In re Guardianship of Ansley, 94 So.3d 711 (Fla. 2d DCA August 17, 2012)

As I recently wrote here, a judge’s attorney’s fee order is automatically subject to reversal if it doesn’t contain detailed findings of fact explaining why and how the judge arrived at his or her final fee-award conclusions.

Transparency in this context is not a luxury; it’s the bare minimum we have a right to expect of our judiciary. Here’s how our supreme court articulated this crucially important point in Fla. Patient’s Comp. Fund v. Rowe, 472 So.2d 1145 (Fla.1985):

[G]reat concern has been focused on a perceived lack of objectivity and uniformity in court-determined reasonable attorney fees. Some time ago, this Court recognized the impact of attorneys’ fees on the credibility of the court system and the legal profession when we stated:

There is but little analogy between the elements that control the determination of a lawyer’s fee and those which determine the compensation of skilled craftsmen in other fields. Lawyers are officers of the court. The court is an instrument of society for the administration of justice. Justice should be administered economically, efficiently, and expeditiously. The attorney’s fee is, therefore, a very important factor in the administration of justice, and if it is not determined with proper relation to that fact it results in a species of social malpractice that undermines the confidence of the public in the bench and bar. It does more than that. It brings the court into disrepute and destroys its power to perform adequately the function of its creation.

Baruch v. Giblin, 122 Fla. 59, 63, 164 So. 831, 833 (1935).

Can a judge cut your attorney’s fees in a contested guardianship proceeding without explaining why? NO

Turning now to the linked-to case above. In this contested guardianship proceeding the former guardian’s attorney’s fees were contested. As explained by the 2d DCA, at the end of the fee hearing the petitioning attorney submitted a proposed fee order containing the kind of detailed findings of fact necessary for a properly drafted fee order. In other words, the petitioning attorney did his job. The trial judge then simply crossed out the $21,694.52 figure reflected at the end of the proposed fee order and wrote the amount of $16,520 above it. The trial judge gave no explanation for why he reduced the fee request by almost 1/4 or $5,174. In other words, as explained by the 2d DCA, the trial judge did not do his job.

The amount that the circuit court authorized the guardian to pay Mr. Martin is obviously less than the sum supported by the findings in the order concerning the reasonable hourly rates, the time expended, and the expenses incurred. Undeniably, there is an internal inconsistency in the order; the amount of fees and expenses awarded does not equal the amount of fees and expenses that the circuit court found were reasonable.

. . .

A comparison of the amount of the actual award in the order under review and the amount requested by Mr. Martin indicates that the circuit court intended to award less than the full amount sought in the petition. However, we do not know what led to the circuit court’s ruling. The above-noted internal inconsistency in the order results in the lack of any meaningful findings concerning the reasonable hourly rates and the number of hours compensated. The order also omits any statement of other factors that the circuit court considered in reducing the amount requested. These deficiencies make it impossible for this court to engage in meaningful appellate review of the order on appeal.  . . .

In short, we are unable to determine the basis for the circuit court’s award. It follows that we also cannot determine whether there is competent, substantial evidence in the record to support the award. Accordingly, we reverse the order under review. . . . We remand for the circuit court to enter a new order that sets forth the basis for the award, including the hours determined to be compensable, the hourly rate, and the other factors considered in arriving at the award. . . . The order must also itemize the costs allowed.

The 2d DCA obviously reached the right conclusion; all they’re doing is telling the trial judge to explain his ruling. Which is why it was disappointing to read Judge Villanti’s special concurrence in which he makes clear he doesn’t really understand why it’s so important for judge’s to explain their fee rulings.

While Mr. Martin is entitled to ask the court to specify exactly why it chose the amount it did, what is really to be gained in so asking? In my view, a request for an order that identifies how Mr. Martin overcharged the ward’s estate in the hopes that the trial court will suddenly agree that it abused its discretion in not awarding the full amount requested in the first instance is simply fodder for further litigation and a second appeal.

Respectfully, does Judge Villanti not understand that the amount of the fee ruling isn’t the point of the majority’s opinion (if properly drafted, the amount of a fee order is almost untouchable on appeal); what really matters in terms of this appellate decision is the message it sends to trial judges: how you explain your fee rulings is just as important as what your final rulings are. In fact, as stated by our supreme court, not explaining yourself in a fee order is “a species of social malpractice” that “brings the court into disrepute and destroys its power to perform adequately the function of its creation.” So yes, there is much to be gained by sending this case back to the trial judge and ordering him to please explain the basis of his ruling.

Bullock v. BankChampaign, N.A., 133 S.Ct. 526 (U.S. October 29, 2012) [docket]

Trusts and estates cases rarely make it to the U.S. Supreme Court, so when they do it’s big news [e.g., see here]. This time around the Supreme Court’s granted cert in a case arising out of our very own 11th Circuit in Bullock v. BankChampaign, N.A. (In re Bullock), 670 F.3d 1160 (11th Cir.2012). The case involves a former trustee (Mr. Bullock) who declared bankruptcy in order to wipe away a breach of trust judgment.

Under 11 U.S.C. § 523(a)(4) a judgment entered against a fiduciary for fraud or misappropriation of trust funds (i.e., “defalcation“) is not dischargeable in bankruptcy. I’ve previously written about this rule here and here as applied both to trustees and personal representatives.

What’s interesting about this case is that all of the courts who have reviewed the facts agree the trustee’s actions giving rise to the original judgment against him actually caused no economic harm to the trust’s assets and that he apparently acted innocently at all times. For a good summary of the facts see here, here. Based on these facts, the U.S. Supreme Court’s going to have to decide what level of mens rea (if any) is necessary to trigger the non-discharge rule for defalcation by trustees.

Here’s how the “question presented” for the Supreme Court in this case was framed by the trustee:

What degree of misconduct by a trustee constitutes “defalcation” under §523(a)(4) of the Bankruptcy Code that disqualifies the errant trustee’s resulting debt from a bankruptcy discharge – and does it include actions that result in no loss of trust property?

According to the 11th Circuit’s opinion, there’s a wide split among the circuit courts as to the meaning of defalcation under § 523(a)(4).

This Court recognizes that there is a split among the circuits regarding the meaning of defalcation under § 523(a)(4). . . .

The Fourth, Eighth, and Ninth Circuits have concluded that even an innocent act by a fiduciary can be a defalcation. . . .

The Fifth, Sixth, and Seventh Circuits require a showing of recklessness by the fiduciary. . . .

The First and Second Circuits require a showing of extreme recklessness. . . .

The Third Circuit has not addressed the issue, and the Tenth Circuit has made the brief statement in an unpublished opinion that defalcation requires some portion of misconduct.

The trustee unsuccessfully argued in favor of the 1st and 2d Circuits’ “extreme recklessness” standard, which apparently would have resulted in a win for him. The 11th Circuit instead adopted the non-extreme recklessness standard applied by the 5th, 6th and 7th Circuits. The 11th Circuit held the former trustee’s judgment should NOT be discharged because even if he acted innocently, as a trustee he should have known his actions were improper, thus he acted recklessly.

Applying the recklessness standard for defalcation to the facts of the instant case, this Court concludes that the bankruptcy court was correct in determining that Bullock committed a defalcation by making the three loans while he was the trustee of his father’s trust. Because Bullock was the trustee of the trust, he certainly should have known that he was engaging in self-dealing, given that he knowingly benefitted from the loans. Thus, his conduct can be characterized as objectively reckless, and as such, it rises to the level of a defalcation under § 523(a)(4). Accordingly, the bankruptcy court’s order must be affirmed on the issue of whether the Illinois judgment debt was non-dischargeable under § 523(a)(4) as a debt arising from a defalcation while Bullock was acting in a fiduciary capacity.

What do we mean by “defalcation” as applied to fiduciaries, and should we apply a strict-liability standard for culpability or require some level of intentional malfeasance? These are fundamental questions for any trusts and estates litigator, which will make the U.S. Supreme Court’s take on this case a must-read even if (like me) you have no intention of ever setting foot in a bankruptcy court. Stay tuned for more . . .

Anyone can tell you what the current state of the law is when it comes to the federal estate and gift tax rules (news flash: for the first time in over a decade they’re permanent, click here). For those of us in the trenches, the more interesting question is “what’s next?” 

If I had to bet on what the next “big thing” in the estate-tax world is going to be, I’d go with one of the five “structural reforms” proposed by the President in his 2013 budget (and explained/scored in this recently published Congressional Research Service report). None of the ideas covered in the CRS Report is new, which means they’ve all demonstrated staying power (usually a good predictor of future enactment). And all of the proposed fixes have the added political bonus of increasing tax revenues without raising tax rates or lowering the exemption amount.

Want to know the future? Read on . . . 

CRS Report:

[T]he current size of the exemption and the rate of tax have been set in permanent tax law, and there is not much indication of a reconsideration. There are, however, some more narrow proposals aimed at abuse that have been included in some other legislation and in the President’s budget proposals. These provisions are described below. All of the estimates of revenue gain are for FY2013-FY2022 and are obtained from the FY2013 budget proposals. Most of the provisions were also estimated by the Joint Committee on Taxation and this source is used in the discussion below except in one case. Note that estimated budget effects would be altered and presumably reduced by the recent estate tax legislation.

[1] Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust (GRAT) is a trust that allows the grantor to receive an annuity, with any remaining assets transferred to the trust recipient. The value of the gift is reduced by the value of the assets used to fund the annuity. If the assets in the trust appreciate substantially, then virtually all of the gift can be reduced by the value of the annuity, while still providing a substantial ultimate gift to the recipient. If the grantor dies during the annuity period, the remaining value of the annuity is included in the estate. This trust approach could be a method of transferring assets roughly tax free if the assets appreciate at a rate faster than the discount rate used to value the annuity. The grantor needs to survive over the period of the annuity. To assure the latter will be likely to occur, many of these trusts have very short annuity periods, as short as two years. The GRAT proposal contained in H.R. 4849 in the 111th Congress and in the President’s budget proposals would impose a minimum annuity term of 10 years, disallow any decline in the annuity, and require a non-zero remainder interest. The provision was estimated to raise $3.6 billion over 10 years.

[2] Minority Discounts

There are existing restrictions to keep estates from engaging in artificial actions designed to reduce the value of estates (such as freezes on assets). As discussed above, courts sometimes allow estates to reduce the fair-market value when assets are left in family partnerships in which no one has a majority control. These discounts have even been allowed when assets are in cash and readily marketable securities, and the setting up of these family partnerships has become an estate tax avoidance tool. A provision in the Administration’s proposal would disallow these discounts. The JCT did not estimate this provision because of the lack of specific detail, but the Administration’s estimate was $18.1 billion over 10 years.

[3] Consistent Valuation

Currently, there is no explicit rule preventing a low valuation of fair-market value for an estate and a high valuation of the asset for purposes of stepped up basis in the hands of the heir. A low value of an asset reduces the estate tax, but a high value (because it reduces the amount of gain) reduces the capital gains tax. Requiring the same value for both purposes was projected to raise $3 billion over 10 years.

[4] Limit the Duration of Generation-Skipping Trusts

When generation-skipping transfers are made to a trust, the estate tax exemption applicable to them also exempts the associated earnings during the trust lifetime. In the past, a trust life has been limited because most states had a Rule Against Perpetuities that generally limited trusts to a 21-year life. Most of these laws have been eliminated. This Administration proposal would limit the life of a GST trust to 90 years. The revenue effect would be negligible over the next 10 years.

[5] Coordinate Grantor Trusts Income and Transfer Tax Rules

In a grantor trust, an individual is treated as owner for income tax purposes. However, the trust and the individual are treated as separate persons for purposes of the estate and gift tax. This proposal from the Administration would include the assets of the trust in the grantors estate and subject distributions to the gift tax if the grantor is the owner for income tax purposes. If the grantor ceases to be the owner, the assets would be subject to a gift tax. This proposal was projected to raise $3.3 billion over 10 years.

Albelo v. Southern Oak Ins. Co., — So.3d —-, 2013 WL 440199 (Fla. 3d DCA February 06, 2013)

Durable powers of attorney (DPOA’s) empower disabled or incapacitated adults to manage their business and personal affairs privately and without court supervision. This includes handling litigation. That’s the law. If you don’t like it, get the law changed . . . but don’t try to wish the issue away by making frivolous arguments in court.

In In re Estate of Schiver, 441 So. 2d 1105 (Fla. 5th DCA 1983), the 5th DCA held that an attorney-in-fact acting pursuant to a properly drafted DPOA could elect the principal’s right to an elective share. According to the 5th DCA:

[DPOA’s have] the beneficial effect of avoiding the time, expense and embarrassment involved in having to establish guardianships for incompetent persons. . . . The holder of a [DPOA] is appointed by the donor of the power, and essentially performs the same functions as would a court appointed guardian. While not a “guardian” in the legal sense, the attorney in fact has fiduciary duties similar in nature.

In Smith v. Lynch, 821 So. 2d 1197 (Fla. 4th DCA 2002), the 4th DCA upheld a probate judge’s refusal to appoint a guardian for a legally incapacitated adult who had previously executed a valid DPOA. According to the 4th DCA “the appointment of a guardian would serve no useful purpose and would unnecessarily interfere with the family.” In support of its decision, the 4th DCA cited F.S. 744.344, which provides that an “order appointing a guardian must be consistent with the incapacitated person’s welfare and safety, must be the least restrictive appropriate alternative, and must reserve to the incapacitated person the right to make decisions in matters commensurate with the person’s ability to do so.”

Bottom line, our legislature intended DPOA’s to be private, non-court supervised, less restrictive alternatives to guardianships. This is basic stuff for Florida probate lawyers. But is it so basic it’s frivolous to even argue otherwise? YES.

3d DCA: 57.105 sanctions triggered by arguing against DPOA and for guardianship:

In the linked-to case above a 78-year old woman executed a valid DPOA in favor of her son. Acting under the authority of this DPOA, son sued mom’s property-insurance company (Southern Oak Insurance Company) seeking to recover damages to mom’s home caused by a burglary. By the time son filed suit on mom’s behalf it was undisputed she was suffering from age-related cognitive disabilities. According to Southern Oak this meant mom’s claim could only be prosecuted by a court-appointed guardian. For reasons unexplained in the 3d DCA’s opinion, Southern Oak somehow convinced the trial judge to buy into its argument, resulting in a dismissal of mom’s lawsuit. This is the kind of ruling that drives probate lawyers nuts. On appeal, it apparently  struck a nerve with the 3d DCA as well (in a bad way!).

This is an appeal by an octogenarian, Maximiliana Albelo, from a trial court order dismissing her premises liability complaint with prejudice, for failure to file a petition in probate to determine her own incapacity. We summarily reverse the order on appeal and grant Albelo’s motion for an award of appellate attorney fees pursuant to section 57.105(1), Florida Statutes (2011). We write only to explain the reasons for our award of sanctions against Southern Oak Insurance Company and its counsel.

This is a garden-variety premises liability claim brought by Albelo for damages to her home caused by a burglary. The burglary and the existence of a loss are conceded. It is equally undisputed Albelo suffers from age-related cognitive disabilities. Although Southern Oak did not receive notice of the claim until more than a year after the burglary, the company paid $1690 on her claim. A few months later, Albelo filed a sworn proof of loss, supported by a public adjuster’s estimate in the amount of $57,760.66. Southern Oak is of the view the sworn claim is fraudulent and instigated not by Albelo, but rather by her son. Southern Oak also is concerned about the binding effect a judgment obtained by Albelo might have against it in the future.

Albelo responds that in April 2007—one month before the burglary, when she was seventy-eight years old—she duly executed a Durable Power of Attorney (DPA) in favor of her son. Section 709.2119, Florida Statutes (2012), regulating powers of attorneys and similar instruments, provides explicit protection to Southern Oak in the circumstances of this case. It states:

(1)(a) A third person who in good faith accepts a power of attorney that appears to be executed in the manner required by law at the time of its execution may rely upon the power of attorney and the actions of the agent which are reasonably within the scope of the agent’s authority and may enforce any obligation created by the actions of the agent as if:

1. The power of attorney were genuine, valid, and still in effect;

2. The agent’s authority were genuine, valid, and still in effect; and

3. The authority of the officer executing for or on behalf of a financial institution that has trust powers and acting as agent is genuine, valid, and still in effect.

§ 709.2119. Southern Oak does not contest the formalities of execution and has not sought to rescind the power of attorney on the ground Albelo was incompetent at the time she executed the document. Southern Oak’s and its counsel’s persistence in arguing Albelo was required to seek a guardian for herself as a condition of continuing this action was frivolous.

Added Bonus:

For those of you caught up in a similar case, you may find the research reflected in the Appellant’s winning Initial Brief on appeal helpful.

Griffith v. Slade, 95 So.3d 982 (Fla. 2d DCA August 22, 2012)

Contesting durable powers of attorney (DPOA’s) is the kind of case that usually ends up on a probate litigator’s desk. Probate matters are all in rem proceedings. Since in rem proceedings aren’t based on personal jurisdiction, probate litigators (like me) get used to litigating cases without ever having to go through the trouble of personally serving anyone. Here’s the problem: this mindset can be a trap when you run across a case that “feels” like a probate matter, but isn’t. Prime example: DPOA litigation.

Is personal service of process needed to challenge a DPOA? YES.

When family members contest a DPOA’s validity, it’s usually a thinly-veiled inheritance dispute. This means these cases look and feel a lot like your standard probate case. They’re not. One big difference: DPOA cases are NOT in rem proceedings; you need to personally serve opposing parties if you want your winning court order to mean anything. In the linked-to case above the contesting parties skipped this step, relying instead on the old probate standby: service by certified mail. This cut-to-the-chase approach may have worked with the trial judge, but it fell flat on appeal. Here’s why:

[In this case], neither a summons nor other process was issued, and service of process was not accomplished. Griffith was sent a “Notice of Hearing” via certified mail. Although Florida Rule of Civil Procedure 1.070(i) provides that defendants may accept service of process by mail and waive formal service, the rule has strict requirements that were not followed here. For example, there is no evidence in the record that the “Notice of Hearing” was accompanied by the petition, requested that Griffith waive service of a summons, or informed Griffith of the consequences of compliance or failure to comply with the request to waive service. See [Shurman v. Atl. Mortg. & Inv. Corp., 795 So.2d 952, 954 (Fla.2001)]. Significantly, “[a] judgment entered without service of process is void and will be set aside and stricken from the record on a motion at anytime.” Myrick v. Walters, 666 So.2d 249, 250 (Fla. 2d DCA 1996) (quoting Kennedy v. Richmond, 512 So.2d 1129, 1130 (Fla. 4th DCA 1987)) (alteration added).

We have also considered the possible effect of the notice requirements contained in section 709.08, Florida Statutes (2010)[FN1]. Section 709.08(5) provides in pertinent part as follows:

(a) A notice, including, but not limited to, a notice of revocation, notice of partial or complete termination by adjudication of incapacity or by the occurrence of an event referenced in the durable power of attorney, notice of death of the principal, notice of suspension by initiation of proceedings to determine incapacity or to appoint a guardian, or other notice, is not effective until written notice is served upon the attorney in fact or any third persons relying upon a durable power of attorney.

(b) Notice must be in writing and served on the person or entity to be bound by the notice. Service may be by any form of mail that requires a signed receipt or by personal delivery as provided for service of process. Service is complete when received by interested persons or entities specified in this section and in chapter 48, where applicable.

The statute does not contemplate an alternative method for service of process, but rather it addresses the notice referenced by section 709.08(4)(a), which provides: “Any third party may rely upon the authority granted in a durable power of attorney that is not conditioned on the principal’s lack of capacity to manage property until the third party has received notice as provided in subsection (5).” In other words, a notice may be issued that informs the recipient that a person may no longer have authority to act pursuant to a power of attorney. However, such notice is not sufficient to bring a person within the jurisdiction of a court for legal proceedings. Indeed, nothing in the statute suggests that it may be used instead of service of process to bring a person before the court.

Although we acknowledge the circuit court’s concern over the alleged behavior of Griffith, “[p]rocedural due process requires that each litigant be given proper notice and a full and fair opportunity to be heard.” Carmona v. Wal–Mart Stores, E., LP, 81 So.3d 461, 463 (Fla. 2d DCA 2011). Griffith was afforded neither.

Because service of process was never properly accomplished or waived, we reverse the order terminating Griffith’s power of attorney and the order denying her motion to strike and set aside the order terminating her power of attorney. 

[FN1]: In 2011, the Florida Legislature substantially revised and renumbered Chapter 709, and repealed sections 709.01, 709.015, 709.08 and 709.11. Ch.2011–210, § 33, at 3273, Laws of Fla. (2011) [click here]. These changes became effective on October 1, 2011, and are not applicable to the case at bar.

Listen to this post

In Fla. Patient’s Comp. Fund v. Rowe, 472 So.2d 1145 (Fla.1985), the Florida Supreme Court adopted the federal “lodestar” method for determining the amount of reasonable attorney’s fees and costs in contested proceedings. However, our supreme court also made clear that “how” trial judges go about explaining the reasons for their fee orders is just as important as what their ultimate rulings are. If a fee order’s going to get reversed, it’s almost always because the trial judge got the “how” part wrong.

How to draft attorney’s fees and costs orders that won’t get reversed on appeal

In Rowe the court held that the only way a trial judge can assure parties that the amount of attorney’s fees/cost they’re paying was determined in a just, objective and uniform manner is to enter orders containing detailed findings of fact as to the appropriate:

  1. hourly rate,
  2. number of hours reasonably expended, and
  3. the appropriateness of reduction or enhancement factors listed in Rule 4-1.5(b) of the Rules of Professional Conduct.

Case Study No. 1

Bishop v. Estate of Rossi, — So.3d —- 2013 WL 132449 (Fla. 5th DCA January 11, 2013)

If a fee order doesn’t contain these findings it is per se erroneous and subject to reversal. In other words, even if the trial judge’s fee order reaches the right conclusion, if it doesn’t explain in detail the reasons why (thereby giving all interested parties confidence in the ruling’s fairness), the order is per se wrong. That’s what happened in the linked-to case above (a contested probate proceeding) applying the fee-shifting rule found in Probate Rule 5.080, and why the order was reversed:

In awarding attorney’s fees, the trial court made two distinct findings; first, entitlement to fees and, second, the reasonable amount of such fees. Entitlement to attorney’s fees is largely a question of law. While specific factual findings are helpful when reviewing a determination of entitlement, such findings are not essential where, like here, “entitlement to attorney’s fees is based on the interpretation of contractual provisions … or a statute … as a pure matter of law….” Hinkley v. Gould, Cooksey, Fennell, O’Neill, Marine, Carter & Hafner, P.A., 971 So.2d 955, 956 (Fla. 5th DCA 2007).

However, where the court sets the amount of the fee, “[t]he law is clearly established that an award of attorney’s fees ‘must … contain express findings regarding the number of hours reasonably expended and a reasonable hourly rate for the type of litigation involved.’” Quality Holdings of Fla., Inc. v. Selective Invs., IV, LLC, 25 So.3d 34, 37 (Fla. 4th DCA 2009) (citations omitted) (emphasis added). This lodestar method of determining reasonable attorney’s fees, adopted by our state Supreme Court in Florida Patient’s Comp. Fund v. Rowe, 472 So.2d 1145 (Fla.1985), applies equally to probate matters. See In re Estate of Platt, 586 So.2d 328, 335 (Fla.1991). Because the trial court here did not make written findings in the order in which it awarded $9,870.00 worth of attorney’s fees against Bishop, it is not possible to ascertain from the face of the order whether the trial court considered and determined the reasonable number of hours expended and the reasonable hourly rate(s).

Case Study No. 2

Mitchell v. Mitchell, 94 So.3d 706 (Fla. 4th DCA August 15, 2012)

Our state court system is overworked and under-resourced. The probate bench is no exception. So if a probate judge believes some’s asking for excessive attorneys fees, the temptation is to simply cut the request by a certain % and call it a day. Understandable, but counter to the full-disclosure ethos underlying Rowe. If a judge is going to cut your fees, same rules apply: NO detailed findings of fact explaining the reasons why = REVERSAL.

This case involved a contested guardianship proceeding in which the probate judge cut one co-guardian’s attorney’s fee request by 40% in an order that didn’t contain detailed findings of fact explaining the reasons why. Maybe a 40% cut was the right call, maybe it wasn’t. Under Rowe it doesn’t matter if the order doesn’t contain detailed findings of fact explaining itself. By the way, also note the parting reference to the need for itemized “cost” findings.

[T]he trial court’s order contains insufficient findings; it does not comply with the requirement that the court make express findings regarding the number of hours reasonably expended and a reasonable hourly rate for the type of litigation involved. Furthermore, the trial court’s order fails to explain the basis for a reduction in fees which the court determined was for “multiple lawyers on the same matter.” While this reduction may have been warranted, the trial court should make a specific finding explaining which work was duplicative. The mere fact that both a partner and an associate appeared at a particular proceeding does not necessarily mean that their work was duplicative.

Although the trial court utilized the correct legal standard in concluding that the legal services must be beneficial to the ward to be compensable, see § 744.108, Fla. Stat. (2010), Thorpe v. Myers, 67 So.3d 338, 345 (Fla. 2d DCA 2011), on remand, the trial court should make a specific finding as to which fees and costs were non-compensable on this ground. The trial court’s conclusion that only 60% of the services of the father’s attorneys benefitted the ward was not supported by any specific findings. In short, “[t]he circuit court’s order must set forth the basis for the award, including the hours determined to be compensable, the hourly rate, and the other factors considered in arriving at the award.” Id. at 346. Additionally, as appellant points out, the order failed to itemize the costs allowed. On remand, the trial court “must also itemize the costs allowed.” Id.

If you’re representing a personal representative or trustee in a complicated estate or trust administration case, the “who gets what” question won’t be easy to answer. No surprise there. What may be surprising, especially to lawyers, is how large a role Florida’s Principal and Income Act (Ch. 738) or “FPIA” often plays in these cases.

Here’s why: trusts and estates have two basic classes of owners: income beneficiaries and principal beneficiaries. Sometimes the same people are both income and principal beneficiaries, sometimes they’re not. When they’re not, there’s an inherent conflict: if a receipt is accounted for as income, the income beneficiary benefits to the detriment of the principal beneficiary, and vice versa. It’s up to PR’s and trustees to resolve this conflict, and the way they do that is governed by the FPIA.

Who gets what?

In a traditional trust where the income beneficiary receives distributions of income at least annually and the principal beneficiary gets the trust principal at the death of the income beneficiary, the FPIA rules governing income/principal determine the benefits to be shared between the beneficiaries.  Same goes for wills: the FPIA governs what the income is and who gets it. However, these are all default rules, and according to F.S. 738.103(1), these rules can all change depending on what the will or trust agreement says. For example, if a trust agreement says that receipts from the sale of a particular asset must be allocated 25% to income and 75% to principal, you do exactly that, and there’s no need to decipher the FPIA rules otherwise governing the transaction. Bottom line, to the extent the written instrument provides guidance on accounting for income and principal, this guidance is treated by Florida law as the final authority.

For an excellent explanation of how the FPIA works in real life, you’ll want to read Things That May Surprise You About Florida’s Principal and Income Act and Related Accounting Law, Parts I and II, a two-part series published in the Florida Bar Journal by William C. Carroll and John W. Randolph, Jr., which I previously wrote about here and here.

So what changed in 2013?

Since its adoption in 2002, there have been three separate “glitch bills” to fix various problems with the FPIA. During the 2012 legislative session, Florida adopted its fourth FPIA glitch bill [click here]. For an in-depth explanation of the statutory changes, you’ll want to read the Legislative Staff Analysis. For a plain-English explanation of the FPIA changes most relevant to those of us in the trenches, you’ll want to read Principal & Income Act Updated, published in the Winter 2013 edition of ActionLine by attorney Edward F. Koren and CPA F. Gordon Spoor. Here’s an excerpt from the ActionLine article:

Fiduciary Duties; General Principals

While most of Florida’s Principal and Income Act is intended to apply to all fiduciaries, including trustees and personal representatives [F.S. 738.102(4)], certain sections of the Act that were intended to apply to all fiduciaries contained the word “trustee.” Additionally, the word “fiduciary(ies)” was used in certain sections that were only intended to apply to “trustee(s).” The 2012 Revisions clarify some of these inconsistencies by using the word “trustee” rather than “fiduciary” in all sections intended to apply only to trusts. Additionally, the 2012 Revisions added a specific provision that states that, “All provisions of this chapter also apply to any estate that is administered in Florida, unless the provision is limited to a trustee rather than a fiduciary.” [F.S. 738.103(3)].

. . .

Addition of “Carrying Value”

The 2012 Revisions re-introduce the concept of “inventory value” by . . . adopting the phrase “carrying value.” In addition to harmonizing . . . F.S. § 736.08135(2)(b) with Florida Probate Rule 5.346, Appendix B(IV), several statutes within the [FPIA] were revised to reference “carrying value” within the context of income and principal allocations. [F.S. 738.202, 738.401(6), and 738.603].

“Carrying value” is defined in F.S. § 738.102(3) as “the fair market value at the time the assets are received by the fiduciary.” This is different from “cost basis,” which is defined in the Internal Revenue Code. For the estates of decedents, and trusts described in F.S. § 733.707(3) after the grantor’s death (i.e., revocable trusts), the carrying value of assets received upon the grantor’s death is the value as determined for federal estate tax purposes (or date of death if no estate tax return is re- quired). For assets acquired during the administration of the estate or trust, the carrying value is equal to the acquisition cost of the asset.

. . .

Changes to Unitrust Provisions

The ease of administration aspect of a unitrust has caused it to gain wide acceptance. Typically, the annual unitrust amount is based on the valuation of the trust as of a specific date. [F.S. 738.1041(2)(b)2.d.] Recent market fluctuations, however, have impacted the value of trust as- sets, resulting in significant variations in the annual calculation of the unitrust amounts. In an effort to minimize these fluctuations, the 2012 Revisions incorporate a “smoothing rule” to be used when computing the fair market value of the unitrust. The smoothing rule incorporates an “Average Fair Market Value” concept [F.S. 738.1041(1)(a)], which requires that fair market value for purposes of the unitrust computation be computed using the average of the fair market value of the trust’s assets at the beginning of the current year and each of the prior two years.

. . .

Distributions To Residuary And Remainder Beneficiaries

As was the case under the 1974 Act, the 2012 Revisions now require that accounting income be allocated to beneficiaries based upon carrying values, except in cases where dispro- portionate distributions are made. This greatly simplifies trust administration by not requiring valuation of trust assets each time a distribution is made–unless disproportionate distributions are made [F.S. 738.202].

. . .

Distributions From Entities

The 2002 Act provided that cash distributions from entities not in liquidation were allocated to income. In determining if a distribution was in liquidation, absent a representation from the entity, a default rule existed that provided that any distributions made by the entity in excess of 20% of the entity’s gross assets (as shown on the entity’s year end financial statements immediately pre- ceding the initial receipt) was deemed to be made in liquidation.

. . .

The 2012 Revisions attempt to . . . clarify the application of the 20% rule used in determining liquidating distributions. For non-publicly traded entities, cash distributions are treated as income unless they are determined to have been received in liquidation. If the total distributions by the entity exceed 20% of the entity’s gross assets as shown on the entity’s year-end financial state- ments immediately preceding the initial receipt, the distribution will be allocated to income to the extent that total distributions received from the entity – for the number of years or portions thereof while it was subject to the trust – have not equaled a cumulative annual return of 3% of the entity’s carrying value, computed at the beginning of each period included in the measuring period. Distributions in excess of this amount are treated as principal [F.S. 738.401(5)(b)].

For publicly traded entities, cash distributions are treated as income unless they are determined to have been made in liquidation. The 20% default rule is replaced by 10% of the entity’s fair market value as of the beginning of the measuring period. If total distribu- tions exceed this 10% threshold, such distributions will be income to the extent that amounts allocated to income for the number of years (or portion of years) that the trust held an interest in the entity have not equaled a cumulative return of 3% of the entity’s fair market value at the beginning of each measuring period [F.S. 738.401(e)].

For the first time in over a decade we have permanent federal estate and gift tax rules.

For those of us who didn’t make it to the Heckerling conference in Orlando this year (including me, I usually go every other year), you’ll want a quick and easy way to explain what the heck happened to the estate and gift tax after the fiscal cliff deal. There’s no shortage of folks willing to give you their two cents on the subject, but separating the wheat from the chaff can be challenging.

So I was happy to run across an article by Forbes staff writer Deborah L. Jacobs entitled After The Fiscal Cliff Deal: Estate And Gift Tax Explained. Ms. Jacobs does a good job of explaining the new law in the type of plain English, question-and-answer format, clients like to hear; but she’s also thorough enough to keep an audience of lawyers and CPA’s interested. Good stuff, highly recommend it. Here’s an excerpt.

Who has to pay federal estate tax? Once you’re worth more than a certain amount, taxes shrink your estate. Under the 2010 tax law, we can each transfer up to $5 million tax-free during life or at death. That figure is called the basic exclusion amount, and it is adjusted for inflation. In 2012 it was raised to $5.12 million per person. The new tax law does not change how much you can pass tax-free. On Jan. 11 the IRS announced that, with the inflation adjustment, the estate tax exclusion amount for deaths in 2013 would be $5.25 million.

Do spouses have to pay the tax when they inherit from each other? The new law doesn’t change this either. There is an unlimited deduction from estate and gift tax that postpones the tax on assets inherited from each other until the second spouse dies. This marital deduction, as it is called, applies only if the inheriting spouse is a U.S. citizen.

How much can the second spouse pass tax-free? Here’s where things get a bit complicated — but in a good way. The 2010 tax law gave married couples a wonderful tax break, which the new law has made permanent. Widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This enables them together to transfer up to $10.5 million tax-free. Tax geeks call this portability.

. . .

How does this relate to lifetime gifts? The lifetime gift tax exclusion and the estate tax exclusion are expressed as a total amount – currently $5.25 million per person – and it is possible to use this exclusion (sometimes called the “unified credit”) to transfer assets at either stage or a combination of the two. If you exceed the limit, you (or your heirs) will owe tax of up to 40%.

. . .

Are there lifetime gifts that don’t count? Absolutely, and this is a common source of confusion. We can each give another person $14,000 per year without it counting against the lifetime exemption. (The amount went up at the end of 2012, as I reported here.) Spouses can combine this annual exclusion to double the size of the gift. Don’t confuse it with the basic exclusion–that $5.25 million discussed above.

Added Bonus:

For those of you who live for tax stat’s, you’ll want to read this recently published Congressional Research Service summing up the economics of the current state of affairs as follows:

Compared with the $1 million exemption and 55% rate under pre-EGTRRA law, the new rules lose an average of about $37 billion over the next 10 years, a two-thirds reduction in estate tax revenues. Regardless of the exemption levels considered, few estates are affected by the tax. The estate tax is a highly progressive tax, with about three-fourths collected from estates in which decedents are in the top 1% of the income distribution. At a $5 million exemption, less than 0.2% of estates will be subject to the tax. Although concerns have been raised about the effects of the tax on small businesses and farmers, estimates indicate that only a small share of these decedents would be affected.

. . . . .

Only a small portion of high-income decedents would be affected by the tax under the $5 million exemption.

  • The estate tax will affect less than 0.2% of decedents over the next decade.
  • The estate tax is concentrated among high income taxpayers: 96% is paid by the top quintile, 93% by the top 5%, 72% by the top 1%, and 42% by the top 0.1%.
  • About 0.2% of estates with half or more of their assets in businesses will be subject to the estate tax.
  • About 65 farm estates (or approximately one per state) are projected to be subject to the estate tax, and constitute 1.8% of taxable estates. Less than a fourth (0.4%) is projected to have inadequate liquidity to pay estate taxes. Less than 1% (0.8%) of farm operator estates is projected to pay the tax.
  • About 94 estates (about two per state) with half their assets in small business and who expect their heirs to continue in the business are projected to be subject to the estate tax; they constitute 2.5% of total estates. Less than a half (1.1%) is projected to have inadequate liquidity to pay estate taxes.
Listen to this post

This is the second time this case has been up on appeal. The first time around the issue was whether live witness testimony is required as a matter of law to prove a lost will or whether affidavits alone will do if your probate judge says it’s OK. As I previously wrote here, the 5th DCA held that live witness testimony is required, it’s NOT optional.

OK, so now we know affidavits aren’t going to cut it; you need live witness testimony. But not just any old witness will do, under F.S. 733.207 your witness [1] must be “disinterested,” and, just as importantly, [2] your witness must have firsthand knowledge of the “specific content” of the lost will. As the 2d DCA recently held in Smith v. DeParry [click here], if you don’t nail both requirements, your lost will is going to stay lost.

Case Study

Brennan v. Honsberger, — So.3d —-, 2012 WL 5969617 (Fla. 5th DCA November 30, 2012)

Now back to our case. On remand, the trial judge again admitted the lost will to probate, this time based on witness testimony. So far so good. Here’s what didn’t happen: the witnesses had nothing to say about the content of the will they witnessed. Not surprisingly, the 5th DCA once again reversed the trial judge (is there a pattern here?). Bottom line, if your witness can’t testify to the content of the lost will, game over:

On remand, the trial court conducted an evidentiary hearing at which Ms. Kessinger and Ms. Liles testified. Although both witnesses testified (consistent with their previously submitted affidavits) as to the execution of the will, neither had knowledge of its content.

In our prior opinion, we stated that as the proponent of a lost will, Ms. Honsberger was required to present the testimony of at least one disinterested witness to establish its content. Id. at 897. Because Ms. Honsberger failed to do so, the trial court erred in admitting the 2002 will to probate.

Jasser v. Saadeh, 97 So.3d 241 (Fla. 4th DCA July 18, 2012)

Karim Saadeh, now in his eighties, emigrated from Jordan with his wife and lived the American dream: he raised a family of three children and became a very successful businessman. Saadeh and his wife were wealthy at the time of his wife’s death in 2007. After his wife’s death, Saadeh met a younger woman through one of his wife’s relatives. Apparently, his children weren’t happy about the new girlfriend. When they found out he was loaning her money, they took matters into their own hands, admittedly transferring “over a million dollars” from his bank accounts (they had co-signing authority) to accounts they controlled alone. And according to their father, that’s not all they did:

Saadeh was upset when he discovered that his children had drained his accounts. Around the same time, he discovered that substantial money and jewelry located in a safe were missing. Because his children had the combination to his safe, he suspected that they had likewise taken these assets. He called the police, who then made a report of the theft. In the report, the children denied taking the money and jewelry from the safe; however, they admitted transferring the monies from the bank accounts. The police report states that the officer found that Saadeh appeared in control of his faculties. Still angry about what he considered his children’s deceit, Saadeh removed his remaining funds from the bank to prevent his children from acquiring more of his money.

If you’re wealthy, old, your memory is failing (whose isn’t?), and your children are worried about your new girlfriend getting her hands on “their” inheritance, here are the facts of life:

  1. At some point one or all of your children will probably sue to have you adjudicated mentally incapacitated (which means you lose control of your money); and
  2. No matter what you’ve heard about how totally screwed up a guardianship proceeding can get if there’s enough money at stake . . . real life can be far worse. This dog’s breakfast of a case is a prime example.

When Saadeh’s lawyer sent his children a letter demanding they return their father’s money and presumably also threatening an “or else” (and yes, there is an “or else,” click here, here), they fought back by (surprise!) filing a petition to have dad adjudicated incapacitated.

For reasons not important to the ultimate outcome of this case, the judge authorized two separate rounds of examining committee evaluations. That’s six separate examiners. One died before he could submit his report (again, how/why is not important to the case). Here’s the important part: the other five examining committee members were unanimous . . . Saadeh was legally competent. Unfortunately, dad was put through the ringer before exiting a free man at the other end of this case.

The “prisoner’s dilemma” as metaphor for settlement agreements in guardianship litigation:

In trusts and estates litigation parties are eventually confronted with the following stark reality: it doesn’t matter how “right” you are, the costs, heartache, and uncertainties inherent to actually litigating your case through to trial can be worse than simply paying the other side to make it all go away. That’s the choice Saadeh was presented with by his children: agree to our terms and get your life back. The way the deal was structured was that Saadeh would sign a trust agreement and other documents transferring all of his earthly belongings to an irrevocable trust controlled by a third party trustee. Under the trust agreement Saadeh was the sole lifetime beneficiary and his children were the remainder beneficiaries. In other words, to get his life back, dad had to agree to an immediate irrevocable gift of a remainder interest in all he owned to his children and he had to agree to give up control of his own money for the rest of his life.

Here’s how the standard settlement logic breaks down in guardianship litigation. As a matter of law, while dad is subject to a guardianship he lacks the legal right to contract (the guardianship strips him of that right). Because dad can’t sign a contract, his children have no legal certainty he’ll live up to his side of the bargain until after they’ve agreed to terminate the guardianship. In other words, all sides have to trust each other. The “dilemma” faced by the parties is that, whatever the other does, each is theoretically better off reneging on its side of their non-legally-binding bargain (dad can take 100% of his property back once the case is dropped; children can be 100% sure dad can never take his property back by keeping the guardianship in place indefinitely after dad signs trust). However, assuming a fair deal, the outcome obtained if both sides renege is worse for everyone (no one’s guaranteed to get what they want; litigation continues) than the outcome obtained if both sides honor their bargain (both sides guaranteed to get some of what they want; end of litigation). This is a classic example of the “prisoner’s dilemma.” This kind of deal is based on trust (not a binding contract), so it won’t work if one side believes it wasn’t treated fairly or was pressured into something it never really wanted. Unfortunately, that’s what happened in this case.

According to the 4th DCA, when the trial court entered an order authorizing the trust “it was not informed of catastrophic gift tax consequences if the trust was created, nor was it informed that the trust could not be revoked by Saadeh himself.” Also, although the facts surrounding creation of the trust were “disputed,” Saadeh:

. . . continually testified that he was misled as to the terms of the trust and that his execution was not voluntary. He was told that the execution of the trust was the only way he could end the guardianship proceedings and get his life back to normal. . . .

[Saadeh’s] court-appointed attorney . . . admitted that he told him that if he signed the trust, the proceedings would be over.

After Saadeh’s legal rights were reinstated he, not surprisingly, attacked the trust he’d signed prior to termination of the guardianship proceeding. Again not surprisingly, the trial court ruled in his favor. According to the trial judge the trust was void because at the time Saadeh signed the trust agreement he lacked the legal right to pretty much do anything . . . including signing a contract. Here’s how the 4th DCA connected the legal dots:

We agree with the trial court that when the court conferred the ward’s rights on the ETG, it removed them from the ward; both cannot simultaneously exercise those rights. Section 744.3031(1) provides that the court shall specify the rights to be exercised by the ETG. In this case, the order delegated to the ETG all legal rights, reserving only the right to vote to the ward. Thus, the court removed the ward’s right to contract. The fact that the court removed his right to contract was specifically discussed not only in the original hearing appointing the ETG but in almost every other hearing thereafter.

. . .

As found by the trial court in granting summary judgment, at the time of the execution of the trust, the right to contract had been removed from Saadeh, as the parties acknowledged to the court the day that the trust was signed. Section 736.0402(1), Florida Statute (2008), provides that “[a]trust is created only if: (a) the settler has capacity to create a trust.” § 736.0402(1)(a), Fla. Stat. (2008) (emphasis added). Thus, because Saadeh had no legal right to execute the trust, the trust was invalid and void. The trial court’s ruling was correct.

Jasser v. Saadeh, — So.3d —-, 2012 WL 6601383 (Fla. 4th DCA December 19, 2012)

I’m guessing Saadeh’s children were caught flat footed by their father’s success in unwinding a “deal” they probably believed was final. If dad were a regular litigant, they’d be right: settling parties are bound by the deals they agree to. But dad wasn’t a regular litigant; he was the “ward” of the court-appointed ETG. You can’t have it both ways in guardianship litigation. Either the ward is incapacitated or he’s not. He can’t be incapacitated for purposes of the threat of ongoing litigation, but NOT incapacitated for purpose of your settlement agreement. Anyway, not willing to leave well enough alone, the children filed a separate declaratory judgment action seeking to force dad to live by the trust agreement the judge had just set aside in the guardianship proceeding. Again the trial judge ruled against them, this time on res judicata grounds. In a separate opinion linked-to above, the 4th DCA again sided with the trial judge. Here’s why:

This Court has explained that “[f]our identities are required for res judicata to be applicable to a case: ‘(1) identity of the thing sued for; (2) identity of the cause of action; (3) identity of the persons and parties to the actions; and (4) identity of the quality or capacity of the persons for or against whom the claim is made.”’ Tyson v. Viacom, Inc., 890 So.2d 1205, 1209 (Fla. 4th DCA 2005) (quoting Freehling v. MGIC Fin. Corp., 437 So.2d 191, 193 (Fla. 4th DCA 1983)).

In this action all four identities are present. As to identity of the thing sued for, the children sued to establish the validity of a trust over the assets of their father in both the prior proceeding and this proceeding. As to identity of the cause of action, they sought a declaratory judgment to determine the validity of the trust executed by Saadeh and the management of the trust assets. At the least, the claims they raise in the second suit could have been brought in the first suit and could have been properly litigated in that suit.

As to the identity of the persons and parties to the action, in the first case, they sued individually, and in this case they sued in their capacity as trustees. “The term ‘parties’ has frequently been given a much broader coverage than merely embracing parties to the record of an action[.]” Seaboard Coast Line R.R. Co. v. Indus. Contracting Co., 260 So.2d 860, 863 (Fla. 4th DCA 1972). As the supreme court explained later, “[f]or one to be in privity with one who is a party to a lawsuit or for one to have been virtually represented by one who is party to a lawsuit, one must have an interest in the action such that she will be bound by the final judgment as if she were a party.” Stogniew v. McQueen, 656 So.2d 917, 920 (Fla.1995) (citing Se. Fid. Ins. Co. v. Rice, 515 So.2d 240 (Fla. 4th DCA 1987)). The children, as trustees, fit within that broad definition. While the children also added their father’s corporation as a defendant because it was an asset of the void trust, it too can be considered a party for res judicata purposes.

Finally, the quality and capacity of the persons for and against whom the claim is made remain the same. In this case, the “real party in interest” on each side remained the same. We conclude that the court did not err in dismissing on the ground of res judicata.