In today’s world the vast majority of inherited wealth gets transferred from one generation to the next by nonprobate “will substitutes” that are not subject to probate, are not controlled by a person’s will, and are not governed by our probate code. Known as the nonprobate revolution, it’s a trend that’s been accelerating for decades.
If you’re a trusts and estates lawyer, the challenge is to adapt to this new reality . . . or perish. For example, under section 732.5165 of our probate code a will that’s the product of fraud, duress, mistake, or undue influence is invalid. This kind of probate-code provision was all we needed when most wealth was in the form of real estate, and most of that property transferred from one generation to the next in the context of a probate proceeding. Today, most wealth is in the form of investment and savings accounts that usually transfer from one generation to the next via nonprobate transfers. These transfers aren’t governed by our probate code. So if one of these transfers is the product of undue influence, can it also be invalidated? Maybe, but you won’t find your answer in our probate code. For these cases you need to look elsewhere.
Fortunately, the 1st DCA’s published two opinions that give us a roadmap for navigating nonprobate inheritance disputes involving two of the most common will substitutes out there: joint accounts and pay-on-death (“POD”) accounts.
Can you challenge a joint account designation on undue influence grounds? YES!
Brown v. Brown, — So.3d —-, 2014 WL 4435974 (Fla. 1st DCA September 10, 2014)
Mrs. Brown’s will split her estate equally among her six children. Her savings and investment accounts didn’t, these accounts were either titled jointly with one adult child or designated POD to that same adult child. In other words, all of the probate assets went one way (to her 6 children in equal shares), and all of her nonprobate assets went another (to 1 child only). The trial court appointed a magistrate to conduct an evidentiary hearing, who concluded Mrs. Brown’s nonprobate accounts didn’t reflect her true testamentary intent. Specifically, the magistrate determined:
[Appellee] has demonstrated by clear and convincing evidence, which includes the admissions of Defendant, that the decedent’s intent was for her “cash accounts,” including her certificates of deposit, to first be used to pay expenses associated with her death and the balance to be divided equally among her six children.
So far so good. And the magistrate also got it right when he applied F.S. 655.79 to invalidate the joint account designations. Under F.S. 655.79, you can invalidate a joint account designation by proof of “fraud or undue influence or clear and convincing proof of a contrary intent.” The statute reads in pertinent part as follows:
(1) Unless otherwise expressly provided in a contract, agreement, or signature card executed in connection with the opening or maintenance of an account, including a certificate of deposit, a deposit account in the names of two or more persons shall be presumed to have been intended by such persons to provide that, upon the death of any one of them, all rights, title, interest, and claim in, to, and in respect of such deposit account … vest in the surviving person or persons….
(2) The presumption created in this section may be overcome only by proof of fraud or undue influence or clear and convincing proof of a contrary intent….
Where things went sideways is the law that was applied to invalidate the POD account designations (this is the kind of mistake that only happens in a nonprobate world!). Who gets these accounts when someone dies is controlled by F.S. 655.82, which does not have the same statutory invalidation mechanism that applies to joint accounts. Bottom line, even though the evidence was the same for all accounts, the POD account ruling was reversed because the wrong law was applied.
Regarding ownership of the funds in a POD account when the account owner dies, the statute provides, “On the death of the sole party or the last survivor of two or more parties, sums on deposit belong to the surviving beneficiary or beneficiaries.” § 655.82(3)(b), Fla. Stat. (2007) (emphasis added). No rebuttable presumption applies. Because the magistrate applied the incorrect statute to the POD accounts, the trial court abused its discretion in adopting the portions of the magistrate’s report and recommendations relating to those accounts.
So does this mean POD accounts are immune to challenge on undue influence grounds? Based on the 1st DCA’s ruling in Brown you might think so. And you’d be wrong, as the litigants learned the hard way in Keul, the next POD account case the 1st DCA tackled.
Can you challenge a POD account designation on undue influence grounds? YES!
Keul v. Hodges Blvd. Presbyterian Church, — So.3d —-, 2015 WL 7444212 (Fla. 1st DCA November 24, 2015)
In this case a POD account designation was invalidated on undue influence grounds. The issue on appeal was whether this kind of case was possible as a matter of law. Trial court said yes, and the 1st DCA agreed. Here’s why:
A POD designation or Totten trust, like a transfer-on-death (TOD) provision, is a “will substitute” that does not transfer ownership of funds until the death of the account holder. E.g., Blechman v. Estate of Blechman, 160 So.3d 152, 157 (Fla. 4th DCA 2015) (recognizing the existence of these and other will substitutes). These are generally considered inter vivos transfers, although they also have attributes of testamentary transfers because they have no effect until the death of the owner. Under Florida law, they are subject to challenge on grounds such as undue influence, fraud, duress, and overreaching.
But what about Brown? According to the 1st DCA, it never ruled you can’t invalidate a POD account designation on undue influence grounds, all it said was that the plaintiff in that case went about it the wrong way. In this case, the challenger got it right. Here’s why:
Appellant misplaces reliance on our decision in Brown v. Brown, 149 So.3d 108 (Fla. 1st DCA 2014). The issue in Brown was whether the decedent’s intent in establishing joint accounts was consistent with property distribution provisions in her will. We held that the magistrate incorrectly applied section 655.79 of the Florida Statutes, as it relates to ownership of funds after death of any joint account owner, to POD designations. Brown did not involve, and does not preclude, an undue influence challenge to a POD designation.
Likewise, Appellant misplaces reliance on the absence of express undue influence provisions in Florida’s banking law on POD designations. The banking statute, section 655.82 of the Florida Statutes, defines a POD designation; and further provides that, “On the death of the sole party or the last survivor of two or more parties, sums on deposit belong to the surviving beneficiary or beneficiaries.” § 655.82(3)(b), Fla. Stat. (2013). Appellant argues that a POD designation cannot be invalidated for undue influence because this statute does not contain the same undue influence provision that the Florida Probate Code contains. The fact that the banking regulatory statute does not expressly address grounds for invalidating a POD designation is not controlling. Seymour v. Seymour, 85 So.2d 726, 727 (Fla.1956) (holding that banking laws, designed primarily to regulate banks, “are not necessarily conclusive of the ownership of deposited money”). We reject Appellant’s argument because a POD account, although not in the strictest sense a testamentary device and not subject to the formalities required of wills, functions as a will substitute and partakes of many of the same equitable considerations that apply to testamentary transfers. Florida law and policy against abuse of fiduciary relationships apply to contracts, inter vivos transfers, and testamentary transfers, and are properly applied to determine whether a POD designation has been obtained through undue influence. We affirm the trial court’s conclusions that, on the evidence presented, Appellant obtained this POD designation through undue influence, and the gift is void.
So what’s the take away?
The nonprobate revolution is a game changer for trusts and estates lawyers. But fundamentally speaking, there’s nothing new here; will substitutes are simply a different way of doing the same job traditional wills have always done. As explained by Prof. Langbien in The Nonprobate Revolution and the Future of the Law of Succession, modern will substitutes are “functionally indistinguishable from a will – each reserves to the owner complete lifetime dominion, including the power to name and to change beneficiaries until death.” And POD and joint accounts are two of the most common will substitutes out there. Here’s what Prof. Langbien had to say about them:
In arranging their personal banking, Americans meet another raft of invitations to execute will substitutes. Married persons in particular elect these options widely. The purest of the bank-operated will substitutes are accounts over which the depositor retains explicit lifetime dominion while designating beneficiaries to take on his death. Where local law permits, such arrangements may assume the blatant form of the P.O.D. (“pay on death”) account, which was pioneered by the United States Treasury for selling government bonds. . . .
More commonly, the joint bank account – whether savings or checking – is manipulated to do the work of a will. In theory, joint accounts differ from other pure will substitutes: they look more like gifts than like wills. When the owner of property arranges to take title jointly, he supposedly creates a present interest in his donee-cotenant. In the prototypical joint tenancy of realty, the donee receives an interest equal to the donor’s, and the donor loses the power to revoke the transfer. Moreover, the commonality-of-use rule requires that the cotenants act together in order to transfer the realty. Joint accounts of personalty, however, “differ from the true joint tenancies as defined in [real] property law, for by the privilege of withdrawal either [cotenant] may consume the account.” Accordingly, a depositor may name a cotenant on a bank account but deal with the account as though it were his own. The cotenant may not even know that he has been designated. Depending on his contract with the bank, the depositor may revoke and alter cotenancy designations as freely as he would beneficiary designations under any of the other will substitutes. He may also achieve the same result by closing the account, withdrawing the funds, and opening another account as he pleases. In this way, joint accounts may be used to approximate the incidents of a will; the cotenancy designation is effectively revocable and ambulatory.
So what’s it all mean? Will “substitutes” = Wills. So the basic facts driving a traditional will contest are also going to drive inheritance cases involving nonprobate transfers. Which means that if you can prove undue influence, that same evidence should control the outcome of your case regardless of whether or not you’re litigating a will contest governed by F.S. 732.5165, a joint account case governed by F.S. 655.79, or a POD account case governed by Florida common law. And if you’ve been litigating will contests all your life, don’t fret. You’ll do fine in this brave new world. The hard part’s proving your case. The law’s the easy part. And the 1st DCA’s just made it easier for all of us the next time a client walks through the door with an inheritance case involving contested joint or POD accounts.