Florida Probate & Trust Litigation Blog

Florida Probate & Trust Litigation Blog

By Juan C. Antúnez of Stokes McMillan Antúnez P.A.

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Downbeat Legacy for James Brown, Godfather of Soul: A Will in Dispute

Posted in Trust and Estates Litigation In the News

James Brown died nearly eight years ago at the age of 73. He left an estate estimated to be worth anywhere from $5 million to over $100 million that’s been at the center of heated litigation ever since — in spite of the carefully crafted estate plan he put in place prior to his death. As reported by the NYT in Downbeat Legacy for James Brown, Godfather of Soul: A Will in Dispute:

James Brown’s will was meant to be everything his life was not. . . . The manic energy that fueled a career of funk classics, pyrotechnic dancing and relentless touring as the Godfather of Soul also contributed to a trail of broken marriages, estranged children, tax liens and brushes with the law over drugs, weapons and domestic violence.

By comparison, his will was as orderly as a book of prayer. . . . The bulk of his estate, worth millions of dollars — perhaps tens of millions — was to go to a trust to provide scholarships to needy children here in his native state and in Georgia, where he grew up. But nearly eight years after his death, at 73, on Dec. 25, 2006, the I Feel Good Trust has not distributed a penny to its intended recipients.

After James Brown’s death in 2006, his body was taken to the stage of the Apollo Theater in Harlem, drawing thousands to a public viewing. Credit Justin Lane/European Pressphoto Agency

One of the many lessons this case has to offer is that no matter how crystal clear a person’s testamentary intent may be, or carefully drafted his estate-planning documents might be, it’s all for naught if they’re not properly enforced in the event of a dispute. Which means shaping the dispute-resolution process should always be a planning priority. And how do we do that? Step one: recognize that our underfunded and overworked probate courts are susceptible to being hijacked by litigants having little interest in actually carrying out a testator’s last wishes, which is what’s apparently happened in the Brown case. Again as reported by the NYT:

In 2008, Henry McMaster, then the South Carolina attorney general, intervened. He said that Mr. Brown’s charitable goals had been endangered by the court challenges filed by his family.  . . . Under a proposed settlement with the family, he redirected a quarter of the estate’s assets to Mr. Brown’s children and grandchildren and a quarter to the singer Tommie Rae Hynie, whom Mr. Brown married in 2001 but had left out of the will.

[B]ut last year the South Carolina Supreme Court threw out the attorney general’s settlement. It described the state’s entry into administration of the estate as “an unprecedented misdirection” of the attorney general’s authority that had led to “the total dismemberment of Brown’s carefully crafted estate plan and its resurrection in a form that grossly distorts his intent.” Based on what it had reviewed, the court said that there was no evidence that Mr. Brown had been unduly influenced or that the will was anything but a true expression of his intent.  . . .

“It’s pernicious,” said Virginia Meeks Shuman, who teaches estate law at the Charleston School of Law. “This idea that you can just completely disregard the testator’s wishes is fine if we are going to live in a country where people don’t have a right to say what happens with their assets when they die.”

By the way, this kind of wholesale post-litigation rewrite of a person’s estate plan isn’t limited to celebrities or South Carolina’s courts. It’s a risk anyone caught up in the uncertainties inherent to estate litigation has to deal with. For example, according to most observers the same thing happened in a 1980s will contest litigated in New York City’s probate court system involving the Johnson & Johnson pharmaceutical fortune of J. Seward Johnson, Sr., who died at age eighty-seven in 1983. As famed NYC attorney William D. Zabel wrote here:

[T]he parties decided to settle. The Will was, to put it charitably, totally rewritten by the contestants. The result: any resemblance to Seward Johnson’s actual last Will seemed purely coincidental. Mr. Johnson should be a veritable whirling dervish in his grave, because all his expressed intentions were flouted.

Lesson learned?

One of the most important elements of any estate plan has to be litigation prediction and prevention. But as the Brown case demonstrates, while this kind of focus may be a necessary precondition to good planning, it’s not sufficient all by itself. Once litigation breaks out, it doesn’t matter what the documents say if the dispute-resolution process is flawed. Which means we aren’t doing our jobs if we don’t also plan for this contingency. How do we do that? I’m a big believer in privatizing the dispute-resolution process whenever possible (see here, here). Battle-scarred veterans of actual courtroom encounters usually “get” this idea immediately; planners (who rarely step into a court room) have more trouble with it. Regardless, one way or another these disputes will get resolved. As those caught up on the Brown estate litigation are learning, planning for that eventuality requires a focus on process, not just prevention.

4th DCA: Can “trust protectors” be used to privatize Florida trust-construction disputes?

Posted in Will and Trust Contests, Will Construction Litigation

Minassian v. Rachins, — So.3d —-, 2014 WL 6775269 (Fla. 4th DCA December 03, 2014)

Trust protectors are a standard feature in offshore trusts, but they’re found less frequently in domestic trusts. The 4th DCA’s opinion in Minassian v. Rachins might change that — at least in Florida.

In what could be a ground breaking decision, for the very first time we now have a Florida appellate decision explicitly sanctioning the use of trust protectors in a domestic trust proceeding. Historically, trust protectors were a standard feature in offshore trusts, but rarely used domestically. Times are changing. Over the last few years there’s been a trend towards wider use of trust protectors in domestic trusts, and this 4th DCA opinion may go a long way towards accelerating that trend.

In this case the authority for resolving any ambiguities in the trust agreement was shifted from the courts to the trust protector, thereby effectively privatizing the dispute-resolution process. As readers of this blog know, I’m all for privatizing inheritance litigation whenever possible. The tool I’ve pointed to in the past for getting that job done is mandatory arbitration (see here). We now have another court-sanctioned tool that’s potentially even more powerful: a trust protector authorized to resolve trust-construction ambiguities by amending or terminating the trust after the settlor’s death.

Case Study:

In this case the settlor named his estate planning attorney (i.e., the professional with most knowledge regarding his testamentary intent) as his trust protector. According to the estate planning attorney, his client had very specific intentions regarding how his trust should be administered after his death for the benefit of his wife, and he also expected his children might be less than thrilled with his plans (especially one estranged daughter). 4th DCA:

The trust protector testified in a deposition that he met with the husband twice, first in person to discuss his estate planning desires, and second over the phone to discuss and execute the documents he had drafted. During the husband’s life, the husband and wife’s “lives revolved around horse racing and legal gambling,” and, in the trust, the husband wanted “to provide for [the wife] in the way they had lived in the past….” . . . The trust protector also stated, “This challenge by the children is exactly what [the husband] expected.” The trust protector noted that the husband referred to his daughter in derogatory terms, and that the daughter had not seen her father in years.

When husband died, the litigation he feared (and wisely planned for) materialized in the form a lawsuit filed by his children against his wife (the trust’s sole trustee) alleging she’d breached her fiduciary duties as trustee by improperly administering the trust. Both sides filed summary judgment motions claiming the trust agreement supported their side of the case. When the trial court ruled against wife, she triggered the trust protector clause to simply re-write the trust agreement in a way that favored her litigation position (effectively doing an end run around the trial court’s adverse ruling). 4th DCA:

In the midst of litigation in which the trustee of a family trust was being sued for accountings and breach of fiduciary duty, the trustee appointed a “trust protector,” as allowed by the terms of the trust, to modify the trust’s provisions. These modifications were unfavorable to the litigation position of the beneficiaries, and they filed a supplemental complaint to declare the trust protector’s modifications invalid.

And here’s how the 4th DCA summarized the operative trust-protector clause:

After the trial court denied the motion, the wife appointed a “trust protector” pursuant to Article 16, Section 18 of the trust. This section authorizes the wife, after the husband’s death, to appoint a trust protector “to protect … the interests of the beneficiaries as the Trust Protector deems, in its sole and absolute discretion, to be in accordance with my intentions….” The trust protector is empowered to modify or amend the trust provisions to, inter alia: (1) “correct ambiguities that might otherwise require court construction”; or (2) “correct a drafting error that defeats my intent, as determined by the Trust Protector in its sole and absolute discretion, following the guidelines provided in this Agreement[.]” The trust protector can act without court authorization under certain circumstances. The trust directs the trust protector, prior to amending the trust, to “determine my intent and consider the interests of current and future beneficiaries as a whole,” and to amend “only if the amendment will either benefit the beneficiaries as a group (even though particular beneficiaries may thereby be disadvantaged), or further my probable wishes in an appropriate way.” The trust provided that “any exercise … of the powers and discretions granted to the Trust Protector shall be in the sole and absolute discretion of the Trust Protector, and shall be binding and conclusive on all persons.”

After wife pulled the trigger on the trust-protector clause, plaintiffs cried foul, and the trial court agreed with them, overriding the trust protector’s actions. Wrong answer says the 4th DCA. Here’s why:

  1. trust protectors are authorized by Florida law;
  2. the powers granted to the trust protector in this case are authorized by Florida law; and
  3. the settlor’s intent to use a trust protector (instead of our courts) to resolve this dispute works under Florida law.

Each of these points is a big deal for Florida trusts and estates attorneys (be it as planners or litigators). What makes the 4th DCA’s analysis so useful to working lawyers is its heavy reliance on Florida’s existing Trust Code, which means we now have a statutory road map — blessed by an appellate court — for using trust protectors in Florida trust agreements. You’ll want to hold on to this opinion.

Trust Protector — OK? 4th DCA: YES:

The Florida Trust Code provides: “The terms of a trust may confer on a trustee or other person a power to direct the modification or termination of the trust.” § 736.0808(3), Fla. Stat. (2008) (emphasis added). This section was adopted from the Uniform Trust Code, which contains identical language in section 808(c). See Unif. Trust Code § 808 (2000). The commentary to this section states:

Subsections (b)-(d) ratify the use of trust protectors and advisers…. Subsection (c) is similar to Restatement (Third) of Trusts Section 64(2) (Tentative Draft No. 3, approved 2001)…. “Trust protector,” a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust. Subsection (c) [as enacted in section 736.0808(3), Florida Statutes] ratifies the recent trend to grant third persons such broader powers….

The provisions of this section may be altered in the terms of the trust. See Section 105. A settlor can provide that the trustee must accept the decision of the power holder without question. Or a settler could provide that the holder of the power is not to be held to the standards of a fiduciary….

Id. at Editors’ Notes (emphasis supplied). See generally Peter B. Tiernan, Evaluate and Draft Helpful Trust Protector Provisions, 38 ESTATE PLANNING 24 (July 2011).

Trust Amendment — OK? 4th DCA: YES:

The children make two arguments as to the inapplicability of section 736.0808(3). First, they contend that this provision conflicts with “the black letter common law rule … that a trustee may not delegate discretionary powers to another.” Second, they argue that sections 736.0410–736.04115 and 736.0412, Florida Statutes, provide the exclusive means of modifying a trust under the Florida Trust Code. We reject both arguments.

As to the conflict with the common law, which precludes non-delegation of a trustee’s discretionary powers, this argument fails for two reasons. First, it is not the trustee that is delegating a duty in this case, but the settlor of the trust, who delegates his power to modify to a third person for specific reasons. Second, “The common law of trusts and principles of equity supplement [the Florida Trust Code], except to the extent modified by this code or another law of this state.” § 736.0106, Fla. Stat. (2008) (emphasis added); see also Abraham Mora, et al., 12 FLA. PRAC., ESTATE PLANNING § 6:1 (2013–14 ed.) (“The common law of trusts supplements the Florida Trust Code unless it contradicts the Florida Trust Code or any other Florida law.”). Thus, section 736.0808, Florida Statutes, supplements common law, and to the extent the common law conflicts with it, it overrides common law principles.

Sections 736.0410–736.04115 and 736.0412, Florida Statutes, provide means of modifying a trust under the Florida Trust Code. The children argue the terms of the trust cannot prevail over these provisions, so as to add a method of modification via trust protector, because section 736.0105 provides, “The terms of a trust prevail over any provision of this code except … [t]he ability to modify a trust under s. 736.0412, except as provided in s. 736.0412(4)(b).” § 736.0105(2)(k), Fla. Stat. (2008). Yet section 736.0808(3), Florida Statutes, expressly allows a trust to confer the power to direct modification of the trust on persons other than trustees. “[A] court must consider the plain language of the statute, give effect to all statutory provisions, and construe related provisions in harmony with one another.” Hechtman v. Nations Title Ins. of New York, 840 So.2d 993, 996 (Fla.2003). These provisions of Chapter 736 can be harmonized by concluding that the sections on modifying trusts do not provide the exclusive means to do so, at least insofar as a trust document grants a trust protector the power to do so. Otherwise, section 736.0808(3) would have no effect. Therefore, we conclude that the Florida Statutes do permit the appointment of a trust protector to modify the terms of the trust.

Privatizing dispute-resolution process — OK? 4th DCA: YES:

It was the settlor’s intent that, where his trust was ambiguous or imperfectly drafted, the use of a trust protector would be his preferred method of resolving those issues. Removing that authority from the trust protector and assigning it to a court violates the intent of the settlor.

We therefore reverse the partial final judgment of the trial court and remand with directions that the trust protector’s amendments are valid. We reject all other arguments made by the children against the validity of these provisions, although not ruling on any matters beyond that issue.

Lesson learned?

The overwhelming majority of trusts established in international financial centers include trust-protector clauses. Domestically, this tool has yet to gain much traction (trust protectors aren’t even mentioned in Florida’s Trust Code). I predict competitive market forces are going to change all that. If I’m right, we can expect to see more and more trust protectors in our domestic trust agreements, and cases like this one — providing a detailed statutory road map for their use — are going to pave the way for that change.

For those who may not be all that familiar with trust protectors and how they work, a good starting place to learn more about them is the article by Florida attorney Peter Tiernan cited in the 4th DCA’s opinion: Evaluate and Draft Helpful Trust Protector Provisions, 38 ESTATE PLANNING 24 (July 2011). Here’s an excerpt:

Trust protectors are no longer a feature of only offshore asset protection trusts. Now trust protectors are being used more and more in domestic trusts as well. The expansion of time that a trust can exist without violating the rule against perpetuities in many states is one reason to consider using trust protectors. A lot can change if a trust is to last for a hundred years or more. Appointing a trust protector (or in this case a series of trust protectors) is an excellent way to deal with those changes.

This expanded use of trust protectors leads to some interesting questions:

  • Who should be appointed as trust protector?
  • What powers should be given to them?
  • Are a protector’s powers fiduciary powers, and should they be?
  • Assuming that fiduciary powers are involved, to what standard of conduct should the trust protector be held?
  • What liability is there to a trustee who blindly follows the directions of a protector?
  • If requested by a prospective trust protector to give an opinion as to whether to accept the position of trust protector, what advice should be given?

4th DCA: Ignorance of the law is no excuse. Just because you don’t know you’re legally entitled to trust accountings doesn’t mean you get sit on your hands for years before suing your trustee for never accounting to you.

Posted in Practice & Procedure

Corya v. Sanders, — So.3d —-, 2014 WL 5617045 (Fla. 4th DCA November 05, 2014)

We all know that, generally speaking, ignorance of the law is no excuse. But does this ancient maxim apply to Florida trust-accounting cases as well? Yes! According to the 4th DCA, just because you don’t know you’re legally entitled to trust accountings doesn’t mean you get sit on your hands for years before suing your trustee for never accounting to you.

Case Study:

At its core, the job of trustee is as much about keeping beneficiaries adequately informed as anything else.  Most trust litigation can be traced back to a trustee’s inability to adequately explain him or herself to the trust’s beneficiaries, and this case is no different. It involves several family trusts that had been irrevocable for decades before suit was filed – one dating back to 1953 — for which the trustee had never prepared accountings. When the trustee was finally sued, the plaintiff demanded trust accountings going back decades to each trust’s respective start date.

While there’s no denying trust accountings are a good thing, asking an individual trustee (in this case the plaintiff’s mother) to reconstruct (and justify) every financial decision she’s made going back decades is going too far. So what’s to be done? Limit the accounting obligation to a reasonable window of time, which our legislature’s defined as being four years. There are two ways a defendant trustee can limit her accounting risk-exposure to just four years: on statute of limitations grounds or the “laches” affirmative defense.

SOL = 4 Years:

As explained by the 4th DCA, the applicable statute of limitations period for trust-accounting actions is four years:

Regardless of whether the breach is deemed to be the result of negligence or an intentional act, the statute of limitations for a legal action alleging breach of trust or fiduciary duty is limited to four years. §§ 95.11(3)(a), (o), (p), Fla. Stat. (2008).

That’s the good news; now here’s the bad. As explained by the 3d DCA in Taplin (which I wrote about here), trustees only get to rely on the statute-of-limitations defense if they comply with the two-part test currently found in F.S. 736.1008(1)(b). If your trustee’s never prepared accountings, he or she isn’t going to qualify for this defense, which is what happened here (and in Taplin). The fallback defense is the statutory-laches affirmative defense found in F.S. 95.11(6), which the 4th DCA tells us applies to trust-accounting actions:

We have previously held that section 95.11(6), referred to as “statutory laches,”[FN4] applies to an action for an accounting by a trustee. Patten v. Winderman, 965 So.2d 1222, 1225 (Fla. 4th DCA 2007). Section 95.11(6), Florida Statutes (2008), states:

 (6) Laches.—Laches shall bar any action unless it is commenced within the time provided for legal actions concerning the same subject matter regardless of lack of knowledge by the [defendant] that the [plaintiff] would assert his or her rights and whether the [defendant] is injured or prejudiced by the delay. This subsection shall not affect application of laches at an earlier time in accordance with law.

[FN4.] In Corinthian Investments, Inc. v. Reeder, 555 So.2d 871, 872 (Fla. 2d DCA 1989), the Second District referred to section 95.11(6) as “statutory laches.” See also Nayee v. Nayee, 705 So.2d 961, 963–64 (Fla. 5th DCA 1998) (discussing the inapplicability of section 95.11 to actions against trustees until amended in 1974 to add section 95.11(6)).

Laches = 4 Years:

And because the statutory-laches defense applies, we get looped back to a 4-year statute of limitations for trust-accounting actions:

Because an action for accounting seeking to enforce a breach of trust or fiduciary duty entitles a beneficiary to damages, the application of section 95.11(6) [statutory laches] bars an action seeking an accounting from a trustee more than four years before the action is filed.[FN7]

[FN7.] Even though an action for an accounting is considered an equitable proceeding, it has the features of a legal action. § 736.0106, Fla. Stat. (2008) (“The common law of trusts and principles of equity supplement this code, except to the extent modified by this code or another law of this state.”) (emphasis added). “An action for an accounting was formerly cognizable both at law and in equity.” Nayee, 705 So.2d at 963 (citing Campbell v. Knight, 92 Fla. 246, 109 So. 577 (1926)).

Laches = Evidentiary Hearing = Risk:

All things being equal, it’s faster and cheaper to cut off claims on statute of limitations grounds vs. laches. Why? Because the first defense gets decided purely on the pleadings depending only how much time has elapsed prior to the lawsuit being filed, while laches is an affirmative defense turning on factual issues requiring an evidentiary hearing and all of the delays and expense that entails.

And here’s another drawback to evidentiary hearings: even if the facts and law are on your side, there’s no guarantee your judge is going to get it right. Anytime you have an evidentiary hearing things can go sideways on you, which is exactly what happened in this case when the trial court concluded the laches defense didn’t apply because “[plaintiff's] testimony [was] credible that he did not know he was entitled to an accounting until he met with a Florida attorney in April, 2007.” Based on this ruling the trial court ordered the defendant trustee to prepare trust accountings going back decades.

Ignorance of the law = NO excuse:

According to the 4th DCA, the trial judge got this one wrong. Defendant trustee is only required to prepare accountings going back four years. Why? Because a plaintiff’s ignorance of the law (for example, his legal right to annual trust accountings) doesn’t toll the laches clock until he finally gets around to consulting a lawyer — decades after learning the operative facts for an accounting action:

[Plaintiff] does not dispute that he had actual knowledge that he was a beneficiary of all four trusts for many years before filing suit against [the defendant trustee]. What he claimed at trial and on appeal is that he did not have actual knowledge he was entitled to accountings for each trust until he consulted with a Florida attorney in April 2007.  . . . His failure to know the law or consult with an attorney is not a lack of actual knowledge of the facts (no accountings given to him) upon which the claim is based. See § 95.031, Fla. Stat. (2008) (stating a cause of action accrues when the last element constituting the cause of action occurs). Knowledge of the law is not an element to be proven to establish entitlement to an accounting by a trustee. [Plaintiff's] lack of knowledge of the law had nothing to do with his knowledge that the accountings were not being given to him each year. . . . Research has not revealed a Florida case which holds that a lack of knowledge of the law is grounds to extend the period for laches or toll the running of the statute of limitations. . . . [T]he trial court concluded laches did not apply because [plaintiff] was not aware of the law. This was error.

S.D.Fla.: Can you prosecute an “unjust enrichment” claim in a case involving contested life insurance proceeds?

Posted in Practice & Procedure

Kowalski v. Jackson Nat. Life Ins. Co., 2013 WL 5954380 (S.D.Fla. November 07, 2013)

If you’re a trusts and estates lawyer, a larger and larger share of your practice is going to have little — if anything — to do with our probate code. Why? Think: non-probate revolution. In today’s world most inherited wealth is transferred from one generation to the next by non-probate transfers, which are not subject to probate, are not governed by a person’s will, and are not subject to challenge under our probate code.

Adapt or Perish:

Take for example life insurance policies, a classic example of a non-probate transfer. Vast sums are controlled by these contracts, most of which will never see the light of day in a probate proceeding. According to the latest ACLI statistics, as of year-end 2013 there was $19.7 trillion of life insurance in force in the U.S. and payments that year totaled $107 billion. Trusts and estates litigators who don’t adapt to this dramatically changing legal landscape risk becoming irrelevant.

So what’s to be done? Think transferable skills. Apply the professional experience you’ve developed litigating traditional probate disputes to the non-probate arena. And we do that by learning to prosecute legitimate inheritance grievances in non-traditional forums (such as federal court, a growing trend) involving creative legal arguments that work with non-probate assets (like insurance policies). That’s exactly what happened in the linked-to case above.

Case Study: 

At the heart of this case is a $175,000 life insurance policy on a mother’s life (the “Insured”) bought and paid for by her son (Edward Kowalski) and his wife (Lisa Kowalski, who’s referred to as “Kowalski” in the court’s order). Edward, the sole owner and beneficiary of the life insurance policy, predeceased his mother. After her husband died, Kowalski did everything she was supposed to do under the terms of the life insurance contract to transfer the policy’s ownership to herself, but for reasons unexplained in the court’s order she didn’t follow up on changing the beneficiary designation to herself as well. When mom died, the insurance policy proceeds automatically defaulted to son Edward’s estate — NOT Kowalski. The beneficiaries of Edward’s estate (the “Estate”) apparently included a woman named “Wilson” who wasn’t about to walk away from her share of the life insurance money. To resolve this dispute, Kowalski sued the insurance company, Jackson Nat. Life Ins. Co. (“Jackson”), in federal court seeking a declaratory judgment reflecting that she was the life insurance policy’s sole owner and beneficiary.

Unjust enrichment claim — succeeds:

The key argument addressed in the court’s order was Kowalski’s unjust enrichment claim against the Estate. Did it work? Yes! Here’s why:

[T]o establish a claim for unjust enrichment, Kowalski must establish that she: (1) conferred a benefit on the Estate, which had knowledge of the benefit; (2) the Estate voluntarily accepted and retained the benefit; and (3) under the circumstances, it would be inequitable for the Estate to retain the benefit without paying for it. See Shands Teaching Hosp. & Clinics, Inc. v. Beech St. Corp., 899 So.2d 1222, 1227 (Fla.Dist.Ct.App.2005). Because the Court concludes that the undisputed record establishes each of these elements, the Court will grant summary judgment for Kowalski on her claim for unjust enrichment.

First, the Court finds that Kowalski conferred a benefit on the Estate which had knowledge of the benefit. . . . [T]he benefit conferred on the Estate is the policy proceeds themselves. . . . The undisputed record before the Court further reflects that Kowalski, and her husband, Edward Kowalski, were the sole source of the premium payments which led to the payment of the policy proceeds. . . . Indeed, the Insured herself confirmed in a conversation with a Jackson representative that Lisa Kowalski was paying the premiums. Transcript of July 18, 2010 Call [DE 126–10] at 2 (“my daughter-in-law pays the insurance on my life-but she’s not listed as the beneficiary yet.”); 5 (“I said, You’ve been paying on it, but I don’t think you have the ownership on it.”).

Second, the undisputed record further establishes that the Estate has accepted this benefit. This is evidenced by Wilson’s participation in this litigation as personal representative of the Estate.

Third, the Court finds that under the circumstances it would be inequitable under for the Estate to retain the policy proceeds without having contributed anything towards payment of the policy premiums. . . . To allow the Estate to retain the policy benefits would represent a windfall to the Estate when the undisputed record before the Court reflects that none of the Insured’s heirs contributed anything to the payment of the policy premiums. See Sharp, 511 So.2d at 365. . . . Thus, it would be inequitable for the Estate to retain the policy proceeds. Because Kowalski has established all the elements of unjust enrichment, the Court will grant summary judgment for Kowalski on this claim.

In most disputes involving life insurance proceeds, the terms of the contract control — no matter how unfair the outcome or counter to the policy owner’s testamentary intent. Which means a standard unjust enrichment claim is usually going nowhere in a life insurance case. Where this problem came up most often in the past was in the post-divorce context. A couple would divorce, but one of them would forget to change his or her life-insurance beneficiary designation forms, often resulting in an unintended windfall for the surviving ex-spouse. If someone tried to challenge these obvious mistakes in court, they’d inevitably lose (see here). Eventually Florida passed a post-divorce statutory fix (see here).

This isn’t a post-divorce case, so the statutory fix doesn’t apply. Because there’s a contract in place here, that should have been the end of the unjust-enrichment claim. But it wasn’t. Why not? If you litigate inheritance disputes, this is the single most important question raised by this case.

Contract defense — fails:

The default proposition is that Florida law bars unjust enrichment claims in cases involving parties to a contract:

Wilson asserts that the existence of the insurance policy bars any claim for unjust enrichment. . . . Florida courts have held that contracts barring the unjust enrichment claim must be between the parties to the unjust enrichment claim. See, e.g., Moynet v. Courtois, 8 So.3d 377, 379 (Fla.Dist.Ct.App.2009) (“[W]here there is an express contract between the parties, claims arising out of that contractual relationship will not support a claim for unjust enrichment.”); Diamond “S” Dev. Corp. v. Mercantile Bank, 989 So.2d 696, 697 (Fla.Dist.Ct.App.2008) (same); Shands Teaching Hosp. & Clinics, Inc., 899 So.2d at 1227 (same).

The defense didn’t apply in this case because the person whose life was insured — was not a party to the insurance policy contract. And just because the Insured signed a statutorily-required written consent to the policy, doesn’t mean she’s a party to the contract. And if the Insured wasn’t a party to the contract, her Estate isn’t either.

The Court agrees with Kowalski that the Insured was not a party to the insurance policy. Although the Insured did sign the insurance policy application, as Kowalski points out, her consent was required under Florida law for her son, Edward, to obtain a policy on her life. (Fla. Stat. § 627.404(5)). The policy itself is clear that all rights under the policy belong to the Owner: “[w]hile the Insured is living, all rights of this Policy belong to the Owner.” . . . Edward Kowalski is listed as the applicant/owner on the insurance policy application. . . . Thus, there is no support for the proposition that the Insured was a party to the insurance policy.

Third-party beneficiary defense — fails:

OK, so the Estate wasn’t a direct party to the insurance contract, but was it a party by implication? In other words, was the Estate a third-party beneficiary of the contract? In the law of contracts a third-party beneficiary is a person who may have the right to sue on a contract, despite not having originally been an active party/signatory to the contract.

In this case the insurance policy proceeds had been paid by default to the Insured’s Estate. Did this make the Estate a third-party beneficiary of the insurance contract? Answer: NO. Even though the Estate obviously “benefited” from the contract (it received the insurance proceeds), the Estate wasn’t a “contractual” third-party beneficiary in the sense that would apparently preclude an unjust-enrichment claim. Here’s why:

There is also no evidence that the Estate or the Insured is a third party beneficiary under the policy. Under Florida law, “[t]he beneficiary has no beneficial interest or right in the policy or to the proceeds. The beneficiary possesses only an expectancy during the insured’s life.” Ross v. Ross, 20 So.3d 396, 398 (Fla.Dist.Ct.App.2009) (citing Pendas v. Equitable Life Assurance Soc’y, 129 Fla. 253, 176 So. 104 (1937); Lindsey v. Lindsey, 342 Pa.Super. 72, 492 A.2d 396, 398 (1985) (“the naming of a beneficiary on a life insurance policy vests nothing in that person during the lifetime of the insured; the beneficiary has but a mere expectancy”)). Moreover, to be considered a third party beneficiary under a contract, “a party must demonstrate that the agreement to be enforced shows a clear intent and purpose on the part of the contracting parties that one of them should become the debtor of a third. One who benefits only indirectly from the provisions of a contract made by others for their own benefit, and not for the benefit of such third party, cannot maintain an action upon the contract.” Deanna Constr. Co. v. Sarasota Entm’t Corp., 563 So.2d 150, 151 (Fla.Dist.Ct.App.1990) (citations omitted). “[A] party claiming third party beneficiary status must be shown to be a direct and intended beneficiary of the agreement, not merely an incidental beneficiary; that in order to find the requisite intent to entitle a party to sue as a third party beneficiary, it must be shown that both contracting parties agreed to benefit the asserted third party.” Id. Here, the Estate is only an incidental beneficiary to the policy because the named beneficiary, Edward Kowalski, predeceased the Insured. Thus, the existence of the insurance policy does not preclude Kowalski’s claims against the Estate, a non-party to the contract.

Unilateral mistake defense — fails:

Having struck out on its contract defenses, the Estate then argued you can’t prosecute an unjust-enrichment claim when it’s your own mistake that caused the problem. Kowalski argued the insurance company bore some of the fault for the beneficiary-designation form never having been changed after her husband’s death. The court didn’t buy it. According to this judge, the only party that made a mistake was Kowalski — but it didn’t matter. Even if the Estate’s unjust enrichment was due solely to Kowalski’s unilateral mistake, the Estate doesn’t get to keep the loot.

Florida courts have permitted unjust enrichment claims based upon the unilateral mistake of one of the parties to stand where the other party received an undeserved windfall. See Sharp v. Bowling, 511 So.2d 363, 365 (Fla.Dist.Ct.App.1987) (relying upon unjust enrichment to force an employee to reimburse her employer for moneys the employer had to pay the IRS as a result of an error in reporting the amount of federal income taxes withheld from the employee’s wages. Although the mistake had been a unilateral one made by the employer, the employee, who had received a tax refund from the IRS as a result of the mistake, was unjustly enriched and “[i]n equity and good conscience … should be required to reimburse her employers.”).[FN6]

[FN6.] Wilson attempts to distinguish Sharp on the grounds that Kowalski does not seek the premiums erroneously paid, but rather the full contract amount. . . . The Court does not find this distinction meaningful because it ignores the fact that the Estate, like the employee in Sharp, will receive a windfall in the amount of the policy proceeds, not the premiums paid.

Lesson learned?

Times have changed. Today, life insurance and other beneficiary-designated non-probate assets such as annuities, pay-on-death accounts, joint accounts and retirement planning accounts have become the dominant wealth transfer mechanism for most middle class families (wills and trusts remain prevalent  for the top 1%). This is the single most significant paradigm shift shaping the day-to-day reality of most trusts and estates lawyers and their clients (not the latest incarnation of our federal transfer-tax system, which impacts only the wealthiest 0.14% of Americans — fewer than 2 out of every 1,000 people who die). Cases like the one linked-to above are excellent examples of what more and more inheritance disputes may look like in the future. We ignore them at our peril.

Note to readers:

The linked-to order was published in 2013. I try to report on cases as they’re published. I don’t always succeed. This blog post is part of an ongoing project to report on older cases I wasn’t able to get to previously.

Lessons from “Clarity on Capacity”: A UK-law perspective on the unique ethical challenges faced by estate planners representing clients with diminished capacity

Posted in Ethics & Malpractice Claims, Trust and Estates Litigation In the News

Clarity on Capacity, an excellent article in the March 2014 STEP Journal, examines how recent court cases have raised questions as to the continued suitability of the “Golden Rule”, which governs the ethical duties UK estate planners have when representing clients with diminished capacity.

Florida ethics Rule 4-1.14 and its ABA model-rules counterpart, Rule 1.14, address the unique ethical challenges faced by attorneys representing clients with diminished capacity. To say this is a “thorny” situation is putting it mildly, especially for estate planners, which means any concrete help we can get navigating these dangerous waters is incredibly valuable.

One way to work the problem is to come at it from the clinician’s viewpoint: what are the indicia of incapacity doctors and other therapists look for when diagnosing and treating adults with diminished capacity? For guidance on this front you’ll want to read a handbook published jointly by the the American Bar Association and the American Psychological Association entitled Assessment of Older Adults with Diminished Capacity: A Handbook for Lawyers, which I wrote about here.

Another way to work the problem is to come at it from a comparative-law perspective. How do estate planners in other parts of the world deal with this kind of situation? For example, our Rule 4-1.14 and the “Golden Rule” developed by English courts cover the same scenario: an estate planner representing a client with diminished capacity. But what’s interesting about the Golden Rule is its focus on building a record to counter future challenges to capacity in will contest cases. The Golden Rule was established in a 1975 opinion written by judge Templeman in Kenward v. Adams (1975) The Times 29 Nov, and provides as follows:

In the case of an aged testator or a testator who has suffered a serious illness, there is one golden rule which should always be observed, however straightforward matters may appear, and however difficult or tactless it may be to suggest that precautions be taken: the making of a will by such a testator ought to be witnessed or approved by a medical practitioner who satisfies himself of the capacity and understanding of the testator, and records and preserves his examination and finding.

This is excellent practical advice for any estate planner, no matter where on the planet he or she happens to be working.  But how has this rule played out in real life — especially in the litigation context? Has this good advice turned into a trap for the unwary? That’s the focus of Clarity on Capacity, an interesting article published in the March 2014 STEP Journal. It’s eye opening and well worth reading for Florida practitioners. Here’s an excerpt:

[The golden rule] is helpful insofar as it emphasises that solicitors and will writers must do what the circumstances reasonably require to satisfy themselves that the testator has capacity to make the will; that they must do what they reasonably can to prevent the will being challenged on the ground of want of capacity; and that, where the testator is aged or has suffered a serious illness, these duties will commonly require the making of the will to be witnessed or approved by a medical practitioner who satisfies themselves of the capacity and understanding of the testator, and records and preserves their examination and finding. It is especially helpful because recent research has shown how a ‘good social front’ can mislead someone who is not medically trained into thinking that a would-be testator has capacity.

. . .

It is unfortunate, however, that Templeman J expressed himself in sweeping terms, using the words ‘aged’ and ‘has suffered a serious illness’ without qualification. Indeed, he impliedly ruled out exceptions by saying that the precautions should ‘always’ be taken. If the sprightly widow has had a serious illness from which she has fully recovered, it cannot surely be appropriate, still less necessary, for her solicitor to get a doctor to confirm that she has the capacity to give her estate to her children equally.

. . .

A number of recent cases involving testamentary capacity have raised questions on the golden rule . . . In Sharp v Adam [2006] EWCA Civ 449 the rule was observed, but the trial judge held, largely on the basis of the evidence of experts who had not seen the deceased, that the will was invalid, and the Court of Appeal upheld his decision. In Key v Key [2010] 1 WLR 2020 the solicitor who took instructions for the will was strongly criticised for failing to observe the rule. In Wharton v Bancroft [2011] EWHC 3250, although lack of capacity was not pleaded, failure to comply with the rule was raised in support of a plea of undue influence. The judge said that the failure was irrelevant, because the solicitor had been called to make a will for a dying man.

In Hill v Fellowes Solicitors [2011] EWHC 61, a professional negligence claim against solicitors in respect of an inter vivos transaction, the judge said that there was ‘plainly no duty upon solicitors in general to obtain medical evidence on every occasion upon which they are instructed by an elderly client just in case they lack capacity’.

The remarks of the Court of Appeal in Burgess v Hawes have had their effect. They influenced the judge in Greaves v Stolkin [2013] EWHC 1140, although it was significant in that case that the solicitor who took instructions for the will had asked questions of the testator with a view to establishing his capacity. More importantly, they were usefully explained by the judge in Re Ashkettle (deceased) [2013] EWHC 2125. He said, among other things: ‘Any view the solicitor may have formed as to the testator’s capacity must be shown to be based on a proper assessment and accurate information or it is worthless.’

No reported case seems to have considered the research already mentioned, which shows how a ‘good social front’ can mislead someone who is not medically trained into thinking that a would-be testator has capacity. In Greaves v Stolkin, this research was mentioned, but the judge apparently thought it was irrelevant to the facts.

Someday All This Will Be Yours: A History of Inheritance and Old Age

Posted in Musings on the Practice of Law

One of the most famous sentences in literature is the opening of Leo Tolstoy’s novel Anna Karenina: “All happy families are alike; each unhappy family is unhappy in its own way.” While this may be great art, it’s nonsense in real life. Families caught up in inheritance disputes are, almost by definition, “unhappy”. Trusts and estates lawyers know all too well these unhappy families are often very much “alike” in fundamental ways — especially as litigants. That’s what makes professional experience so valuable; after a while you know what to expect and what your next steps should be (both in and out of court). But what of the past? Has the world changed so dramatically there’s not much we can learn from past inheritance disputes?

That’s a question Hendrik Hartog, a Princeton history professor, grapples with in Someday All This Will Be Yours, a fascinating study of over 200 New Jersey appellate opinions involving estate disputes (including trial transcripts for approximately 60 of those cases) decided as the agrarian 19th century turned into the industrial 20th (circa 1840 to 1940), and families began to face longer life expectancies without the safety nets of pensions, nursing homes, Social Security, Medicare and Medicaid we have today. All of these cases rested on the same underlying transaction: a promise by an older property owner to a younger person — usually a child or another younger relative, but sometimes an employee or neighbor. “Someday,” an old man or woman had said, “all this will be yours!” “When I die, I will leave you the land,” or “I will pay you for your time and effort,” or “you will inherit everything,” or “you will be treated as my own child.” “But until then, you must stay with me and work,” or “stay with me; care for me.” Or, “Don’t leave me!” When the older person hadn’t kept his or her promise, disputes arose, and a percentage of those disputes ended up in court.

While the litigants Hartog writes about may have been acting in historically specific ways, the family dynamics animating their disputes remain the same today. In the cases Hartog analyzed older property owners were using their wealth to counter one of the great fears of old age: loneliness. In addition to fears of loneliness, a yearning for care provided with “[l]ove — incorporating feelings of duty, kindness, sympathy, concern, and affection — also played a crucial role in old people’s strategies.” Property rights, fear of loneliness, a desire for lovingly provided care. Today’s estate planners see these same dynamics at play in their practices every day. In fact, we now have empirical evidence to back up the “folk” wisdom we’ve long taken for granted: loneliness kills. Research shows the effect of loneliness and isolation on mortality is equivalent to smoking 15 cigarettes a day, is equivalent to being an alcoholic, is more harmful than not exercising, and is twice as harmful as obesity (Holt-Lunstad, 2010).

But are we more inclined to sue today than we were a century ago? In other words, can Hartog’s case studies (and the extraordinarily detailed accounts of intimate family relationships offered by the trial transcripts) teach us something we can use today about how to either avoid litigation as estate planners, or successfully resolve these disputes as estate litigators? Short answer: Yes! Based on Hartog’s findings, things haven’t changed all that much. Here’s an excerpt:

One should not be surprised that people chose to litigate when such situations occurred. The moment of parental death was one that was widely understood [circa 1840 to 1940] as a distinctly legal moment in the life course. Inheritance, probate, and the transfer of familial assets were paradigmatic moments when everyone knew they had to deal with the law. Situations involving land and other valuable properties and their final disposition were ones in which, perhaps above all others in everyday life, potential litigants had an enormous incentive to sue. . . . [I]n this individualistic and capitalistic legal culture, such legal conflict was normal, although unpleasant, for family members. It remained a predictable event in a family’s history. Family members would find many disincentives to sue because of the disruption to or destruction of familial relationships. However, by the time litigation was initiated, often the family was already in deep conflict. The possibility of a negotiated settlement may have been long past.

If you read Someday All This Will Be Yours, which I highly recommend, don’t go looking for specific legal strategies. Instead, approach the book for what it is: a richly textured study of how inheritance disputes played themselves out in a specific historical context. While the litigation tactics driving these cases may have evolved over time (for example, today most inheritance-agreement cases in Florida would be governed by F.S. 732.701, not the quantum meruit or specific performance arguments underlying these disputes circa 1840 to 1940), the “human” factor remains the same.

The unhappy family you represented last year (or a decade ago) is not, as Tolstoy claimed, “unhappy in its own way.” Nor were the unhappy families involved in estate disputes a century ago. As Hartog demonstrates, when you know what to look for, families caught up in these cases are much more “alike” than you’d expect. Identifying these patterns of behavior and learning from them is what informs this thing we call “professional judgment.” And that judgment is what sets us apart as lawyers (anyone can google a statute on the internet). That’s a lesson worth learning (or remembering), no matter how long you’ve been toiling away at this weird profession we call lawyering.

M.D.Fla.: Can you be found guilty of “defalcation” for billing a client in accordance with Florida’s statutory fee schedule?

Posted in Compensation Disputes, Ethics & Malpractice Claims

West v. Chrisman, Slip Copy, 2014 WL 4683182 (M.D.Fla. September 19, 2014)

According to the Supreme Court, a person accused of defalcation satisfies the required state of mind when he or she acts with a conscious disregard of a substantial and unjustifiable risk that his or her conduct will violate a fiduciary duty. A “substantial and unjustifiable risk” is one that, “considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.”

If there’s anyone out there that still believes F.S. 733.6171 (the probate code’s attorney’s fee statute) or its trust-code equivalent (F.S. 736.1007) establishes a fee that’s “set” or otherwise blessed by Florida law, this case is going to be a rude awakening. Not only did billing in accordance with the statutory fee schedule not shield a probate attorney from getting his fees cut by 90%!, a bankruptcy court’s ruled he was guilty of defalcation for doing so.

How bad is a finding of “defalcation”? Pretty bad.

In Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), the Supreme Court recently held that a finding of “defalcation” requires evidence of either “an intentional wrong” or “reckless conduct of the kind set forth in the Model Penal Code.” According to the Supreme Court, a person accused of defalcation satisfies the required state of mind when he or she acts with a conscious disregard of a substantial and unjustifiable risk that his or her conduct will violate a fiduciary duty. A “substantial and unjustifiable risk” is one that, “considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.” Id. at 1760.

How could billing in accordance with Florida’s statutory fee schedule result in a court finding that you’ve acted in gross deviation from the standard of conduct a law-abiding person would observe? Read on . . .

Case Study:

This case involves a $23 million estate and a fee dispute between the decedent’s former estate planning/probate attorney (“West”), and the decedent’s daughter (“Aleta”). After her father’s death Aleta signed West’s fee agreement, which proposed that his legal fees be “calculated pursuant to the provisions of Florida Statutes § 733.6171 and § 737.2041,” but included no calculation of the fees. In other words, the fee would be based on a percentage value of the estate, instead of West’s billable hourly rate. When the fee agreement was signed West was also serving as co-trustee of the decedent’s trust, a fact which plays a big part in the bankruptcy court’s ruling. (Anytime an estate planner writes himself into his client’s trust agreement as a trustee, it’s an ethical red flag, see here.)

Applying the fee schedule contained in F.S. 733.6171, West estimated his firm’s fees would be $355,887, based on a percentage value of the estate. Aleta testified that she was “shocked” by that amount, but that West told her that the bill was “set by Florida statute and law,” and that, prior to his passing, her father had known about it. West and his paralegal both deny ever having said any such thing. Anyway, Aleta made two payments (totaling $237,258) before falling out with West, ultimately suing him in state court seeking a return of the fees already paid.

While the state case against him was pending, West filed a voluntary petition for Chapter 7 bankruptcy. Aleta sued West in the bankruptcy proceeding, alleging that he “had abused his fiduciary position as Co–Trustee of the Trust to fraudulently enter into a fee arrangement with the Estate and the Trust.” Aleta sought a determination that West therefore owed a debt equaling the fees already paid him under the arrangement, that would not be dischargeable by his bankruptcy petition.  Under 11 U.S.C. 523(a)(4), debts “for fraud or defalcation while acting in a fiduciary capacity” are not dischargeable under the bankruptcy code (as I’ve previously reported here, here).

To say West got clobbered in his bankruptcy trial is putting it mildly. First, the bankruptcy court concluded that our probate code’s percentage-based approach to compensation does not apply in this case “because clearly that would lead to an unreasonable fee.” Next, using the lodestar method the court determined a reasonable fee of only $24,780, which, when subtracted from the $237,258 in fees actually paid to West, resulted in a total debt of $212,478. Finally, the bankruptcy court concluded that West had falsely represented to Aleta that the fee was set by Florida law and that Aleta had justifiably relied upon that statement in entering into his fee agreement. The bankruptcy court thus concluded that West had made fraudulent representations in violation of his fiduciary duties, and that any fees West owed to Aleta would not be dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(4).

For our purposes, the key ruling on appeal affirming the bankruptcy court’s defalcation ruling against West is the following:

Here, West was Co–Trustee before he entered into the Fee Agreement with Aleta. Accordingly, as the Bankruptcy Court held, he had the duty to do more than simply not to act unreasonably. He had the duty to “administer the trust in good faith, in accordance with … the interests of the beneficiaries,” and to “administer the trust solely in the interests of the beneficiaries.” Fla. Stat. §§ 736.0801 and 736.0802 (emphases added). And he had “[the] obligation to make full disclosure to the beneficiary of all material facts.” First Union Nat’l Bank v. Turney, 824 So.2d 172, 188 (Fla. 1 st DCA 2001).

By entering into the Fee Agreement without affirmatively advising Aleta that such a fee was not mandatory or explaining any alternatives to her, West acted in reckless disregard of these duties. West is an experienced attorney who has practiced law for many years. He admits that he knew that the provisions of Florida Statutes §§ 733.6171 and 737.2041 were not mandatory,[FN3] and that he had a duty to minimize attorneys’ fees, see Doc. 1–125 at 103. Despite having this knowledge and experience, however, instead of advising Aleta of her options, West pushed Aleta to sign the fee agreement, even going so far as to tell her that it was “required” by Florida law. At the very least, West acted in reckless disregard of his duties of loyalty and candor, and grossly and egregiously deviated from the standard of conduct that a law-abiding fiduciary would observe. Accordingly, the Court will affirm the Bankruptcy Court’s finding that West committed a defalcation while acting as a fiduciary, in violation of 11 U.S.C. § 523(a)(4).

FN3. Indeed, West makes much of the fact that Paragraph 3 of the Fee Agreement uses the word “propose,” Doc. 15 at 39–42, and Wigglesworth testified that West sometimes charged flat fees, Doc. 1–77 at 192.

Lesson learned?

We can all agree hourly billing is a terrible way to do business. So what’s to be done? Don’t wait for a top-down solution. Legislating a one-size-fits-all fix doesn’t work (as the tortured history of F.S. 733.6171 makes abundantly clear, see below). The only thing we can do is work the problem from the bottom up, one client at a time, adjusting to the particular facts of each case. For example, if your engagement agreement provides for billing in accordance with Florida’s statutory fee schedule found in F.S. 733.6171, you’ll want this same agreement to contain text affirmatively advising the client that such a fee is not mandatory and explaining possible hourly-billing alternatives. According to the bankruptcy judge in this case, this omission lead directly to the defalcation ruling.

For an excellent discussion of how we can use the latest in behavioral finance to inform our billing practices, you’ll want to read a white paper by Chicago estate planner Louis Harrison entitled Billing in a Pareto Optimal World, which he states “is a result of ten years of analysis and research, and reliance on the principles of behavioral finance to explain irrational client behavior.” I think Harrison’s one of the best speakers in our field. Anyway, here’s his “macro takeaway” as applied to hourly billing:

How interesting behavioral finance is to what we do on a day to day basis. We would theorize that focus on this area could be the single greatest untapped value to us as practitioners. But it does require thought and focus, and effort for which no hourly payment is immediately made. Creativity on bonus structures is perhaps our greatest missed opportunity. As the tired metaphor goes, “we can’t catch any fish if our pole is not in the billing lake to begin with.” We sometimes become so focused on short term results associated with hourly billing that we miss the retirement forest for the billing trees.

I couldn’t agree more. Now if only I could use some behavioral finance magic to get myself to follow his good advice!?

How did we get here?

According to the Florida Bar’s pamphlet on attorney’s fees, there “are more than 200 Florida Statutes which allow for an award of attorney’s fees in certain legal actions.” I’m sure each one of those fee statutes has its own back story, and F.S. 733.6171 is no exception. The spark that lead to the current iteration of the statute was the Florida supreme court’s ruling in In re Estate of Platt, 586 So.2d 328 (Fla. 1991), which concluded that probate courts could not — as a matter of law — approve attorney’s fees based solely on a fixed percentage of the value of the estate. Instead, probate courts are required — as a matter of law — to evaluate contested fees by using the lodestar method (which is all about hourly billing, see here).

After Platt the Bar swung into action, coming up with a series of legislative changes responding to the court’s adoption of the lodestar method and also mounting public dissatisfaction with the then existing probate system (as captured in this 1994 Pulitzer Prize winning series of editorial reports). The statute we have today was passed in 1995. Although it says nothing about “billable hours,” when challenged, courts will (because as a matter of law, they must) apply the lodestar method, which means that in the absence of agreement we’re stuck with the tyranny of the billable hour. For an entertaining blow-by-blow history of the legislative process leading up to our current fee statute, you’ll want to read Paying for Personal Representatives and their Attorneys May Cost You an Arm and a Leg, a 1994 article published in the UM Law Review.

Survey: top three reasons families engage in estate planning: (1) avoid probate (59%), (2) minimize discord among beneficiaries (57%), and (3) protect children from mismanaging their inheritances (39%).

Posted in Trust and Estates Litigation In the News

7th Annual Industry Trends Survey reports that the top three reasons families engage in estate planning are to: (1) avoid probate (59%), (2) minimize discord among beneficiaries (57%), and (3) protect children from mismanaging their inheritances (39%).

WealthCounsel’s 7th Annual Industry Trends Survey looked at the business challenges faced by estate-planning professionals in 2013 and provided insight into what motivates clients to engage in planning.

According to the survey, the top two reasons families engage in estate planning revolve around privatizing the wealth-transfer process (i.e., “avoid probate”: 59%), and the threat of inheritance disputes (i.e., “minimize discord among beneficiaries”: 57%). In my opinion, the single most powerful tool we have as planners responding directly to both of these concerns is the mandatory arbitration clause. These clauses both privatize the dispute-resolution process and minimize the family discord caused by an overworked and underfunded public court system. Back in 2007 Florida was the first state in the nation to adopt legislation expressly authorizing these clauses in wills and trusts (for my write up of the statute and sample clauses, see here).

If you look at any bank, trust company or brokerage firm’s account opening agreement, you’ll find a mandatory arbitration clause in there. If arbitration clauses make sense for corporate institutions with the resources and experience needed to best evaluate the pros and cons of our public court system, why don’t they also make sense for our clients? Answer: no good reason. I’ve written before on why privately funded and administered arbitration proceedings are a better dispute-resolution process for estate litigation. Whether you agree with me or not, there’s no denying this fact: arbitrating inheritance disputes responds directly to the top concerns our clients want us to focus on.

2d DCA: Surviving spouse’s Homestead Rights vs. ex-spouse’s contractual rights under Marital Settlement Agreement. Who wins?

Posted in Homestead Litigation, Marital Agreements and Spousal Rights

Friscia v. Friscia, — So.3d —-, 2014 WL 4212689 (Fla. 2d DCA August 27, 2014)

2d DCA: “[T]he homestead status afforded to the Decedent’s interest in the marital home does not negate the terms of the MSA. . . . Because the MSA provides that it is binding on the parties’ “respective heirs, next of kin, executors and administrators,” . . . Second Wife [is] bound by its terms as well. Unfortunately for the Second Wife, the . . . provisions of the MSA result in her having a life tenancy in the Decedent’s interest in name only.”

It’s not unusual for marital settlement agreements (“MSAs”) to pop up as major players in contested probate proceedings (see here, here, here), what is unusual — which makes this case a “must read” for probate lawyers — is how the MSA’s contractual provisions trumped one of the sacred cows of Florida inheritance law: a surviving spouse’s homestead rights.

Case Study:

The decedent (“Husband”) entered into a MSA as part of his 2008 divorce from “Former Wife”. They had two children together. After the divorce Husband and Former Wife owned their “Marital Home” 50/50 as tenants in common. Under their MSA, Husband and Former Wife agreed she could continue living in the Marital Home until their youngest child graduated from high school, at which point Former Wife had the option of either buying out Husband’s 50% share in the property or selling it and splitting the net sales proceeds 50/50 with Husband.

Husband married again (“Second Wife”), then a few years later died in 2011. Second Wife was the personal representative of Husband’s estate. Husband’s youngest child had yet to graduate from high school in 2011, which meant Former Wife’s occupancy rights under the MSA remained in effect. Second Wife tried to circumvent the MSA by taking control of Husband’s 50% share of the Marital Home.

[1] Can a person have two homestead properties? YES

Second Wife argued the Marital Home didn’t qualify as creditor-protected homestead property because Husband wasn’t living in the house when he died, so she was free to take control of it as PR and sell it pay estate obligations. Wrong answer. As I’ve previously written here, under Florida law it’s possible to have more than one homestead property, even if you’re not living in the second house.

In this case, as in [Beltran v. Kalb, 63 So.3d 783 (Fla. 3d DCA 2011)], the final judgment of dissolution did not operate to transfer the Decedent’s interest and the former marital home had not been deeded when the Decedent died. Thus, the Decedent and the Former Wife still owned the former marital home as tenants in common at the time of his death. See Beltran, 63 So.3d at 786–87. And the fact that the Former Wife had been awarded exclusive use and possession of the marital home did not in itself extinguish its homestead protection. See id. at 787. The Decedent’s interest retained its homestead protection because the Decedent’s sons, whom he still supported financially, continued to live on the property. See id.; see also Nationwide Fin. Corp. of Colo. v. Thompson, 400 So.2d 559, 561 (Fla. 1st DCA 1981) (“[T]he Florida Constitution does not require that the owner claiming homestead exemption reside on the property; it is sufficient that the owner’s family reside on the property.”).

[2] Did the MSA’s sales clause waive homestead property’s creditor protection? NO

Having struck out on her first homestead argument, Second Wife then claimed that the homestead property’s creditor protection shield had been waived by the MSA’s sale clause, so here again she was free to take control of it as PR and sell it pay estate obligations. My guess is that most probate lawyers would have bet on Second Wife winning this point. Why? Because not too long ago in Cutler v. Cutler (a case I wrote about here), the 3d DCA held that a Will’s sale’s clause stripped the decedent’s homestead property of its creditor protection, freeing the estate’s PR to take control of the property and sell it to pay estate obligations. Why the different outcome this time around? Because for probate purposes the homestead property’s protected status gets decided when the decedent dies. If the sales clause applies at death (as it did in Cutler), creditor protection falls; if the sales clause does not apply at death (as in this case), creditor protection stands.

Here’s what the 2d DCA had to say in terms of the importance of timing:

As relates to this case, the operative time frame for determining homestead status is the time of the owner’s death because a property’s character as homestead dies with the decedent. Rohan Kelley, Homestead Made Easy, 65 Fla. B. J. 17, 18 (Mar. 1991); see also Wilson v. Fla. Nat’l Bank & Trust Co. at Miami, 64 So.2d 309, 313 (Fla.1953). “Although the property is no longer ‘homestead,’ the exemption from forced sale ‘bonds’ to the title and transfers to the heir or devisee, if the constitutional conditions are met.” Kelley, supra, at 18.

Again, because the MSA’s sales clause had yet to kick in when Husband died, it didn’t waive the homestead property’s creditor protection shield, which meant Second Wife couldn’t take control of it as PR and sell it to pay estate obligations:

[T]he Decedent’s agreement to sell the marital home was not necessarily inconsistent with the homestead right protecting his interest in the home from forced sale. See In re Ballato, 318 B.R. 205, 209 (Bankr.M.D.Fla.2004) (holding that a provision of a final judgment of dissolution providing for the sale of the marital home and the division of the proceeds does not in itself preclude homestead status on one spouse’s half interest); Barnett Bank of Cocoa, N.A. v. Osborne, 349 So.2d 223, 223 (Fla. 4th DCA 1977) (“[W]e determine the trial court correctly ruled that the property was subject to the homestead exemption claimed by the former husband, notwithstanding the former husband and wife having been divorced and the wife entrusted by the decree with custody of the children and possession of the home” until the youngest reaches majority.).

Similarly, the Decedent’s agreement to divide the proceeds was not necessarily inconsistent with his homestead right protecting his share of the proceeds from claims of his creditors. See Kerzner, 77 So.3d at 217 (holding that a husband’s agreement to sell the marital home and pay any “liens or encumbrances” on the home with the proceeds does not constitute a waiver of homestead protection from claims of his creditors because a judgment held by a creditor is not a lien or encumbrance on the homestead property).

Thus, the MSA provision providing for disposition of the marital home did not constitute a waiver of the Decedent’s homestead protections from forced sale or the use of any sale proceeds to pay his creditors.

[3] Will surviving spouse’s homestead rights trump ex-wife’s contractual rights under the MSA? NO

This is the part of the case I find most interesting. A key component of the MSA was Former Wife’s right to keep living in the Marital Home until the kids were out of high school. This contractual right conflicts directly with Second Wife’s right to a life estate in Husband’s 50% share of the Marital Home, which she’s entitled to under F.S. 732.401(1) if it’s homestead property. Not one to wait around, once she lost her homestead disqualification argument, Second Wife showed up at First Wife’s doorstep and demanded to be let in so she could enforce her homestead life-estate rights. As reported by the 2d DCA, this bit of “self help” didn’t end well:

Second Wife went to the former marital home “to exercise her right in the life estate” and Thomas [Husband's older son] refused entry. When the Second Wife persisted with her attempts to gain entry, Thomas called the police and they escorted the Second Wife from the property. [Second Wife] argued that, as a life tenant, [she] has an unrestricted right of access to the property.

Why didn’t Second Wife’s ploy work? Because under the MSA’s successors-in-interest clause, Husband’s executor (i.e., his PR), heirs,  and “next of kin” (including his Second Wife) were bound by the terms of the MSA as they relate to the Marital Home, even if that means his new wife ends up with a life estate “in name only.”

[T]he homestead status afforded to the Decedent’s interest in the marital home does not negate the terms of the MSA. If the Decedent had lived, the Former Wife would have been entitled to exclusive use and possession of the former marital home. . . . Because the MSA provides that it is binding on the parties’ “respective heirs, next of kin, executors and administrators,” . . . Second Wife [is] bound by its terms as well. Unfortunately for the Second Wife, the . . . provisions of the MSA result in her having a life tenancy in the Decedent’s interest in name only.

Lesson learned?

This “homestead” case has attracted a good amount of commentary (e.g., see here, here). My guess is that most probate lawyers will read it and scratch their heads in consternation, while most divorce attorneys will do the same and feel vindicated. Why? Because at its core this case really isn’t about homestead law, what it’s really about is the lengths to which our courts will go to enforce settlement agreements, even when that enforcement action takes place as part of a probate proceeding involving parties who never signed the contract (like a new wife!).

As noted by the 1st DCA in Pierce v. Pierce (a case I wrote about here), the “mediation and settlement of family law disputes is highly favored in Florida law.” My personal experience is that judges will bend over backwards to hold parties to their settlement agreements, especially in family disputes. If you’re involved in an inheritance dispute that revolves around enforcing an MSA, step one is to get the dispute before the right judge (which may be your family-law judge instead of your probate judge, see here). Step two: hammer away at the point that litigating parties make big sacrifices when they settle their disputes short of trial. The benefit of that bargain is meaningless if the deal goes up in smoke when one side dies. The way we make sure that doesn’t happen is by enforcing MSAs in the probate context, even if that means someone’s homestead rights get sacrificed in the process.

Changing trustees can be contentious, but there are ways for beneficiaries to ease the process.

Posted in Trust and Estates Litigation In the News, Trustees In Hot Water

“Choosing a trustee is hard — but getting rid of one is harder. Beneficiaries who choose to switch trustees can find the process costly, drawn out, and unpleasant. But it may be getting a bit easier. Last year, the Superior Court of Pennsylvania ruled that Jane McKinney, the beneficiary of her parents’ trusts, was allowed to switch trustees from PNC Bank — the trustee after a series of bank mergers — to SunTrust Delaware Trust, which was geographically closer to her home.” Source: Dumping a Trustee, by Amy Feldman, Barron’s (September 27, 2014).

As a family trust moves into its second or third generation, it’s almost inevitable that someone’s going to be unhappy with the trustee. The good news is that most well-drafted trust agreements include a mechanism for replacing trustees as and when needed. Now the bad news: in the absence of good drafting trust beneficiaries may have to sue for the removal of their trustee. In the past the only grounds for that kind of suit was a showing of some kind of malfeasance or negligence. This type of litigation is fraught with uncertainty and usually very expensive to pursue. Fortunately for Florida trust beneficiaries, as of 2007 we’ve adopted § 706(b)(4) of the Uniform Trust Code, which is the UTC’s “no fault” trustee removal provision. This UTC provision is incorporated into our trust code at F.S. 736.0706(2)(d), and it empowers a court to remove a trustee without cause if:

[R]emoval is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available.

Here’s the official commentary to the UTC provision, explaining the rule’s underlying rationale:

It has traditionally been more difficult to remove a trustee named by the settlor than a trustee named by the court, particularly if the settlor at the time of the appointment was aware of the trustee’s failings. . . . Because of the discretion normally granted to a trustee, the settlor’s confidence in the judgment of the particular person whom the settlor selected to act as trustee is entitled to considerable weight. This deference to the settlor’s choice can weaken or dissolve if a substantial change in the trustee’s circumstances occurs. To honor a settlor’s reasonable expectations, subsection (b)(4) lists a substantial change of circumstances as a possible basis for removal of the trustee. Changed circumstances justifying removal of a trustee might include a substantial change in the character of the service or location of the trustee. A corporate reorganization of an institutional trustee is not itself a change of circumstances if it does not affect the service provided the individual trust account. Before removing a trustee on account of changed circumstances, the court must also conclude that removal is not inconsistent with a material purpose of the trust, that it will best serve the interests of the beneficiaries, and that a suitable cotrustee or successor trustee is available.

To date we haven’t had a Florida appellate decision discussing F.S. 736.0706(2)(d). So if you’re involved in a case seeking to apply this statute, for now all you can do is look to rulings from sister states that have also adopted the UTC’s “no fault” approach. Which brings me to In re Jane McKinney Descendants’ Trust, a 26-page scholarly, well written and thoughtful Pennsylvania appellate opinion that’s received a good amount of national attention and is a “must read” for trust lawyers working in UTC jurisdictions (like Florida). Here’s an excerpt from a recent Barron’s piece entitled Dumping a Trustee reporting on the case:

Last year, the Superior Court of Pennsylvania ruled that Jane McKinney, the beneficiary of her parents’ trusts, was allowed to switch trustees from PNC Bank — the trustee after a series of bank mergers — to SunTrust Delaware Trust, which was geographically closer to her home. The case was important because the court didn’t require McKinney to show any cause, such as negligence or bias in its dealings, issues that historically would have been required in forcing a trustee to step aside. Instead, the court ruled that “a string of mergers over several years, resulting in the loss of trusted bank personnel, coupled with the movement of a family from Pennsylvania to Virginia, constitutes a substantial change in circumstances.”

Although the UTC’s no-fault approach is a vast improvement over traditional trust law, it does impose one very significant hurdle: unanimous consent by all of the trust’s beneficiaries. As reported in the Barron’s piece, this may be a lot harder than you’d expect:

It’s especially problematic, if all (or a majority) of a trust’s multiple beneficiaries need to sign off on a change of trustee. A pending Washington, D.C., case revolves around the Tompkins family trust; some of its 94 beneficiaries want to switch trustees. While the Tompkins case may be extreme, getting agreement even among four children after the parents have died may prove difficult enough. “We’ve seen removal delayed because the beneficiaries cannot agree,” says Magill. “It forces shared decision-making that isn’t suited to the circumstances.”

Lesson learned?

Good drafting pays off; include easy-to-execute provisions for removing trustees in all of your trust agreements.