Florida Probate & Trust Litigation Blog : Florida Probate Litigation, Will Contest Lawyer & Attorney : Juan C. Antúnez : Serving Miami, Jacksonville, Tampa Saint Petersburg, Orlando, Fort Lauderdale

Here's something you don't see every day: an acknowledgment by a credible source usually not associated with the "liberal media" (Rupert Murdoch's the WSJ) reporting that repeal of the estate tax is not a free ride, there are consequences: taxes will be shifted from a wealthier segment of the U.S. population to a less wealthy segment of the U.S. population. As reported by the WSJ in Why No Estate Tax Could Be a Killer:

Congress shocked everyone by letting the estate tax lapse on Jan. 1.

Now, here is the real stunner: For many, the lapse actually will raise taxes.

Under last year's law, estates up to $3.5 million, or $7 million for married couples, were exempt from federal tax. This year that law has been replaced by a fiendishly complex levy raising taxes on the assets of those with little as $1.3 million. It will affect the heirs of at least 50,000 U.S. taxpayers who die this year, whereas the old law affected only about 15,000 estates a year, according to the Tax Policy Center.

"The new system is far worse for many people who have assets between $1.3 million and $3.5 million," says veteran estate lawyer Ronald Aucutt, of McGuire Woods.

The linked-to article does a good job of walking readers through a simple hypothetical demonstrating how differently this year's and last year's regimes treat the same asset held by two fictional widows: Ms. Bentley has total assets of $20 million, while Ms. Subaru's total is $2 million. Guess who is paying more taxes this year?

• Email This
• Print
• Comments
• Trackbacks

As reported by Forbes in States Race To Clean Up Congress' Estate Tax Mess, several states - including Florida - aren't waiting around for Congress to get its act together on the estate tax front.

While Congress dilly dallies, the states are racing to come to the aid of families whose estate plans have been thrown into disarray by the Jan. 1 lapse of the federal estate tax. That lapse could, among other things, lead to the unintended disinheritance of spouses, which could in turn lead to expensive legal fights among family members and, ultimately, the impoverishment of some widows or widowers. It could also, ironically, force some families to pay extra state estate taxes.

Legislators in a handful of states, led by Virginia [click here], have already introduced legislation to try to head off such bad results. Virginia's House of Delegates passed its "emergency" bill unanimously Tuesday and the state's Senate is expected to take it up immediately [click here]. Similar bills are pending in Maryland, Nebraska, South Dakota, Tennessee and Washington. Other states, including Florida and New York, have somewhat different legislation pending.

By the way, Forbes has a very cool interactive map showing state-level estate tax laws for 2010 [click here].

Florida's Statutory Fix

At this year's Heckerling conference one of the giants of the Florida trusts and estates bar, Bruce Stone, reported on Florida's statutory fix (CS/HB 361) in an excellent presentation entitled The Clock Struck Midnight: Now What Do We Do?  You can track the status of CS/HB 361 here. Full text of the bill is here.  The following is the proposed trust-code provision as reported by Bruce:

The following is a draft as of noon Monday, January 18, 2010, of a statute to be proposed for adoption in Florida, addressing the uncertainties and potential liabilities of fiduciaries caused by repeal of the estate and generation-skipping transfer taxes. The proposed statute may be submitted to the Florida legislature for its regular session which convenes on March 2, 2010.

Section I - section 736.04114 shall be created as follows:

736.04114 Limited judicial construction of irrevocable trust with federal tax provisions.--

(1) Upon the application of a trustee or any qualified beneficiary of a trust, a court at any time may construe the terms of a trust that is not then revocable to define the respective shares or determine beneficiaries, in accordance with the intention of the settlor, if a transfer occurs during the applicable period and the trust contains a provision that:

(a) includes a formula devise referring to the "unified credit", "estate tax exemption," "applicable exemption amount," "applicable credit amount," "applicable exclusion amount," "generation-skipping transfer tax exemption," "GST exemption," "marital deduction," "maximum marital deduction," or "unlimited marital deduction;"

(b) measures a share of a trust based on the amount that can pass free of federal estate tax or the amount that can pass free of federal generation-skipping transfer tax;

(c) otherwise makes a devise referring to a charitable deduction, marital deduction, or a similar provision of federal estate tax or generation-skipping transfer tax law; or

(d) appears to be intended to reduce or minimize federal estate tax or generation skipping transfer tax.

(2) For the purpose of this section:

(a) "applicable period" means a period beginning January 1, 2010 and ending on the earlier of (i) December 31, 2010, or (ii) the date that an act becomes law that repeals or otherwise modifies or has the effect of repealing or modifying Section 901 of The Economic Growth and Tax Relief Reconciliation Act of2001.

(b) a "transfer occurs" when an interest takes effect in possession or enjoyment.

(3) In construing the trust, the court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and the settlor's probable intent. In determining the settlor's probable intent, the court may consider evidence relevant to the settlor's intent even though the evidence contradicts an apparent plain meaning of the trust instrument.

(4) This section does not apply to a transfer that is specifically conditioned upon no federal estate or generation skipping transfer tax being imposed at the time of the transfer.

(5) Unless otherwise ordered by the court, during the applicable period and without court order, the trustee administering a trust containing one or more provisions described in subsection (1) may (a) delay or refrain from making any distribution, (b) incur and pay fees and costs reasonably necessary to determine its duties and obligations (including compliance with provisions of existing and reasonably anticipated future federal tax laws), and (c) establish and maintain reserves for the payment of these fees and costs and federal taxes. The trustee shall not be liable for its actions as provided in this subsection made or taken in good faith.

(6) The provisions of this section are in addition to, and not in derogation of rights under the Florida Trust Code or the common law to construe a trust.

• Email This
• Print
• Comments
• Trackbacks

At a top current rate of 45%, the federal estate tax automatically makes the IRS the single largest creditor of most large estates. If the estate tax is looming in the background it's imperative that every decision made by the parties and their lawyers with respect to how they characterize and prosecute their trust/probate claims be considered against this backdrop. I recently presented a national NBI seminar on this very same topic [click here].

At long last probate litigators and their clients have clearer guidance from the IRS on exactly how to make sure they maximize the tax-deduction benefits of estate litigation. The IRS has issued final regulations under IRC § 2053 governing estate tax deductions for administration expenses and claims against estates. Click here for a link to the new reg’s, which became effective on October 20, 2009.

In its background summary for the new reg's [click here] the IRS explained its thinking for why they were needed:

The amount an estate may deduct for claims against the estate has been a highly litigious issue. See the Background in the notice of proposed rulemaking published in the Federal Register on April 23, 2007 (REG-143316-03, 2007-1 C.B. 1292 [72 FR 20080]). Unlike section 2031, section 2053(a) does not contain a specific directive to value a deductible claim at its value at the time of the decedent’s death. Section 2053 specifically contemplates expenses such as funeral and administration expenses, which are only determinable after the decedent’s death.

The lack of consistency in the case law has resulted in different estate tax treatment of estates that are similarly situated, depending only upon the jurisdiction in which the executor resides. The Treasury Department and the IRS believe that similarly-situated estates should be treated consistently by having section 2053(a)(3) construed and applied in the same way in all jurisdictions.

Accordingly, in an effort to further the goal of effective and fair administration of the tax laws, the Treasury Department and the IRS published proposed regulations in the Federal Register on April 23, 2007. In formulating the proposed rule, the Treasury Department and the IRS carefully considered: the statutory framework and legislative history of section 2053 and its predecessors; the existing regulatory provisions under section 2053, particularly those that are generally applicable to all amounts deductible under section 2053; the numerous judicial decisions involving an issue under section 2053(a)(3) and the analysis and conclusion in each; and, the practical consequences of various possible alternatives for determining the amount deductible under section 2053(a)(3).

To help us make sense of it all estate-tax gurus Steve R. Akers and Jonathan G. Blattmachr/Mitchell M. Gans published excellent materials pointing out opportunities and pitfalls built into the new reg's for practitioners and clients alike [click here, here].

• Email This
• Print
• Comments
• Trackbacks

I've recently been lecturing on tax issues in play in probate and trust litigation [click here]. After giving this lecture a couple of times I noticed a pattern: the single tax question most probate lawyers were concerned with was how to limit a personal representative's personal tax-exposure risk, which is inherent to all probate administrations.

Here's the problem:

A personal representative ("PR") is personally liable for paying the decedent's remaining tax bills, be they income taxes, gift taxes or estate taxes. See 31 U.S.C. §3713(b) and IRS Manual 5.17.13.8 (10-16-2007). That's right, when you say "yes" to being someone's PR, you also say "yes" to personally guaranteeing the IRS that all of their taxes are paid up. But how can a PR make sure the decedent wasn't cheating on his or her taxes? And how can a PR make sure he's uncovered all those skeletons in the closet before distributing any assets of the estate to the heirs?

Solution:

There are three risk-management tools every probate lawyer needs to know about and incorporate into his or her practice:

• IRS Form 56,
• IRS Form 4810, and
• IRS Form 5495.

Even if you're working with a CPA who's supposed to be taking the lead on all the tax issues, you need to know these protective measures exist and ensure your PR gets the full benefit of them. Here's why.

IRS Form 56 [click here]

A Form 56 needs to be filed twice: when your PR first gets appoint to let the IRS know who your PR is and where to send all tax notices; and again when your PR finishes his job and is discharged. What you're doing here is making sure that any correspondence from the IRS having to do with the decedent's taxes gets to your PR right away; the last thing you want is your PR to get sued for failing to pay the decedent's back taxes because the deficiency notices went to the wrong address. Also, the instructions to Form 56 state that the filing of a Form 56 when your PR is discharged will “relieve [the PR] of any further duty or liability as a fiduciary.”

IRS Form 4810 [click here]

Not only do you want to make sure the IRS knows your PR exists and that this is the person they need to contact for all matters related to the decedent, you'll also want to "shake the bushes" to make sure there are no unpaid back taxes involving the decedent. You do this by filing a Form 4810 (Request for Prompt Assessment for Income and Gift Taxes). A cautious PR will wait for the IRS to respond to this assessment request prior to making any distributions to the estate's beneficiaries. You don't want all the cash to go out the door only to be surprised by some huge tax assessment that puts your PR in the uncomfortable position of having to ask heirs to give money back to pay back taxes.

IRS Form 5495 [click here]

At the same time your PR files a Form 4810, he'll also want to simultaneously (but separately) file a Form 5495 (Request for Discharge from Personal Liability for Decedent’s Income and Gift Taxes). This is another way to make sure your PR gets the heads up on any of the decedent's unpaid back taxes. If Form 5495 is properly filed, the IRS has nine months in which to notify the PR of any deficiency for the decedent’s applicable income or gift tax returns. If the PR pays the additional tax, or if no notice is received from the IRS within nine months from the date of filing Form 5495, the PR is then discharged from personal liability.

For an excellent in-depth explanation of all three of these forms and how they work together to minimize a PR's personal tax-exposure risk (as well as other helpful hints), you'll want to read Minimizing a Personal Representative’s Personal Liability to Pay Taxes, Part I & Part II, by Florida trusts and estates attorneys William C. Carroll and John “Randy” Randolph.

But what payments can you make while you're figuring out the tax issues?

If the PR distributes any portion of the estate to the beneficiaries before all of the federal taxes are paid, he or she could be held personally liable to the extent of the distribution.  Personal liability under 31 USC § 3713(b) is the "muscle" behind the federal priority under 31 USC § 3713(a).

One way to manage a PR's personal tax-liability risk is to not pay a cent to anyone until every conceivable tax issue is identified and taken care of. But we all know this isn't possible. In order to properly manage an estate there are certain payments that can't wait.  Primary examples include court costs, reasonable compensation for the PR and the PR's attorney, and expenses incurred to collect and preserve assets of the estate. Fortunately PR's don't have to guess which payments they can and can't make without exposing themselves to personal liability. If a PR follows F. S. §733.707, which lists the distribution priorities for in-solvent estates under Florida's Probate Code, he'll be alright. Why? Because the payment priorities under Florida law are, for the most part, consistent with the payment priorities under 31 USC § 3713(a), as construed by the IRS (see IRS Manual 5.17.13.6 (10-16-2007)).

The only discrepancy between Florida's and the IRS's list of priority payments has to do with the payment of a family allowance. Under F. S. §733.707, a family-allowance payment is considered a "Class 5" priority, below the U.S. Government "Class 3" priority, but the IRS considers a reasonable family allowance payment to have priority over its claims for payment of taxes (see IRS Manual 5.17.13.6 (10-16-2007)). In other words, the IRS approach is more lenient than Florida's Probate Code.

• Email This
• Print
• Comments
• Trackbacks

Tax issues loom large in trusts & estates litigation, especially when the estate tax is in play. So on Monday, September 14, 2009, I'll be teaching a 90-Minute National Teleconference entitled Tax Issues in Trust and Probate Litigation.

In this seminar I'll examine how an awareness of the tax issues lurking in the background of almost every contested proceeding can be leveraged to maximum advantage for all concerned.  Click here to sign up.  I hope you can join me.

Bonus Materials:

The written materials for this seminar include a copy of the Mediation Settlement Agreement discussed in Private Letter Ruling 200844010, in which the IRS ruled that if you split a single marital trust into five separate sub-trusts and then terminate just one of those sub-trusts, IRC § 2519 would be triggered only with respect to the terminated sub-trust. The significance of this state of the art sample settlement agreement is that it provides an excellent real-life example of how to elegantly navigate all the issues you need to both anticipate and deal with in any settlement agreement involving a termination of a marital trust that's been QTIP'd. This sample document alone is worth the price of admission.

• Email This
• Print
• Comments
• Trackbacks

Boulis v. Blackburn, --- So.3d ----, 2009 WL 2382358 (Fla. 4th DCA Aug 05, 2009)

The decedent at the heart of this probate battle, Konstantinos "Gus" Boulis, was a Greek immigrant and self-made millionaire who had started as a dishwasher in Canada and ended up in Florida, where he built an empire of restaurants, hotels and cruise ships used for offshore casino gambling. His 2001 gangland-style murder was allegedly linked to the $147.5 million sale of his company, SunCruz Casinos, to a partnership including disgraced Republican über lobbyist Jack Abramoff.

Apparently Boulis wasn't very fond of his wife: he completely cut her out of his estate. Lucky for her Boulis died a Florida resident, so she was able to claim a 30% share of his estate under F.S. § 732.201. That's the good news. The bad news is that she may have to fork over close to half of her share in estate taxes.

The Elephant in the Room: Estate Tax Allocation:

In large estates the elephant in the room is always: "who's going to pay the estate tax?" Considering that the top marginal estate tax rate is 45%, whose share of the estate gets used to pay this tax bill is a huge big deal. For example, if Boulis's widow was awarded a $10 million elective share, how the estate-tax allocation question is answered could mean the difference between her walking away with $10 million or $6.5 million!

Usually zero estate taxes are allocated to a widow's elective share because of the unlimited estate-tax marital deduction. However, Boulis's widow wasn't a U.S. citizen, so the normal rules don't apply. But even for non-citizens, it's pretty easy to avoid paying any estate tax by creating a qualified domestic trust or "QDOT" to hold the widow's share of the estate. For reasons not explained by the 4th DCA, this hasn't happened in this case.

Having failed to dodge the estate-tax bullet by relying on the federal tax code provisions governing QDOTs, Boulis's widow fell back on two state-level statutory-construction arguments involving F.S. 733.817, Florida's estate-tax allocation statute.

[1]  Is an elective share ever liable for estate taxes?

Because elective-share assets going to a surviving spouse almost never trigger any estate tax, F.S. 733.817 doesn't have a specific clause addressing those rare instances where a tax is triggered. Boulis's widow argued this omission means taxes are NEVER allocated to elective share assets. Wrong answer says the 4th DCA, here's why:

Appellant argues that certain probate code sections relieve her elective share of any liability for estate taxes. Section 733.817, Florida Statutes (2000), governs the apportionment of estate taxes. Subsections (5)(a), (5)(b), and (5)(c) apply to the apportionment of taxes on property passing under the decedent's will, property passing under the terms of any trust created in the decedent's will and homestead property, respectively.

*     *     *

“The purpose of section 733.817 is to ensure that all estate and inheritance taxes are shared on a ratable basis by the beneficiaries receiving the property subject to those taxes.” Tarbox v. Palmer, 564 So.2d 1106, 1108 (Fla. 4th DCA 1990). As appellant is not entitled to the marital deduction on her elective share, then that elective share is subject to tax. The net tax on an elective share is not apportioned under paragraphs (5)(a), (5)(b), or (5)(c), and it is not otherwise excluded. Therefore, the net tax attributable to the elective share is apportionable under section 733.817(5)(f).

[2]  But what if the decedent waived the normal tax allocations rules?

Boulis's widow then argued that even if her share of the estate was taxable, her husband's will trumped application of the Florida tax allocation statute because it directed that the payment of taxes attributable to property NOT passing under his will (such as her elective share) must be paid from property passing under his will (read: tax everyone else but the widow). This allocation argument has a long and storied past here in Florida. Unfortunately for Boulis's widow, by now it's pretty well settled that the language in the will has to be extremely specific for this argument to work. In this case it wasn't, so she lost this argument as well.

In his will, the decedent “direct[s][his] Personal Representative to pay out of the property which would otherwise become a part of the Residuary Estate, all estate, inheritance, transfer and succession taxes, including interest and penalties thereon, which may be lawfully assessed by reason of my death.” Appellant argues that pursuant to section 733.817(5)(h)1., Florida Statutes (2000), this provision of the will directs appellees to pay the taxes on the elective share out of the residuary estate. The trial court held that section 733.817(5)(h)4., Florida Statutes, is the applicable provision and, under that section, the decedent has not effectively directed the payment of taxes attributable to property not passing under the governing instrument from property passing under the governing instrument.

Section 733.817(5)(h), Florida Statutes, provides in pertinent part:

(h)1. To be effective as a direction for payment of tax in a manner different from that provided in this section, the governing instrument must direct that the tax be paid from assets that pass pursuant to that governing instrument, except as provided in this section.

*     *     *

4. For a direction in a governing instrument to be effective to direct payment of taxes attributable to property not passing under the governing instrument from property passing under the governing instrument, the governing instrument must expressly refer to this section, or expressly indicate that the property passing under the governing instrument is to bear the burden of taxation for property not passing under the governing instrument. A direction in the governing instrument to the effect that all taxes are to be paid from property passing under the governing instrument whether attributable to property passing under the governing instrument or otherwise shall be effective to direct the payment from property passing under the governing instrument of taxes attributable to property not passing under the governing instrument.

In In re Estate of McClaran, 811 So.2d 799 (Fla. 2d DCA 2002), the Second District addressed the issue of whether the direction in the decedent's will was effective under section 733.817(5)(h) to override the statutory method of apportionment of estate taxes. McClaran's will provided in pertinent part:

My personal representative shall pay from the residue of my estate ... estate and inheritance taxes assessed by reason of my death, except that the amount, if any, by which the estate and inheritance taxes shall be increased as a result of the inclusion of property in which I may have a qualifying income interest for life or over which I may have a power of appointment shall be paid by the person holding or receiving that property.

Id. at 800 (emphasis in original).

*     *     *

Just as in McClaran, the direction in the decedent's will does not include an express indication that the property passing under the will is to bear the burden of taxation for property not passing under the will.

• Email This
• Print
• Comments
• Trackbacks

U.S. v. Guyton, Slip Copy, 2009 WL 1308431 (M.D.Fla. May 08, 2009)

The IRS is the "über" creditor of any probate estate. Why? Two reasons. First, the personal representative (PR) is personally liable for any of the decedent's unpaid taxes to the extent the PR pays any debts due by the decedent before paying the decedent's tax liability. 31 U.S.C. § 3713(b); IRS Manual § 5.5.1. There's nothing like personal liability to focus the mind. Second, the normal rules simply don't apply to the IRS. As the court ruled in the linked-to order, the IRS is NOT subject to the limitations periods applicable to all other creditors:

Turning to Defendant's final threshold argument, case law makes clear that the Government's claim is not subject to state statutes of limitation, including Florida Statute § 733.705(8), absent its own consent. See e.g., United States v. Summerlin, 310 U.S. 414 (1940); see also United States v. Kellum, 523 F.2d 1284, 1286 (5th Cir.1975).

• Email This
• Print
• Comments
• Trackbacks

Veteran Florida probate litigator Amy Beller was kind enough to direct me to Private Letter Ruling 200844010, in which the IRS ruled that if you split a single marital trust into five separate sub-trusts and then terminate just one of those sub-trusts, IRC § 2519 would be triggered only with respect to the terminated sub-trust. The significance of this PLR is that it provides an excellent summary of the transfer-tax consequences you need to both anticipate and deal with any time you terminate a marital trust that's been QTIP'd, while also explaining how to manage those tax issues by elegantly leveraging the flexibility built into Florida's new Trust Code.

Here's a key excerpt from the linked-to PLR:

In the present case, Spouse has a qualifying income interest for life in Marital Trust, and Child 1, Child 2, Child 3, Child 4, and Child 5 are the presumptive remainder beneficiaries. Pursuant to Settlement Agreement, Marital Trust will be divided into five trusts: specifically, four Surviving Settlement Trusts and Child 1’s Settlement Trust. Under State Statute 1, each of the five trusts will be treated as a separate trust for all purposes from the date on which the severance is effective. After the division, Spouse will have a qualifying income interest for life, and Child 2, Child 3, Child 4, and Child 5 will be the remaindermen of the Surviving Settlement Trusts. Child 1’s Settlement Trust will be terminated. Accordingly, based on the facts submitted and representations made, we conclude that the division of Marital Trust into five trusts and the subsequent termination of Child 1’s Settlement Trust pursuant to Settlement Agreement will not be deemed to be a transfer under § 2519 of any property interest, or interest in, the Surviving Settlement Trusts, and therefore, such division and termination will not give rise to any gift tax liability with respect to any property of, or interest in, any of the Surviving Settlement Trusts.  

Amy represented the surviving spouse/income beneficiary of the marital trust, so she deserves a good amount of the credit for this PLR.  By the way, South Florida tax lawyer Charles Rubin also wrote about this PLR here on his blog Rubin on Tax.

• Email This
• Print
• Comments (1)
• Trackbacks (1)