delay implementing a settlement in your favor, you might not be entitled to interest during the period of delay. Finally (at least for this post), a Will is not the only potential leak in an estate plan. Atim moved funds from Hunt’s estate into a joint account with right of survivorship prior to Hunt’s death. Perhaps Atim knew the Will left everything to the children and he was making a grab for the cash. If those funds had been in a revocable or irrevocable trust, they would not have been accessible without the trustee’s participation and, if the trustee had violated the terms of the trust by facilitating the transfer, the Chancery Court might have set aside the transfer, pulling them back into the estate.
