Lee v. Lee, 263 So.3d 826 (Fla. 3d DCA January 23, 2019)

A “disclaimer” is essentially a refusal of a gift or bequest, and you typically see them in the context of postmortem estate planning. For example, if a parent dies and leaves assets via a will to a child and the will names the grandchildren as the successor beneficiaries, a disclaimer of the bequest by the child would result in the assets passing to the next person entitled to the property, in this case the grandchildren.

Conceptually, disclaimers rest on two basic principles of property law: “a transfer is not complete until its acceptance by the recipient, and … no person can be forced to accept property against his will.” Jewett v. Commissioner, 455 U.S. 305, 323 (1982) (Blackmun, J., dissenting).

Florida Uniform Disclaimer of Property Interests Act:

In Florida, the law governing disclaimers is codified in the Florida Uniform Disclaimer of Property Interests Act, which is our heavily revised version of the Uniform Disclaimer of Property Interests Act.

In order for a Florida disclaimer to be valid, F.S. 739.104 tells us it must:

  1. be in writing,
  2. declare that the writing is a disclaimer,
  3. describe the interest or power disclaimed,
  4. be signed by the person making the disclaimer,
  5. be witnessed and acknowledged in the manner provided for by deeds of real estate, and
  6. be delivered in the manner provided in F.S. 739.301.

And if you want to record a disclaimer, thus providing constructive notice to anyone conducting a title search that might involve real property that has been disclaimed, F.S. 739.601 tells us the disclaimer must also contain a legal description of the real estate to which the disclaimer relates. But does that mean all disclaimers of real estate have to include legal descriptions? That’s the question the 3d DCA dealt with in this case.

Must all probate disclaimers of real estate contain legal descriptions? NO

In Lee v. Lee the decedent died intestate survived by three children. His estate was composed of two principal assets: (i) real property located in Miami, and (ii) settlement proceeds from a wrongful death claim. For reasons not disclosed in the opinion, one of the children disclaimed her interest in the estate. The disclaimer was witnessed by two persons and notarized, but it didn’t contain a legal description of the real estate.

The disclaiming child apparently had a change of heart, because she subsequently tried to undo her own disclaimer by arguing it wasn’t valid because it didn’t contain a legal description of the real estate being disclaimed. The trial court agreed. Not so fast, said the 3d DCA. Just because the statue gives you the option of recording a disclaimer if it contains a legal description, doesn’t mean it’s required. So saith the 3d DCA:

Section 739.601 provides additional requirements if the disclaimer is to be recorded, thus providing constructive notice to anyone conducting a title search that might involve real property that has been disclaimed. See § 739.601(1) – (2), Fla. Stat. (2014). This statute provides that a disclaimer “relating to real estate does not provide constructive notice to all persons unless the disclaimer contains a legal description of the real estate to which the disclaimer relates and unless the disclaimer is filed for recording in the office of the clerk of the court in the county … where the real estate is located.” § 739.601(1), Fla. Stat. (2014). The statute further provides as follows: “An effective disclaimer meeting the requirements of subsection (1) constitutes constructive notice to all persons from the time of filing. Failure to record the disclaimer does not affect its validity as between the disclaimant and persons to whom the property interest or power passes by reason of the disclaimer.” § 739.601(2), Fla. Stat. (2014) (emphasis added).

Hence, if the disclaimer is to be recorded to provide constructive notice, then the disclaimer must contain a legal description of the real property. It is clear, though, from subsection (2) of this statute, that a non-recorded disclaimer is valid as between the disclaimant and the person to whom the property passes by reason of the disclaimer, regardless of whether the disclaimer includes a description of the real property. If the legislature had intended for all disclaimers of real property, whether recorded or not, to contain a legal description, there would have been no need in section 739.601(1) to include a requirement of a legal description for disclaimers that would be recorded.

The instant disclaimer meets each statutory requirement found in section 739.104(3). While the absence of a legal description of the subject property renders the disclaimer incapable of recordation under section 739.601, the lack of a legal description does not otherwise affect its validity.

Bitetzakis v. Bitetzakis, — So.3d —-, 2019 WL 405568 (Fla. 2d DCA February 01, 2019)

Will execution formalities are second nature to most of us, but it never hurts to go back to basics.

Under F.S. 732.502, a Florida will isn’t valid unless it’s in writing and signed at the end in the presence of at least two attesting witnesses, who sign the will in the presence of the testator and in the presence of each other. Like most US states (and Commonwealth jurisdictions), Florida’s rules for executing wills trace their roots back almost two centuries to the UK Wills Act of 1837.

Florida’s “Strict Compliance” Standard:

The execution rules are simple, but you need to get them exactly right. Why? Because Florida requires “strict compliance”. In other words, unless every last statutory formality is complied with exactly, the will’s invalid (see here, here for past examples).

And while a growing chorus of critics may argue this level of formalism’s outlived its usefulness (think “harmless error” rule), strict compliance is the historical norm. Why has this approach persisted for so long (and in so many jurisdictions)? Because these formalities — applied generally — do a good job of ensuring that most wills accurately and reliably reflect a testator’s intent (even if on occasion these same rules invalidate clearly genuine yet formally defective wills), as explained in Decoupling the Law of Will-Execution:

[F]ormalities are explained as fulfilling several functions that ensure that a will accurately and reliably reflects the testator’s intent. … First, will formalities serve an evidentiary function by providing reliable evidence that the testator intended a particular document to constitute a legally effective will. Second, they serve a protective function by reducing the possibility of fraudulent wills. [Third,] … will formalities serve  a cautionary function by reminding the testator of the legal significance of executing a will. … [And fourth,] will formalities serve [a] channeling function by funneling all wills into a substantially similar form. Because all wills are written, signed, and witnessed, probate courts can more efficiently determine whether the testator intended to execute a valid will.

…

Although the traditional law gives the court assurance that it can safely distribute the decedent’s estate according to the terms of a formally compliant will, critics contend that requiring courts to invalidate clearly genuine yet formally defective wills conflicts with formality’s role in the realization of testamentary   intent. They argue that the rule of strict compliance  is overly concerned with  preventing the validation of fraudulent or unintended wills and should be more concerned with validating genuine wills.

It’s against this backdrop that the 2d DCA considered what it means to actually “sign” a will under a strict-compliance reading of F.S. 732.502.

Was the decedent’s first name enough to validly execute his will? NO

In Bitetzakis v. Bitetzakis the decedent clearly intended to execute a valid will, but thought he had to do so before a notary (not true). Midway through signing his name, his wife stopped him and told him he’d need to sign again before a notary. She also testified that her husband normally wrote his entire name when signing documents. The next day they went to see a notary but husband goofed again, mistakenly signing a self-proving affidavit instead of re-signing his will.

So does half a signature count? Trial court said yes, 2d DCA said NO. Why not? Think strict compliance (as in even the tiniest mistake = invalid will). So saith the 2d DCA:

Generally, “[t]he primary consideration in construing a will is the intent of the testator.” Allen v. Dalk, 826 So.2d 245, 247 (Fla. 2002) (citing Elliott v. Krause, 531 So.2d 74, 75 (Fla. 1987)). However, “when testamentary intent is contained in a will, it can only be effectuated if the will has been validly executed” in strict compliance with section 732.502, Florida Statutes. Id. (emphasis added). Section 732.502(1)(a) dictates that in order to properly execute a will, the testator “must sign the will at the end” or else the testator’s name “must be subscribed at the end of the will by some other person in the testator’s presence and by the testator’s direction.”

In this case, the probate court erred because the evidence does not establish that the decedent signed at the end of the will or directed another to subscribe his name in his stead. See Dalk, 826 So.2d at 247 (“[W]here a testator fails to sign his or her will, that document will not be admitted to probate.”). Under these very unique circumstances, it is clear that the decedent recorded something less than his full customary signature and therefore did not sign the will within the meaning of section 732.502. See Signature, Black’s Law Dictionary (10th ed. 2014) (defining a signature as a “person’s name or mark written by that person … esp., one’s handwritten name as one ordinarily writes it” and “the act of signing something; the handwriting of one’s name in one’s usual fashion”).

To be sure, Florida law permits a testator to sign a will by making a mark not commonly regarded as a formal signature. See In re Williams’ Estate, 182 So.2d 10, 12 (Fla. 1965) (“[A] mark made by the testator at the proper place on his will with the intent that it constitute his signature and evidence his assent to the will is sufficient to satisfy the statutory requirement that he ‘sign’ his will.”). However, in this case we cannot construe the decedent’s alphabetic first name as constituting his mark because there is no evidence that the decedent had the concomitant intent that it serve in place of his signature. In other words, there is no evidence that the decedent signed his first name “with the intention that [a portion of his signature] evidence his assent to the document.” Id. at 13. To the contrary, that the decedent intentionally ceased signing the will and later signed the self-proof affidavit in an apparent attempt to ratify it dispels any notion that he believed or intended that his first name serve as his signature and assent to the will.

There have been numerous books and essays written about Mark Twain’s final two unhappy years in Redding, Connecticut, as well as several accounts capturing the lives, also generally tragic, of his surviving daughter and granddaughter.

A fascinating new article co-authored by Connecticut judge Henry S. Cohn and attorney Adam J. Tarr entitled A Challenging Inheritance: The Fate of Mark Twain’s Will, retells some of that story, but from a legal perspective probate attorneys should find particularly interesting. The article makes use of source documents from the estates of Mark Twain and his descendants, including original wills, probate papers, trust instruments, and court and business filings.

Over a century after his death, Mark Twain still matters. On that note, the article concludes by explaining how the literary “Mark Twain” has succeeded in the twenty-first century, well beyond his death in 1910. Good stuff, highly recommended. Here’s an excerpt:

The last years of Mark Twain’s life were marked with tragedy and emotional hurt. He lost his favorite daughter in 1896, his wife in 1904, and his youngest daughter Jean on Christmas Eve 1909, just four months before his death. Mark Twain’s will, which was written in August 1909 just before his health worsened, captures this emotional state of affairs.

Even though the provisions of Twain’s will and Clara’s subsequent bequests were illustrative of familial grief, Mark Twain’s investments and accumulated assets were a positive factor and only grew over time. While even in death some of his investments were deemed worthless, the trustees under Twain’s will and the Mark Twain Foundation achieved many financial triumphs. Further, thanks to the Papers Project, the Mark Twain literary “brand” has been glowingly successful. Writing in the April 17, 1960 Hartford Courant, Bissell Brooke declared: “Mark Twain again has caught the public’s fancy. Posthumously, he has never been more ‘alive.'”

Johnson v. State, — So.3d —-, 2019 WL 1053155 (4th DCA March 06, 2019)

The bread and butter work of most probate litigators includes breach of fiduciary duty claims by guardians, trustees, and agents acting under powers of attorney (POAs). These are all civil cases. What many probate litigators may not be aware of is that for good and valid reasons, much of this conduct can also get a defendant arrested, criminally prosecuted, and sent to prison for a very long time under F.S. 825.103, which criminalizes most of this conduct as a form of “exploitation of an elderly person or disabled adult.”

And because these cases often turn on issues of “intent” (for example, if a caregiver uses a POA to pay herself from mom’s bank account, did caregiver intend to financially exploit mom or compensate herself for legitimate services?), and because a person’s intent is usually proven indirectly by circumstantial evidence, the importance of what “test” is used to decide the intent question can’t be overstated, especially when the consequences may include years behind bars. The Johnson v. State case is all about what it takes to prove criminal “intent” in exploitation of the elderly cases.

Case Study:

The Johnson v. State case involves an 88 year old woman who was Baker Acted and hospitalized after exhibiting signs of dementia and found living in deplorable conditions. A neighbor visited her in the hospital, and ultimately ended up as her agent under a power of attorney (“POA”). Eventually, a guardian was appointed on behalf of the elderly woman and her neighbor (and neighbor’s minor daughter) were removed as signatories on her accounts. The guardian placed the elderly woman in a nursing home where she died a short time later.

According to the defendant neighbor, she used the POA to withdraw $13,549 from her elderly neighbor’s bank accounts to pay for her care, pay property taxes, pay for the cleanup of her elderly neighbor’s home, and pay an attorney to represent her elderly neighbor in guardianship proceedings. According to the neighbor, of this amount she deposited $2,590 in her own bank account to compensate herself for the time she spent working on the elderly woman’s home and to reimburse herself for expenses she incurred on her behalf. Also, according to the neighbor, she added her minor daughter as a pay-on-death beneficiary of the elderly woman’s bank accounts “based on advice from the bank’s manager …. to protect the funds in the event a probate case was filed.”

Based on these facts, one could plausibly conclude all we have is a fee dispute (i.e., was $2,590 a reasonable reimbursement for time spent and expenses incurred?) and an example of a well intentioned neighbor making a dumb mistake involving pay-on-death bank account designations that resulted in no harm (if the bank funds were frozen, the pay-on-death designations were never effectuated). On the other hand, one could just as plausibly conclude what we have here is the use of a POA to defraud an elderly woman. The deciding factor is: what was going on inside the head of the defendant neighbor? … in other words, what was her intent?

As explained by the 4th DCA, because this is a circumstantial-evidence case, the prosecutor’s burden is especially high.

In circumstantial cases, “a conviction cannot be sustained unless the evidence is inconsistent with any reasonable hypothesis of innocence.” Id. (quoting State v. Law, 559 So.2d 187, 188 (Fla. 1989) ). “[I]f there is direct evidence of a defendant’s actus reus, but the defendant’s intent is proven solely through circumstantial evidence, the special standard of review applies only to the state’s evidence establishing the element of intent.” Id.

Someone else’s money in your bank account = conviction:

If you can’t be convicted if you’re able to come up with “any reasonable hypothesis of innocence” for why you did something, you’d think just about any plausible explanation should be enough (including: “I’m sorry, I’m an idiot.”) And you’d be wrong. Why? Because once someone else’s money ends up in your bank account, no matter how well intentioned you might be or how reasonable your conduct might seem at the time, if in hindsight your fact finder doesn’t buy your story, you’re going to get convicted. So saith the 4th DCA:

There are two key cases issued by this Court which are instructive to the issue of intent in an exploitation of the elderly case. The first is Everett v. State, 831 So.2d 738 (Fla. 4th DCA 2002). … The second key case is McNarrin v. State, 876 So.2d 1253 (Fla. 4th DCA 2004). … Everett and McNarrin establish that when a defendant charged with exploitation of the elderly alleges that funds taken from the alleged victim were used for the victim’s benefit, the State must submit evidence to the contrary. Such contrary evidence could include unexplained deposits in the defendant’s bank accounts or acquisitions of property. See Everett, 831 So.2d at 742. In the instant case, although there was evidence corroborating Appellant’s claim that much of the money taken from the victim’s accounts was used for the benefit of the victim, there was also evidence establishing that Appellant deposited some of the money taken from the victim’s accounts into her own bank account and named her daughter as the beneficiary of the victim’s accounts. This evidence, when viewed in the light most favorable to the State, supports the alternative theory that Appellant intended to benefit herself and not preserve the victim’s estate. See Durousseau v. State, 55 So.3d 543, 557 (Fla. 2010) (“Under the circumstantial evidence standard, when there is an inconsistency between the defendant’s theory of innocence and the evidence, when viewed in a light most favorable to the State, the question is one for the finder of fact to resolve and the motion for judgment of acquittal must be denied.”). Accordingly, we affirm the trial court’s denial of Appellant’s motion for judgment of acquittal on the issue of intent.

When it comes to probate proceedings, there’s a strong public policy favoring finality, even it means valid claims sometimes get sacrificed. For example, F.S. 733.903 tells us that once a probate proceeding is closed, it won’t be reopened because sometime after the fact someone finds a perfectly valid will that would have changed everything.

And if you’re the personal representative, F.S. 733.901(2) tells us that once you’re discharged, you too can rest easy in the knowledge that you can’t be sued for anything you did during the probate proceeding. But alas, this last bit of finality is subject to a few exceptions, which are the focus of 1st DCA’s opinion in the Sims case.

Sims v. Barnard, — So.3d —- 2018 WL 5796936 (Fla. 1st DCA November 06, 2018)

This case involves a probate proceeding that went on for over 10 years, involved multiple personal representatives, and one very active pro se litigant. The final PR was an attorney who filed a final accounting that was objected to. The probate judge overruled the objections, approved the final accounting, and discharged the PR in 2015. Two years later the PR was sued by the same objecting party for “fraud” and “embezzlement”.

The former PR claimed the suit against him was barred by F.S. 733.901(2), and the trial court agreed. On appeal the claimant argued his lawsuit shouldn’t have been dismissed because his claims fall under the “fraud” and “concealment” exceptions. Here’s how the 1st DCA summarized this argument and the controlling Florida law:

Appellant correctly asserts that section 733.901 “does not serve as an absolute bar to the suits filed after the discharge of the personal representative.” Van Dusen v. Southeast First Nat’l Bank of Miami, 478 So.2d 82, 89 (Fla. 3d DCA 1985). The statutory bar codifies “a modified res judicata concept … applicable in probate cases.” Id. at 91. The bar will not be applied to a suit for fraud by concealment, where its application “would permit a fiduciary to benefit from its alleged wrongful acts if it could conceal them for the statutory period.” Karpo v. Deitsch, 196 So.2d 180, 181 (Fla. 3d DCA 1967) (holding that suit was not barred by discharge where suit alleged PR concealed from heirs the true value of estate and concealed from the court the identities of the heirs preventing heirs from asserting objection or claim prior to discharge). Likewise, where the PR conceals its intentional transfer of an estate asset by failing to report the distribution in the petition for distribution or otherwise, the PR “is not entitled to the sanctuary provided by” section 733.901. Van Dusen, 478 So.2d at 91.

The lawsuit at the center of this case seemed to include the magic “fraud by concealment” allegations needed to survive a motion to dismiss. So rather than challenge the pleading on its face, the defendant challenged it on summary judgment, which allowed the trial court (and the appellate court) to look beyond the four corners of the complaint. When that happened, the claims crumbled, both at the trial court level and on appeal.

Appellant filed his lawsuit against Bernard and the law firm on March 13, 2017. While the amended complaint generally alleged fraud and “embezzlement,” the facts asserted by Appellant were that the PR failed to provide him with sufficient accountings to explain all expenditures, leading Appellant to the conclusion that estate funds had been removed without explanation. The missing interim accountings, which Appellant was ultimately provided, simply do not rise to the level of “concealment” by the PR presented in Van Dusen and Karpo.

Wallace v. Watkins, — So.3d —- 2018 WL 3946062 (Fla. 5th DCA August 17, 2018)

But what if an estate gets probated and years later an heir shows up who was excluded from the original proceeding? That’s what happened in this case.

According to the appellate brief, “[a]lthough the decedent died in 1971, no one in the family had the means or know-how to file estate administration papers with the County at that time.” While it’s never stated explicitly, reading between the lines my sense is that the property at issue in this case is an example of “heirs property” passed down informally to surviving family members who lack the resources to judicially perfect their property rights in a probate proceeding.

As explained in an excellent Florida Bar Journal article entitled The Disproportionate Impact of Heirs Property in Florida’s Low-Income Communities of Color, these arrangements can lead to all sorts of negative consequences. By the way, the authors of this article advocate for Florida’s adoption of the Uniform Partition of Heirs Property Act, although not everyone thinks that’s a good idea. See The Uniform Partition of Heirs Property Act: A Solution in Search of a Problem.

Now back to the case. The decedent died in 1971. In terms of formally clearing title to her property, nothing happened until 2001 (29 years later), when her two daughters initiated a summary administration to probate a parcel of real property owned by the decedent at the time of her death. The decedent had adopted three of her grandchildren. These adopted children didn’t get notice of the probate proceeding, nor did they get a share of the property.

Fast forward another 15 years to 2016. The adopted children filed a petition to reopen the Watkins estate under F.S. 735.206(g), which provides as follows:

(g) Any heir or devisee of the decedent who was lawfully entitled to share in the estate but who was not included in the order of summary administration and distribution may enforce all rights in appropriate proceedings against those who procured the order and, if successful, shall be awarded reasonable attorney’s fees as an element of costs.

This statute seems pretty clear cut. If you’re an heir, and you weren’t included in the probate proceeding, you get a do-over. But reading the statute that way runs headlong into Florida’s strong public policy favoring finality in probate proceedings. So not surprisingly, as explained by Judge Schwartz in a thoughtful concurring opinion he wrote in Klem v. Espejo-Norton (a case I wrote about here) the usual rule in Florida is that an estate won’t be reopened even if a rightful heir was excluded. The exception to this rule being the type of “fraud by concealment” scenarios discussed in the Sims case above.

The probate judge reopened the Watkins probate proceeding in a non-evidentiary hearing where apparently no one made a “fraud by concealment” argument. Instead, the argument was made that the petition to re-open was time barred by F.S. 733.710(1), Florida’s non-claim statute for probate creditor claims. Since this isn’t a creditor-claim case (it’s a case about excluded heirs) that argument went nowhere.

Florida’s nonclaim statute applies to claims brought against the estate by creditors. It does not apply to the beneficial interests of heirs. See In re Estate of Robertson, 520 So.2d 99, 102 (Fla. 4th DCA 1988) (rejecting argument that nonclaim statute barred claim of heirship because such claims were “not the type of ‘claim’ contemplated” by nonclaim statute); see also Frank T. Pilotte, Creditors’ Claims and Family Allowance, in Practice Under Florida Probate Code (9th ed. 2017) (“[H]owever, the definition of claims and the nonclaim statute clearly do not apply to the beneficial interests of beneficiaries.”).

So what happened here? While the 5th DCA did say the heirship claims weren’t time barred as creditor claims, it didn’t grant the adoptees any property rights, all it did was affirm a trial court order reopening an estate. Does that mean the general rule barring the reopening of probate proceedings in the absence of fraud doesn’t apply in summary administration cases? Who knows. Here’s what we do know for sure: a family with not-that-much to begin with found itself enmeshed in the kind of probate/property-rights mess that seems to disproportionately burden folks most likely to be the recipients of “heirs property”. And that’s a shame.

Under Florida’s Trust Code there are two classes of beneficiaries, and which class you fall in is a big deal.

As defined in F.S. 736.0103(4), the term “beneficiary” refers to the entire universe of persons who have a beneficial interest in a trust, as well as to any person who has a power of appointment over trust property in a capacity other than as trustee. For purposes of this definition it’s immaterial whether the beneficial interest is present or future, vested or contingent, or whether the person having the interest is ascertainable or even living.

What’s a “qualified beneficiary”?

By contrast, the term “qualified beneficiary,” as defined in F.S. 736.0103(16), encompasses a much smaller — but favored — subset of trust beneficiaries. This class of beneficiaries is limited to current beneficiaries, intermediate beneficiaries, and first line remainder beneficiaries, whether vested or contingent. These beneficiaries are prioritized in two key ways. First, qualified beneficiaries are going to have standing in just about any judicial proceeding involving their trusts. Second, qualified beneficiaries are at the center of all trustee disclosure obligations.

For example, no matter what your trust agreement says, F.S. 736.0105 tells us you can’t waive the duty under F.S. 736.0813 to notify qualified beneficiaries of an irrevocable trust of the existence of the trust, of the identity of the trustee, and of their rights to trust accountings; nor can you waive the duty to provide a complete copy of the trust instrument and to account to qualified beneficiaries; nor can you waive the duty to respond to the request of a qualified beneficiary of an irrevocable trust for relevant information about the assets and liabilities of the trust and the particulars relating to trust administration.

Bottom line, you can’t do your job as trustee if you don’t know who your qualified beneficiaries are.

Miss law school? How about a couple of brain teaser hypotheticals?

And just in case we didn’t get the message that identifying a trust’s “qualified” beneficiaries is critically important (and can be a tricky exercise in real life), the trust code’s 2006 Legislative Staff Analysis (written largely by FSU Law Professor David F. Powell, who was the scrivener for the Ad Hoc Trust Law Committee of the Florida Bar that drafted Florida’s trust code) went so far as to provide hypothetical examples for those of us trying to pin down exactly who falls within this favored class of beneficiaries:

Example 1 — Meaning of Beneficiary. At his death, ninety-year-old D leaves $1,000,000 to T as trustee “to pay the income to D’s spouse S for life, then to distribute trust property to such of D’s descendants as S by will appoints, and in default of appointment in continuing trust to spray income among D’s children from time to time living, and at the death of the last to distribute all trust property per stirpes to D’s then living descendants and if there be none, to D’s alma mater, QB University.” D is survived by S, by two children, C1 and C2, by a grandson Bob (C1’s child) and by a great-granddaughter Fay (Bob’s child). On these facts, the beneficiaries of D’s trust include S, C1, C2, Bob, Fay, QB University, and an indeterminate and unascertainable class of as yet unborn descendants of D. Note that T’s power to spray trust income among D’s children does not make T a beneficiary because T holds that power as a trustee.

Example 2 — Meaning of Qualified Beneficiary. Same facts as Example 1. The qualified beneficiaries of D’s trust, as of his death, include S, C1, C2 and Bob. S is included because she is a permissible distributee. C1 and C2 are included because they would become permissible distributees were S’s interest to terminate at D’s death (i.e., were she to die at that time). Bob is also a qualified beneficiary because he would take the trust property were the trust to terminate at D’s death (because of the death of S, C1 and C2). As of D’s death, neither Fay nor QB University are qualified beneficiaries. Note however, that if Bob were to die after D’s death, Fay would then become a qualified beneficiary because she would be entitled to trust property as a consequence of a hypothetical trust termination at that time. That is, the determination of who is a qualified beneficiary is made as of a specific point in time and can change over time.

Clearly, who’s in and who’s out as a qualified beneficiary isn’t always going to be obvious. You need to apply the statute to a concrete set of facts to make sense of it. And thanks to the 4th DCA we now have two more real life examples. In both cases the 4th DCA makes clear that when in doubt the term “qualified beneficiary” is going to be read expansively, even if the trust agreement was intentionally drafted to reach the opposite result.

Should you assume intermediate beneficiaries die “sequentially” or “simultaneously”?

Hadassah v. Melcer, — So.3d —- 2019 WL 141039 (Fla. 4th DCA January 09, 2019)

In this case the trust agreement left everything to D’s surviving spouse, S, and upon her death to her three daughters, A, B, and C, and when the last daughter dies, to several charities. F.S. 736.0110 extends the rights of a qualified beneficiary to any charitable organization expressly designated to receive distributions from a charitable trust if the organization would otherwise meet the definition of a qualified beneficiary.

D was survived by his three daughters (his wife predeceased him). D’s trustee then filed an action seeking to resign and he named D’s three daughters and the charities as defendants, alleging that they were all qualified beneficiaries of the trust. The daughters argued that the charities weren’t qualified beneficiaries, and thus didn’t have a say in who gets to be successor trustee, because if any one of them died, the surviving sisters would get their share. Thus, the charities weren’t first line remainder beneficiaries. The trial court agreed and entered summary judgment against the charities.

Wrong answer, says the 4th DCA. When you’re defining who falls within the magic circle of qualified beneficiaries you need to assume all intermediate beneficiaries die simultaneously.

The lower court’s order contemplates the sequential termination of the daughters’ individual interests such that A’s interest passes to B and C; then B’s interest passes to C; then C’s interest passes to the charities. This interpretation is contrary to the plain language of the statute.

The statute contemplates the simultaneous termination of the interests of the distributees (“termination of the interests of other distributees or permissible distributees then receiving or eligible to receive distributions”). If the interests of the distributees of the trust were simultaneously terminated, all of the daughters’ interests would terminate and the charities would be the distributees. Therefore, the charities are qualified beneficiaries under the plain language of the statute.

Can you use a “multiple-trust scheme” to draft remainder beneficiaries out of the picture?

Rachins v. Minassian, 251 So.3d 919 (Fla. 4th DCA July 11, 2018)

When it comes to blended families, estate planning can be a special kind of hell, as amply demonstrated by this case, which is now on its second round before the 4th DCA.

In this case D’s trust was for the benefit of his surviving spouse, S, and upon her death for D’s adult children from a prior marriage. D was survived by S and his children. Both D and his estate planning attorney clearly anticipated there was going to be trouble, and tried their best to draft those problems out of existence, as I previously reported here the first time this case made its way to the 4th DCA.

This time around the question was whether a trust agreement that says S’s “Family Trust” terminates when she dies and that at that time new trusts would be created for D’s children, effectively cuts them out as qualified beneficiaries of S’s trust. As explained by the 4th DCA, that was clearly D’s intent.

[I]t appears that the husband settled on the multiple-trust scheme for the very purpose of preventing the children from challenging the manner in which the wife spent the money in the Family Trust during her lifetime.

So did this bit of defensive drafting work? Nope. Here’s why:

[T]he fact that the Family Trust terminates upon the wife’s death does not preclude the children from having a beneficial interest in the Family Trust. Indeed, by definition, a remainder interest in a trust refers to the right to receive trust property upon the termination of the trust. ….

Thus, while the husband may have intended to prevent the children from challenging the manner in which the wife spent the money in the Family Trust during her lifetime, see Minassian, 152 So.3d at 727, the children are qualified beneficiaries under [F.S. 736.0103(16)] and are therefore entitled to the corresponding protections afforded to qualified beneficiaries under the Florida Trust Code.

Johnson v. Townsend, — So.3d —- 2018 WL 5291297 (Fla. 4th DCA October 24, 2018)

Florida remains the largest recipient of state-to-state migration in the US, and the top choice among retirees. A percentage of those transplants are going to be married couples that moved to Florida directly from a community property state or may have lived in a community property state at some time during their marriage. How big a percentage? Bigger than you might think.

There are nine community property states in the US, including our two most populous states: California and Texas. Additionally, Alaska is an elective community property state, and of the five inhabited US territories, Puerto Rico and Guam are community property jurisdictions. That’s a lot of people. But it doesn’t end there.

You also need to keep in mind that married couples moving to Florida from foreign civil law jurisdictions (think all of Latin America) usually bring along with them some kind of community property rights. Florida is a perennial – and growing – private banking center for Latin America’s wealthy, the number one destination for Latin American migration to the U.S., and the most popular U.S. state for foreign real estate investors.

Florida Uniform Disposition of Community Property Rights at Death Act (FUDCRPDA)

OK, so even if community property is common, why should we care? Because when one of those community property transplants dies in Florida, the surviving spouse’s testamentary community property rights don’t go away, they’re preserved by the Florida Uniform Disposition of Community Property Rights at Death Act (“FUDCRPDA”) (see F.S. sections 732.216 to 732.228); Florida’s version of the Uniform Disposition of Community Property Rights at Death Act (which has been adopted in 17 states).

For more on FUDCRPDA and how it’s supposed to work, you’ll want to read Playing Both Sides of the Florida Community Property Street?, by Richard Warner, one of the smartest probate practitioners and most provocative commentators in Florida.

But here’s the problem: because Florida isn’t a community property state, community property is an issue most Florida probate attorneys never think about, which means it might be a while before anyone gets around to looking into whether a surviving spouse has any community property rights worth filing a FUDCRPDA claim to preserve. Does this lack of awareness matter? Yes. Why? Because community property claims in Florida probate proceedings are forfeited if they’re not made before the statutory filing deadline. So what’s the filing deadline? According to the 4th DCA, it’s sooner than you might think.

Case Study: Texas + Florida =  FUDCPRDA Claim

The linked-to case above involves a married couple that moved to Florida from Texas (a community property state). When husband died in January 2015, he was survived by his wife and children from a prior marriage. In March 2015 the decedent’s will was admitted to probate and his wife was appointed personal representative. In September 2017 (two years and eight-and-a-half months after the decedent’s death), surviving spouse filed a FUDCPRDA claim, described as follows by the 4th DCA:

The wife’s petition, filed pursuant to sections 732.216–.228, Florida Statutes (2015) (known as the “Florida Uniform Disposition of Community Property Rights at Death Act”) sought to confirm and effectuate her vested 50% community property interest in an investment asset acquired and titled in the decedent’s name while the decedent and the wife were domiciled in Texas, a community property state. See § 732.219, Fla. Stat. (2015) (“Upon the death of a married person, one-half of the property to which ss. 732.216–732.228 apply is the property of the surviving spouse and is not subject to testamentary disposition by the decedent or distribution under the laws of succession of this state.”).

The decedent’s daughters objected, claiming wife’s FUDCPRDA claim was time barred. So what’s the deadline for filing a community property claim? Good question; FUDCPRDA doesn’t tell us, you need to look elsewhere.

If a surviving spouse is going to make an elective share claim, F.S. 732.2135(1) tells us exactly what the deadline is for filing that kind of claim. By contrast, FUDCPRDA doesn’t have any explicit filing deadlines. Wife argued there are none (which makes sense if she was simply perfecting existing property rights to non-estate assets she already owned). Daughters argued wife’s community property claim is a form of creditor claim, so the filing deadlines for probate creditor claims apply (which makes sense if we view a FUDCPRDA claim as creating new property rights to estate assets owned by the decedent).

Is a surviving spouse’s community-property claim subject to the filing deadlines for probate “creditor” claims? YES

Daughters won the definitional argument: community property claims = creditor claims: creditor deadlines apply.

[W]e agree with the daughters’ argument that the wife’s petition to determine her community property interest is a “claim” as that term is defined in section 731.201(4). Section 731.201(4) defines a “claim” as

a liability of the decedent, whether arising in contract, tort, or otherwise, and funeral expense. The term does not include an expense of administration or estate, inheritance, succession, or other death taxes.

(emphasis added). The wife’s community property interest is “a liability of the decedent.” Although the decedent’s possession of the community property in his name may have created a resulting trust, see [Quintana v. Ordono, 195 So.2d 577, 580 (Fla. 3d DCA 1967)] (“A resulting trust is generally found to exist in transactions affecting community property in noncommunity property states where a husband buys property in his own name.”), upon the decedent’s death, his estate became liable to the wife for her community property interest. Thus, upon the decedent’s death, the wife’s community property interest was a claim which the wife had to pursue.

And once the daughters won the definitional argument, the outcome was inevitable: wife’s claim was time barred:

Upon the decedent’s death, the wife had the ability to perfect her community property interest by seeking an order of the probate court pursuant to section 732.223. Because the wife’s community property interest was a “claim” as defined in section 731.201(4), the wife had three months after the time she published the notice to creditors to file her claim according to section 733.702(1), and in any event had two years after the decedent’s death to file her claim according to section 733.710(1). The wife did neither. As a result, the circuit court properly found that the wife’s untimely claim (in the form of her petition) was barred, and that no exception to the statutory deadlines existed. Ruling otherwise would have left no deadline by which the wife had to file a petition to perfect her community property interest, contrary to section 733.710(1).

Below are links to the briefs filed with the 4th DCA.

  1. Initial Brief
  2. Answer Brief
  3. Reply Brief

So what are testamentary community property rights in Florida?

The only way to make sense of how the 4th DCA ruled in this case is to think of a FUDCPRDA claim as a form of testamentary marital right that’s forfeited if not pursued (like an elective share claim), not an adjudication of existing property rights to non-estate assets surviving spouse already owns.

The 4th DCA crystallized the competing property rights views animating this case by granting wife’s motion to certify to the Florida Supreme Court the following question of great public importance:

We deny appellant’s motion for rehearing and/or rehearing en banc. However, we grant appellant’s motion to certify to the Florida Supreme Court the following question of great public importance:

Whether a surviving spouse’s vested community property rights are part of the deceased spouse’s probate estate making them subject to the estate’s claims procedures, or are fully owned by the surviving spouse and therefore not subject to the estate’s claims procedures.

The Florida Supreme Court ultimately denied the wife’s petition, effectively ending the case. Below are links to the briefs and the court’s order denying further review.

  1. Jurisdictional Initial Brief
  2. Jurisdictional Answer Brief
  3. Order Denying Petition for Review

FUDCPRDA Claim + Probate Creditor Deadlines = Trap for the unwary:

The ultra-short filing deadlines for creditor claims are intentionally designed to cut off potential claimants as soon as possible, which means you need to be thinking about them from day one. The “notice to creditors” mandated by F.S. 733.2121 makes sure everyone is acutely aware of these deadlines. And when it comes to marital rights, like elective share claims, the applicable statutes again give us explicit filing deadlines. FUDCPRDA doesn’t explicitly set a filing deadline, you need to infer it from the limitations periods applicable to “creditor” claims. This is a huge trap for the unwary. You’ve been warned …

If you make your living in and around our probate courts you’ll find the FY 2016-17 Probate Court Statistical Reference Guide interesting reading. The chart below provides the “cases filed” data for three of our largest circuits/counties: Miami-Dade (11th Cir), Broward (17th Cir), and Palm Beach (15th Cir).

And because one year’s snapshot is only so useful, the chart also reports the per-judge average case filing numbers for the prior four years to reflect trends over time.

Type of Case Miami-Dade (11th Cir) Broward (17th Cir) Palm Beach (15th Cir)
Probate 4,354  3,541  4,825
Baker Act  4,714  3,507  2,126
Substance Abuse 937  782  684
Other Social Cases 1,725  383  212
Guardianship 892  448  472
Trust 55  42  212
Total 12,677  8,703  8,531
# Judges 5 3 4.5*
2016-17: Total/Judge  2,535  2,901

 1,896
2015-16: Total/Judge  3,070  2,866 2,109
2014-15: Total/Judge  3,122  3,044  2,020
2013-14: Total/Judge  3,069  3,899  1,950
2012-13: Total/Judge  2,848  3,105  1,871

*In Palm Beach County (15th Cir) there are 9 part time probate judges. For purposes of the chart I count them as 4.5 full time probate judges.

So what’s it all mean?

In Miami-Dade – on average – each probate judge took on 2,535 NEW cases in FY 2016-17, in Broward the figure was slightly higher at 2,901/judge, with Palm Beach scoring the lowest at 1,896/judge. Keep in mind these case-load figures (which have remained relatively constant over the last five years) don’t take into account each judge’s EXISTING case load or other administrative duties.

These stat’s may be appropriate for uncontested proceedings, which represent the vast majority of the matters handled by a typical probate judge, but when it comes to that small % of estates that are litigated, these same case-load numbers (confirmed by personal experience) make two points glaringly clear to me:

[1] We aren’t doing our jobs as planners if we don’t anticipate — and plan accordingly for — the structural limitations inherent to an overworked and underfunded state court system. As I’ve previously written here, one important aspect of that kind of planning should be “privatizing” the dispute resolution process to the maximum extent possible by including mandatory arbitration clauses in all our wills and trusts. Arbitration may not be perfect, but at least you get some say in who’s going to decide your case and what his or her minimum qualifications need to be. And in the arbitration process (which is privately funded) you also have a fighting chance of getting your arbitrator to actually read your briefs and invest the time and mental focus needed to thoughtfully evaluate the complex tax, state law and family dynamics underlying these cases (a luxury that’s all but impossible in a state court system that forces our judges to juggle thousands of cases at a time with little or no support).

[2] We aren’t doing our jobs as litigators if we don’t anticipate — and plan accordingly for — the “cold judge” factor I wrote about here; which needs to be weighed heavily every time you ask a court system designed to handle un-contested proceedings on a mass-production basis to adjudicate a complex trial or basically rule on any technically demanding issue or pre-trial motion of any significance that can’t be disposed of in the few minutes allotted to the average probate hearing.

You’d be surprised how varied a probate judge’s docket is:

But numbers alone don’t tell the whole story. To understand the breadth of issues a typical probate judge contends with in an average year, you’ll want to read the official definition given for each of the categories listed in my chart by the Florida Office of the State Courts Administrator 2016-17 Glossary:

Probate:

All matters relating to the validity of wills and their execution; distribution, management, sale, transfer and accounting of estate property; and ancillary administration pursuant to Chapters 731, 732, 733, 734, and 735, F.S.

Baker Act (Mental Health Act):

All matters relating to the care and treatment of individuals with mental, emotional, and behavioral disorders pursuant to sections 394.463 and 394.467, F.S.

Substance Abuse Act (Marchman Act):

All matters related to the involuntary assessment/treatment of substance abuse pursuant to Sections 397.6811 and 397.693, F.S.

Other Social Cases (Probate):

All other matters involving involuntary commitment not included under the Baker and Substance Abuse Act categories. All matters involving the following, but not limited to:

  • Adult Protective Services Act cases pursuant to Section 415.104, F.S.
  • Developmental disability cases under Section 393.11, F.S.
  • Incapacity determination cases pursuant to sections 744.3201, 744.3215, and 744.331, F.S.
  • Review of surrogate or proxy’s health care decisions pursuant to Section 765.105, F.S., and rule 5.900, Florida Probate Rules
  • Tuberculosis control cases pursuant to Sections 392.55, 392.56, and 392.57, F.S.

Guardianship (Adult or Minor):

All matters relating to determination of status; contracts and conveyances of incompetents; maintenance custody of wards and their property interests; control and restoration of rights; appointment and removal of guardians pursuant to Chapter 744, F.S.; appointment of guardian advocates for individuals with developmental disabilities pursuant to section 393.12, F.S.; and actions to remove the disabilities of non-age minors pursuant to sections 743.08 and 743.09, F.S.

Trusts:

All matters relating to the right of property, real or personal, held by one party for the benefit of another pursuant to Chapter 736, F.S.

Lindenau v. Lundeen, 2018 WL 1152403 (M.D. Florida March 05, 2018)

Florida remains the largest recipient of state-to-state migration in the US, and the top choice among retirees.

Not surprisingly, many of these transplants are slow to abandon the professional relationships they’ve fostered back home — often for decades. When it comes to estate planning that can be a big mistake. Why? Because just because your estate planning documents work back home doesn’t mean they’ll work in Florida. And the person who “pays” for that mistake may be the attorney — not the client (think malpractice claim).

For example, if a trust’s executed somewhere else (like Illinois), F.S. 736.0403(1) tells us it’s generally going to be valid in Florida if it’s valid back home. But that last rule is subject to some big caveats, including Florida’s special execution rules for revocable trusts having “testamentary” provisions. In those cases F.S. 736.0403(2)(b) tells us the non-Florida revocable trust has to comply with Florida’s execution formalities for wills — no matter what the rule might be back home. That can be a huge trap for the unwary.

Case Study:

At the heart of the Lindenau v. Lundeen case is an Illinois retiree who moved to Florida but kept working with his estate planning attorney back home. The decedent’s Illinois attorney (Lundeen) drafted an amendment to his client’s Illinois revocable trust after the client had moved to Florida and established a new domicile in Florida. The trust amendment was signed by the decedent (Falkenthal) in the presence of two witnesses, but only one of the witnesses signed it. That’s just fine in Illinois, not so much in Florida, as Falkenthal’s new Florida girlfriend (Lindenau) learned when the 2d DCA held in Kelly v. Lindenau (which I wrote about here) that the trust amendment granting her title to the home she shared with Falkenthal failed as a matter of law.

Failed Trust = Malpractice Lawsuit:

So what happened next? Surprise! Lundeen found himself on the receiving end of a malpractice suit in Florida. But it wasn’t all bad news. Fortunately for Lundeen he was represented by excellent defense counsel that got the case removed to federal court, then moved to dismiss it on jurisdictional grounds. Here’s how the federal judge described these two defensive moves:

Following the unfavorable appellate decision, Lindenau filed this lawsuit in the Circuit Court for the Twelfth Judicial Circuit in and for Manatee County, Florida. (See Doc. 2.) Lundeen timely removed it here. (Doc. 1.)

Lindenau alleges that Lundeen committed legal malpractice by “neglecting to draft the Second Amendment according to § 732.503 and § 736.0402, Fla. Stat., failing to advise Falkenthal regarding the execution requirements of Florida law, and by failing to ensure that the Second Amendment was executed by two attesting witnesses.” (Doc. 2 ¶ 22.) Lundeen moved to dismiss the Complaint for lack of personal jurisdiction(Doc. 10), filing a declaration in support. (Doc. 9.) Lindenau responded with her own affidavit and additional evidence. (Docs. 19, 19–1.) Finding no direct conflict in the submitted evidence when construed in Lindenau’s favor, the Court exercised its discretion to hold a non-evidentiary hearing.3 (See Doc. 24.)

Florida’s long-arm statute:

When you’re litigating long-arm jurisdiction it’s a two-step process. First the Court needs to determine if the claims against the non-resident defendant fall within F.S. 48.193, Florida’s long-arm statute. So does drafting a trust amendment in Illinois that fails in Florida fall under Florida’s long-arm statute? Yup:

In [Robinson v. Giamarco & Bill, P.C., 74 F.3d 253, 257 (11th Cir. 1996)] … Michigan attorneys negligently drafted and reviewed a Florida resident’s will, trust, and follow-on testamentary documents. 74 F.3d at 255–56. The client died in Florida, and the will was admitted to probate and the trust administered in Broward County, Florida. Id. at 256. The trust and the estate incurred unexpected tax liability and consequently sued the Michigan attorneys for malpractice. Id. The Eleventh Circuit held the Michigan attorneys “commit[ed] a tortious act within this state” because “[t]heir negligence has allegedly caused damages to an estate in Florida.” Id. at 257.

Robinson controls on the question of the long-arm statute’s applicability. Lundeen negligently drafted a trust amendment, allegedly causing damage to a third-party beneficiary of the Trust in Florida. (Doc. 2 ¶ 23.) Robinson and the “broad construction” the Eleventh Circuit traditionally affords § 48.193(1)(a)(2) subject Lundeen to Florida’s long-arm statute …

Choice-of-Law Clauses Really Matter:

But just because you’re covered by F.S. 48.193 doesn’t mean you’re done. Once that condition’s satisfied, the Court then moves to step two by evaluating whether the defendant has “minimum contacts” with Florida, such that hauling him into a Florida courtroom does not offend “traditional notions of fair play and substantial justice.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). If step two’s satisfied, the case stays in Florida. If not, it gets dismissed.

In this case the Court said it was a “close call,” but the trust amendment’s Illinois choice-of-law clause tipped the scales in Lundeen’s favor; case dismissed. See you in Illinois. Here’s why:

Lundeen contends this case … aligns with Fleming & Weiss, P.C. v. First American Title Insurance Co., 580 So. 2d 646 (Fla. 3d DCA 1991). There, the out-of-state law firm sent an opinion letter to a Florida bank concerning a subordination agreement that would be used in Florida as part of a mortgage agreement to purchase Florida property, which allegedly caused harm in Florida. Id. at 647. The firm sent the letter “knowing and expecting” it would be used by the Florida bank “in transacting the Florida land loan.” Id. at 648 (Nesbitt, J., dissenting). Nevertheless, the court held the firm’s contacts with Florida insufficient to satisfy due process because the firm “did not solicit business in Florida, maintained no agent or property in Florida,” and “stated … the opinion was based solely on New York law.” Id. at 647–48.

That final point is a critical one. Like the opinion letter in Fleming & Weiss, Lundeen drafted the Trust so that Illinois law would govern. This is an “an indication” that Lundeen never intended to avail himself of Florida’s laws and did not expect to be haled into court here …

Also similarly to Fleming & Weiss, Lundeen does not solicit business in Florida, has no office in Florida, is not licensed in Florida, owns no property in Florida, and has no other clients in Florida. And while the attorneys in Fleming & Weiss … knew and expected their documents would be used in Florida, Lundeen had no such guarantee when he drafted the Trust and the Amendments. (See Doc. 9 ¶¶ 18, 25.) His lack of expectation or intention to subject himself to Florida law distinguishes this case. … By including an Illinois choice-of-law clause and not expecting or intending the Trust to be invoked by Florida courts under Florida law, Lundeen did not purposefully avail himself of this forum, according to Fleming & Weiss.

This case instead comes down to whether Lundeen’s act of drafting the First and Second Amendments “involve some purposeful availment of the privilege of conducting activities within the forum, thereby invoking the benefits and protections of its laws.” … Because the Trust and Amendments were to “be construed and governed by the laws of Illinois” (Doc. 2–1 at 8), and Lundeen did not expect nor intend for the Trust to be administered in Florida under Florida law (Doc. 9 ¶¶ 18, 25), Lundeen cannot be said to have created a “substantial connection” with Florida sufficient to subject him to jurisdiction. See Fleming & Weiss, 580 So. 2d at 647–48.6 Accord Newsome v. Gallacher, 722 F.3d 1257, 1280 (10th Cir. 2013) (collecting cases supporting general agreement among federal courts that “representing a client residing in a distant forum is not necessarily a purposeful availment of that distant forums’ laws and privileges”).

Turkish v. Brody, — So.3d —-, 2016 WL 6992203 (Fla. 3d DCA November 30, 2016)

The family at the center of this case made its money investing in New York and Florida real estate (starting in the 1920s), and they’ve been feuding with each other over that fortune for decades. For that backstory you’ll want to read this 1994 2d Cir opinion.

Fast forward to 2008. One of the surviving heirs was a woman named Ada Turkish who had two children, a son named Arthur and a daughter named Carole. According to the 3d DCA, Mrs. Turkish clearly favored her son.

The record before this Court reflects that, despite Arthur’s lack of significant outside employment for decades, he nonetheless maintained an extravagant lifestyle. His mother, Mrs. Trask, was aware of, participated in, and enjoyed Arthur’s lifestyle, and opted to finance his lifestyle through distributions from Trust Number One and other substantial gifts.

In contrast to her brother, Carole survived on Social Security. The contrast between the siblings was a key theme throughout the litigation, as reported by the DBR in Grandchildren going to court over real estate trust money:

The plaintiff, Carole Brody, 75, lives with her daughter in a two-bedroom apartment in Aventura and buys what she needs on her monthly Social Security stipend. The brother, defendant Arthur S. Turkish, lives in a luxury home in Broken Sound Club, one of the most prestigious country clubs in Boca Raton.

Mrs. Turkish’s gifts to Arthur triggered over $3 million in unpaid gift taxes. Her lawyers negotiated a settlement with the IRS that reduced her gift-tax liability down to $1,022,500. Apparently short on cash, Mrs. Trask chose to fund her tax payment by asking Arthur to funnel cash to her from “Trust Number One,” a trust she’d previously created for the benefit of Arthur and his sister Carole. Arthur was a co-trustee of this trust (his sister Carole wasn’t). Arthur said yes, and exercised his authority as trustee to make a $1,022,500 trust distribution to himself; he then gave these funds to his mom who used the money to pay the IRS and signed a promissory note to pay Arthur back.

When sister Carole got wind of the tax-payment deal between mom and Arthur, she objected, arguing that the $1 million gift tax payment was primarily for Arthur’s benefit (think: self-dealing by Arthur). This factual point was accepted by the trial court, as reflected in the 3d DCA’s opinion:

[FN 1]: It is undisputed that Mrs. Trask made numerous and substantial gifts to Arthur, and therefore, the IRS settlement directly benefitted Arthur because Arthur would have been responsible for a large portion of any gift tax liability as he was the one who received a large portion of the gifts.

Arthur (as trustee) and Carole (as beneficiary) settled this dispute by entering into a Supplemental Release Agreement (“SRA”). Under the terms of the SRA, Arthur agreed to assign his mom’s $1 million promissory note back to their trust, which presumably would make the trust whole. However, unbeknownst to Carole, mom didn’t have the financial wherewithal to pay the loan. The promissory note was virtually worthless.

What’s it take to make sure a trustee/beneficiary settlement agreement’s binding?

The general rule in Florida is that parties deal with each other at arm’s length when settling disputes, so a settlement agreement can’t be invalidated simply because one side misleads the other (see here), or one side makes false representations to the other during a mediation conference (see here).

But what if the settling parties are a trustee and his beneficiary, is it still every man for himself? Not so much. Under F.S. 736.1012, a settlement agreement between a trustee and a beneficiary is voidable if “at the time of the consent, release, or ratification, the beneficiary did not know … of the material facts relating to the breach.” Florida’s statue tracks the text of Uniform Trust Code Section 1009 verbatim. And according to the commentary to UTC Section 1009, if the trustee’s actions constituted self-dealing, full disclosure isn’t enough; under those circumstances a beneficiary’s release is binding “only if the transaction was fair and reasonable.”

In this case the trust was governed by New York law, which has a rule similar to F.S. 736.1012 for enforcing trustee/beneficiary settlement agreements. And because mom’s promissory note wasn’t worth the paper it was written on, and this material fact wasn’t affirmatively made known to Carole, the SRA wasn’t binding, which resulted in Arthur having to pay his sister back half of the tax-money distribution, or $511,250. Here’s how the 3d DCA put it:

In the instant case, although the facts recited in the SRA were accurate, the Co–Trustees failed to make a “full disclosure” to Carole, a beneficiary—that the promissory note Arthur agreed to “contribute” to Trust Number One in exchange for Carole’s release was virtually worthless because Mrs. Trask did not have the ability to repay the promissory note during her lifetime and there would be insufficient estate assets to pay the promissory note upon her death … Therefore, we affirm the trial court’s ruling that the SRA is invalid due to Arthur’s failure to disclose material facts.

So what’s the take away?

If you’re a trustee negotiating a settlement agreement with a beneficiary, the burden is on you to make sure your beneficiary affirmatively represents and warrants that he or she has full knowledge of all material facts related to the deal, that the deal’s “fair and reasonable” (from the beneficiary’s point of view), and that these rep’s and warranties are documented and reflected in the text of your agreement. A “knowing” waiver of rights is a big deal in marital agreements as well. Family law lawyers have had decades to develop contractual rep’s and warranties to address this issue. I think those agreements are excellent models for trustees to use when drafting settlement agreements with their beneficiaries.

Can you rely on trust accountings and 6-month limitation notices to make sure a trustee/beneficiary settlement agreement’s binding?

Arthur argued that even if the SRA was voidable based on his failure as trustee to disclose material facts to Carole, her claim for breach of trust against him was barred because the tax-payment deal had been fully disclosed in a trust accounting she’d been served with, and this accounting contained a six-month limitation notice under F.S. 736.1008(2), which provides as follows:

Unless sooner barred by adjudication, consent, or limitations, a beneficiary is barred from bringing an action against a trustee for breach of trust with respect to a matter that was adequately disclosed in a trust disclosure document unless a proceeding to assert the claim is commenced within 6 months after receipt from the trustee of the trust disclosure document or a limitation notice that applies to that disclosure document, whichever is received later.

So again the issue is: were the material facts “adequately disclosed” to the beneficiary (Carole)? According to F.S. 736.1008(4)(a), a “trust disclosure document adequately discloses a matter if [1] the document provides sufficient information so that a beneficiary knows of a claim or [2] reasonably should have inquired into the existence of a claim with respect to that matter.”

The 3d DCA again ruled against Arthur. Why? Same reason the SRA failed: mom’s promissory note was worthless, and this material fact hadn’t been “adequately disclosed” to Carole (in fact, it wasn’t disclosed to her at all). Here’s how the 3d DCA explained this ruling:

The 2008 accounting … fails to disclose that the promissory note that Arthur contributed to Trust Number One was basically worthless … Further, the 2008 accounting for Trust Number One did not provide Carole with sufficient information that reasonably should have led her to inquire into her claim against the Co–Trustees. Therefore, the six-month statute of limitations set forth in section 736.1008(2) is not applicable because the matter was not “adequately disclosed in a trust disclosure document.” As such, Carole’s claims for breach of fiduciary duty … were not time barred.

I don’t think you can make sense of this case unless you look at it through the prism of trustee self-dealing. If a trustee wants a beneficiary to waive off on that kind of transaction, the burden of proof is always going to be on the trustee.

Which means a trustee shouldn’t assume generally applicable “disclosure” standards are going to shield him from a self-dealing claim. Which in turn means that an accounting-disclosure defense is unlikely to work unless you make it 100% clear that you’ve engaged in self-dealing, and why the transaction isn’t in the best interest of your beneficiaries. If you invite a beneficiary to sue you, and tell her why she could sue, and she still ignores you, then you might just possibly get away with barring future claims by relying on a six-month limitation notice under F.S. 736.1008(2). This kind of explicit disclosure does exist in SEC filings (which are voluminous and way more detailed than a standard trust accounting). I’m sure if you spent some time rummaging around those filings you could find model disclosure text.

For a thoughtful and well-reasoned alternate take on this case, you’ll want to read an excellent Florida Bar Journal article written by Patrick Duffey and Cady Huss entitled Full Disclosure: The Unexpected Ambits and Annals of the Adequate Disclosure Doctrine. Their thesis is that the facts and circumstances of Arthur’s accounting were enough to trigger Carole’s “reasonable inquiry” duty, which means Arthur’s trust-accounting defense should have worked. Here’s an excerpt:

Here, the beneficiary was separately represented by counsel and actively engaged with the trustee as an adversary with respect to the very matter at issue on appeal. She freely entered into the settlement agreement that gave rise to the contested promissory note. The underlying circumstances — that is, the necessity of the funds to pay a settlement with the IRS — would put any reasonable person on notice that, at a minimum, the mother lacked liquid assets to make payment on the note. The trustee made no affirmative representations as to the mother’s solvency. Title to the condominium was nothing more than a red herring: The promissory note was not secured by the property (nor did it purport to be) and had the condominium been owned outright by the mother, it would have been protected homestead not subject to the claims of creditors — including the trust. That holding then leads to an important question: Can a trustee ever rely on the inquiry prong in reporting trust operations to beneficiaries in accountings and other trust disclosure documents?

Bottom line, trustee/beneficiary settlement agreements involving pending claims of self-dealing are minefields that can blow up on you no matter how scrupulously well intentioned the trustee might be or how solid your legal advice is. If you find yourself advising a trustee trying to negotiate a settlement agreement with a beneficiary involving pending claims of self-dealing or any other pending breach of fiduciary duty claims, you’ll want read the Turkish opinion and Patrick and Cady’s excellent article. And you’ll also want to make sure your client appreciates the risks and uncertainties going in. Forewarned is forearmed.