Lyons v. Lyons, — So.3d —-, 2014 WL 5460621 (Fla. 4th DCA October 29, 2014)

“The Federal estate tax exemption is high enough, $5.43 million per person and double that per couple, that it only affects the very wealthiest people in the country – not even 1% – but an outdated estate planning technique meant to get around a much lower exemption in the 1980s and 90s has left a nasty surprise for anyone still using a qualified personal residence trust (QPRT).” How QPRTs Went From Effective Estate Planning To Time Bomb

This is one of two cases published in 2014 involving litigated homestead rights and property deeded to a qualified personal residence trust (QPRT). (The other was Stone v. Stone, which I wrote about here.) Prior to 2014 it had been over ten years since a Florida appellate court mentioned the word “QPRT” . . . and now all of a sudden we have two QPRT cases in one year. Coincidence? Maybe. It might also reflect the fact that this once common tax planning strategy is now backfiring on many families, and a spike in QPRT/homestead litigation is part of the collateral damage. Here’s an excerpt from How QPRTs Went From Effective Estate Planning To Time Bomb:

The Federal estate tax exemption is high enough, $5.43 million per person and double that per couple, that it only affects the very wealthiest people in the country – not even 1% – but an outdated estate planning technique meant to get around a much lower exemption in the 1980s and 90s has left a nasty surprise for anyone still using a qualified personal residence trust (QPRT).

. . .

The problem is that QPRTs transferred ownership without an increase in basis. In other words, if a house was bought for $100,000 decades ago, transferred via QPRT, and later sold for $1 million (not at all unreasonable figures) the children would have to pay capital gains tax on the $900,000 increase. That might have made sense when there was the trade-off of avoiding estate taxes, but the rationale behind QPRTs has mostly disappeared.

Case Study:

In 1993 Richard and Norma Lyons, a husband and wife, signed a joint deed transferring title to their homestead property to Norma alone. On that same day Norma signed another deed transferring title for the homestead property to a QPRT. Richard and Norma had five children. Richard died in 2007. In 2010 Norma signed a deed transferring title to the homestead property to herself and one of the couple’s daughters, presumably bypassing their three sons. The sons objected; suing to set aside the 2010 deed. Norma defended her 2010 deed by claiming her original 1993 deed transferring the house to the QPRT was invalid because it violated her predeceased husband’s homestead rights, thus it remained her property to do with as she pleased.

Let me digress here a moment. Putting aside the standing issue that ultimately decided this case, the sons’ challenge to their mother’s 2010 deed probably would have prevailed anyway. First, the joint deed Richard and Norma signed in 1993 conveying title to their homestead property probably resulted in a valid waiver of dad’s homestead rights (see Stone v. Stone here). Second, once Norma conveyed the homestead property to the QPRT in 1993, it stopped being her property to give away in 2010 — it was trust property (see Aronson v. Aronson here).

Does a surviving widow have “standing” to assert her predeceased husband’s homestead rights to undo her own actions? NO

Now back to the case at hand. The trial judge was asked to decide if Norma had standing to challenge her own actions as a violation of her pre-deceased husband’s homestead rights. Norma said she did, her sons said she didn’t. Art. X, § 4(c) of the Florida Constitution and F.S. 732.4015(1) prohibit the devise of homestead property if the property’s owner is survived by: (1) a non-owner spouse or (2) minor children. Norma didn’t fall into either of these two protected classes, which means she lacked standing (as argued by her sons). The trial court judge didn’t see it that way, ruling in Norma’s favor. On appeal the 4th DCA reversed, here’s why:

In this case neither Norma nor the adult children were members of the class specifically protected by the constitutional provision. . . . As to Norma, although she is a surviving spouse, she owned the homestead and transferred the homestead to the QPRT. Article X, section 4(c) does not serve to protect Norma from her own actions in transferring her own homestead property.

The plain language of the constitutional provision describes and limits the actions of the owner of the homestead property. . . . The entire provision hinges on the conduct of the owner spouse, and the resultant protections to the non-owner surviving spouse or minor children.

Clearly, in the present case, Norma and her husband were owners of the homestead when they quit claimed the homestead to Norma. Norma then became the sole owner of the homestead and quit claimed the homestead to the QPRT. Norma cannot now claim the quit claim she then executed as sole owner was void ab initio, as she is not the non-owner surviving spouse. At the time of Norma’s quit claim to the QPRT, the only non-owner spouse was Richard.

If there were any infirmities in Norma’s action of quit claiming the homestead to the QPRT, only Richard as the non-owner spouse could rely on the provisions of article X, section 4(c). Clearly, Norma does not have standing to assert Richard’s potential rights had he been the surviving spouse. Norma, as the owner, should not be able to challenge her own acts, as she is not within the class of persons the constitutional provision is designed to protect.

Further, it would be absurd for the party who created the alleged infirmities in the quit claim deed to be able to attack the viability of the same quit claim deed. In other words, Norma should not be able to attack the quit claim deed as void ab initio, where she drafted, relied on, and was the sole signatory to it.

Lesson learned?

The 4th DCA never mentions failed tax planning in this opinion or its opinion in the Stone case, which is not surprising. Both cases turn on non-tax issues involving Florida homestead law. But that doesn’t mean tax issues weren’t driving either of these cases (whether consciously or unconsciously). An appellate decision is like the tip of an iceberg — we only “see” the 10% of a case that breaks the surface on appeal, the other 90% remains hidden (and remember, it was the unseen 90% that sunk the Titanic). Lesson learned? Never assume you know the whole story.