Iraqi Heir Loses Half of Estate, Blames Bank After years of litigation, plus an appeal to Georgia’s Supreme Court (see Namik v. Wachovia Bank of Ga., 612 S.E.2d 270 (Ga. S. Ct. 2005), the Court of Appeals in Georgia recently upheld a $1.1 million judgment against Wachovia Bank of Georgia for failing to avoid estate taxes on trust assets held for a non-resident-alien (“NRA”) (see Wachovia Bank of Ga. v. Namik, 620 S.E.2d 470 (Ga. Ct. App. August 25, 2005). Although the latest appeal in this case was published in August of 2005, the trial took place in 2002. Here’s an excerpt from this 2003 newspaper story regarding the facts of the case:
The case tests to what extent a bank can be held responsible for investment decisions that expose an estate to higher taxes. The issue is clouded, however, by the bank’s unsuccessful efforts to contact the client, who died in an Iraqi prison. Issam Namik, son of retired Iraqi general Ibrahim Namik Ali, claims Wachovia mismanaged a living trust his father established with the bank in 1989. The bank, he claims, failed to follow Ali’s instructions and unnecessarily exposed the $3 million estate to $1.4 million in estate taxes. In December 2002, a Fulton County probate judge ordered the bank to pay $1.1 million to the estate. According to documents in the trial and appeals courts, Ali came to Atlanta in the spring of 1989 to visit his son. While he was here, he set up a living trust at Wachovia. Ali bought three certificates of deposit, two for $350,000 and one for $2.65 million. The bank sent Ali to trust officer Thomas Slaughter, who set up the revocable living trust with the understanding that when the largest CD matured, the proceeds would fund the trust. Ali told the bank he wanted the funds invested only in U.S. government backed investments, and Slaughter set down Ali’s instructions in a memo, according to court documents. The largest CD matured in September 1989, with $2,780,380 rolling into Ali’s trust. A new trust officer tried repeatedly to contact Ali, using the phone number and addresses Ali had provided earlier that year, but failed. Namik claimed he ordered the bank to stop trying to contact his father because Ali had been arrested on his return to Iraq and was in danger. Meanwhile, in order to avoid what it thought would be a 30 percent income tax withholding requirement, Wachovia parked the funds from the Ali trust in a tax-free Fidelity money market account while awaiting further instructions from Ali. Those instructions never came. Ali, arrested immediately and without explanation upon his return to Iraq, died in custody in May 1990. Namik didn’t learn of his father’s death until 1992 and did not inform the bank until 1994. Wachovia didn’t receive a death certificate until 1995, and that’s when the legal struggle began. (Emphasis added.)
Lesson Learned: U.S. situs assets held by non-resident-aliens (“NRAs”) are subject to U.S. estate taxes (see IRC § 2101 and IRC § 2106). Avoiding this tax is so simple U.S. corporate trustees run the risk of getting sued when beneficiaries learn that dad’s savings account just got chopped in half to pay easily avoidable U.S. estate taxes (which is what happened to Wachovia in this case). In this case Wachovia learned that short-term U.S. treasury bills (under 183 days) are subject to U.S. estate tax, while long-term U.S. treasury bills are not (see IRS Technical Advice Memorandum 9422001). Any corporate trustee that services NRA clients owes it to itself (and its shareholders) to know these tax situs rules cold.