The competitive pressures and technical complexities of a sophisticated estate planning practice can be daunting. Not surprisingly, estate planning is one of the most common areas for legal malpractice claims.

For me, what really matters is not whether you’ve ever made a mistake (no one’s perfect), it’s what you do after you realize you’ve made a mistake that really counts. While we’ve all learned that the cover-up is usually worse than the crime, if we’re not careful, very human frailties can overcome ethics, one lie can lead to another, and before you know it a bad – but manageable – situation has morphed into a career-ending catastrophe.

That’s the bitter lesson Suzanne P. Land, a successful estate planning attorney, first female capital partner of her large Cincinnati, OH law firm, active community volunteer and single-mother of two young children (click here, and scroll down), is learning.

Back Story:

Land did estate planning work for a wealthy couple involving the creation of family limited liability companies (“LLC’s”). The LLC’s were supposed to lower the family’s estate tax bill by creating valuation discounts. Although this kind of estate tax planning is fairly common, it’s not without its complexities and hidden traps [click here for a sample memo explaining how it’s all supposed to work]. One of those traps caught Land unawares; causing the LLC’s to fail from a tax planning perspective. This mistake will likely cost Land’s clients an extra $1.1 million in estate taxes.

When Land’s mistake came to light during an estate-tax audit, rather than admit her mistake and deal with it head on, she tried to cover it up. The cover up included:

  • Forging client signatures to create false, back-dated amendments to the LLC operating agreements
  • Lying to the IRS about the forged LLC documents
  • Creating fake client correspondence and legal invoices to reflect work she never performed, then providing these fake documents to the IRS to authenticate the forged LLC documents
  • Providing two false affidavits to the IRS to authenticate the forged LLC documents

Cover Up = Criminal Prosecution:

No one should make light of how scary and professionally embarrassing a potential $1+ million malpractice claim must have appeared to Land. But no matter how bad the malpractice claim may end up being, it’s nothing compared to the career-ending catastrophe the cover up lead to. After the cover up unraveled, Land eventually pled guilty to one count of tax obstruction (26 USC § 7212(a)). This type of felony can result in up to a three year prison sentence.

A DOJ press release described Land’s conduct as follows:

According to the [unsealed portion of her plea agreement] and statements made in court, to conceal from the IRS the deficiencies in the documents that she drafted for her wealthy clients, Land forged the posthumous signatures of both her deceased clients and their living children on amendments to the documents. Land also misled an appraiser as to the value of the estates, created fake legal invoices that reflected work she never performed, and lied to the IRS about the circumstances surrounding the creation of the amendments. According to the terms of the plea agreement, Land admitted that the “relevant and foreseeable” tax loss that could have resulted from her obstruction was approximately $1,140,636.

According to the felony conviction/final judgment, Land was sentenced to 5 years of probation, including 3 years of what amounts to house arrest. It could have been much worse; at least she’s not going to jail (unlike the Texas attorney I wrote about here, who was sentenced to two years in federal prison for intentionally falsifying an estate tax return).

At the time she pled guilty the local NBC affiliate reported here that Land’s defense attorney stated she had voluntarily ceased practicing law and was “looking forward to getting this process through to the end.” I’m not sure how “voluntary” this last step was. Land’s felony conviction resulted in the automatic suspension of her law license in Ohio and Kentucky, effectively ending her legal career for the foreseeable future.

The stakes are high. Forbes Magazine lists Marilyn Monroe as the third-highest money-maker in its annual ranking of “The Top–Earning Dead Celebrities,” with an annual income of $27 million in 2011 alone. This income stream has been growing since Ms. Monroe’s death 50 years ago in 1962, and if Forbes’ 2011 figures are any indication, it isn’t going to run out anytime soon.  Who controls this fortune has been litigated by Marilyn Monroe’s estate for years in New York and California, culminating in the 9th Circuit’s August 30, 2012 decision in Milton H. Greene Archives, Inc. v. Marilyn Monroe LLC, — F.3d —-, 2012 WL 3743100 (9th Cir. 2012).

The fundamental question before every court that’s heard this case is the following: Did the residuary clause of Marilyn Monroe’s will gift her post mortem right of publicity to her heirs?

Here’s the problem for Ms. Monroe’s heirs: when she died in 1962, her state of domicile, New York, didn’t recognize any post mortem publicity rights (to this day, New York is one of the few holdouts not recognizing this posthumous property right, click here). Also, under New York probate law, Marilyn Monroe’s will can’t gift a property right that didn’t exist when she died. Bottom line: the heirs lose (although some creative financial engineering by the estate may have saved the day anyway).

The following is an excerpt from Marilyn Monroe’s estate loses right to charge for image use, reporting on the 9th Circuit’s recent ruling.

It is a decision one imagines the legendary Hollywood star might well have embraced: Marilyn Monroe, according to a new legal ruling, belongs to everybody.

A US federal court said on Thursday that Monroe’s estate was wrong to pursue photo libraries and other organisations that use her image without permission or payment on T-shirts and other memorabilia. It all stems from a decision made almost half a century ago by the Some Like It Hot star’s legal representatives in the wake of her 1962 death. Faced with a grand tax bill from the Californian authorities if they registered her final abode in the state, they chose to list the actor’s official domicile as New York, where Monroe had a second home, because the latter did not charge estate taxes.

Unfortunately, a move that saved Monroe’s heirs millions of dollars at the time could now end up costing them far more. New York does not share California’s generous laws regarding control of dead celebrities’ images, and last week’s hearing ruled in favour of those who believe the actor’s estate has, for decades, been wrongly extracting a fee each time Monroe’s image is used.

The issue came to light when the estate took a number of photo libraries to court in the middle of the last decade for selling her image on without permission. Several courts, noting that Monroe’s official final abode was New York, opted to abide by that state’s statutes and threw out the cases. The legal battle continued up until last week’s decision by the federal ninth circuit court of appeals, despite efforts by the state of California at one point to retrospectively award rights to the estate via a change in the law. That position now appears to have been reversed.

. . .

In a footnote to its ruling, the [9th Circuit] pointed out that Monroe once foresaw the battle over rights to her image and its outcome. “We observe that the lengthy dispute over the exploitation of Marilyn Monroe’s persona has ended in exactly the way that Monroe herself predicted more that 50 years ago,” reads the judgment. “‘I knew I belonged to the public and to the world, not because I was talented or even beautiful but because I had never belonged to anything or anyone else.'”

Would Marilyn Monroe’s heirs have fared better if she’d died domiciled in Florida?

Two keys points determined the ultimate outcome of this litigation: [1] New York’s non-recognition of a posthumous right of publicity; and [2] New York probate law limiting the inheritance flowing under Marilyn Monroe’s will only to property she owned at the time of her death in 1962. To really understand what happened here you need to compare and contrast what the outcome would have been under Florida law.

In contrast to New York, Florida law does recognize a posthumous property right in a decedent’s right of publicity. Under F.S. 540.08 a decedent’s posthumous publicity rights are statutorily recognized and enforceable for 40 years. If F.S. 540.08 had applied at the time of Marilyn Monroe’s death, her heirs would have won their case if she’d died domiciled in Florida. But it didn’t. Florida didn’t recognize a posthumous right of publicity until 1967 . . . five years after Marilyn Monroe’s death.

Is the 1967 timing of Florida’s adoption of F.S. 540.08 significant? Yes! Why? Because Florida law limits what you can gift under your will only to what you owned at the time of your death. Under F.S. 732.6005(2), which states in relevant part that “a will is construed to pass all property which the testator owns at death,” your will can’t gift new property rights you weren’t somehow entitled to at the time of your death. New York law is identical to Florida law on this point, as explained in Shaw Family Archives Ltd. v. CMG Worldwide, Inc., 486 F.Supp.2d 309 (S.D.N.Y. 2007), one of the underlying federal cases leading up to the 9th Circuit’s latest ruling.

It is well-settled that, under New York law, “A disposition by the testator of all his property passes all of the property he was entitled to dispose of at the time of his death.” N.Y. Est. Powers & Trusts Law § 3-3.1 (formerly N.Y. Decedent Est. Law 14) (emphasis added). The corollary principle recognized by the courts is that property not owned by the testator at the time of his death is not subject to disposition by will. . . .

Nor does § 2-602 of the Uniform Probate Code, which states that a will may pass “property acquired by the estate after the testator’s death,” have anything to do with the present case, because . . . New York [is not] among the 18 states that have adopted the Uniform Probate Code in whole or even in part. This court has not found, nor has [Marilyn Monroe’s estate] cited, any provision in . . . the New York . . . probate laws that codifies § 2-602. 

Did you catch the big distinction between existing Florida and New York probate law and the change triggered by UPC § 2-602? It’s a big deal. Under the UPC section the residuary beneficiaries of your will can inherit entirely new property rights acquired by your estate after your death. If this law had applied to Marilyn Monroe’s estate her heirs would have won (it didn’t, so they lost). Here’s the official commentary to UPC § 2-602 explaining what this section is intended to do.

This section is revised to assure that, for example, a residuary clause in a will not only passes property owned at death that is not otherwise devised, even though the property was acquired by the testator after the will was executed, but also passes property acquired by a testator’s estate after his or her death. This reverses a case like Braman Estate, 435 Pa. 573, 258 A.2d 492 (1969), where the Court held that Mary’s residuary devise to her sister Ruth “or her estate,” which had passed to Ruth’s estate where Ruth predeceased Mary by about a year, could not go to Ruth’s residuary legatee. The Court held that Ruth’s will had no power to control the devolution of property acquired by Ruth’s estate after her death; such property passed, instead, by intestate succession from Ruth. This section, applied to the Braman Estate case, would mean that the property acquired by Ruth’s estate after her death would pass under her residuary clause.

Listen to this post

There’s trouble brewing over a bank account and vacant lot “Widow” claims she owned jointly as a “tenancy by the entireties” or “TBE” property with her now deceased husband. The call with Widow’s family lawyer went well, so you agree to meet with her to discuss the case. You won’t have a prayer of properly evaluating this case if you don’t know the dramatically different evidentiary rules applying to TBE cases involving personal property vs. real property. The most important decision any probate litigator makes happens long before the first pleading is filed: it’s deciding when to say NO and when to say YES to a new case.

Fortunately for you and your prospective client, the 4th DCA recently published two opinions in separate cases explaining in plain English the very different evidentiary rules controlling TBE cases involving personal property vs. real property. This is your road map for successfully evaluating TBE cases.

Case Study No. 1: Joint Bank Account (Personal Property)

Wexler v. Rich, — So.3d —-, 2012 WL 555482 (Fla. 4th DCA February 22, 2012)

In Beal Bank, SSB v. Almand and Assocs., 780 So.2d 45 (Fla.2001), the Florida supreme court receded from its prior law that created no presumption of a tenancy by the entireties when a husband and wife opened a joint bank account. The court held that unless the signature card on the account expressed a contrary intent, an account opened by a husband and wife creates a presumption that the account is held by the entireties, assuming that the other unities of time, title, and possession are present. “The presumption we adopt is a presumption affecting the burden of proof pursuant to section 90.304, Florida Statutes (2000), thus shifting the burden to the creditor to prove by a preponderance of evidence that a tenancy by the entireties was not created.” Beal Bank, 780 So.2d at 58–59. The court’s holding in Beal was later codified in a 2008 amendment to F.S. 655.79(1), providing that “[a]ny deposit or account made in the name of two persons who are husband and wife shall be considered a tenancy by the entirety unless otherwise specified in writing.”

So here’s the question, what does a bank account opening form have to say to qualify as having “specified in writing” that a husband and wife joint account is NOT a TBE account? Answer: if the form had an option for TBE ownership and a separate option for “joint account,” and the married couple checks the joint account box, even if they didn’t have the foggiest idea of what they were doing legally, that’s enough. They’ve “specified in writing” that they did not want their joint account to be deemed a TBE account. Here’s how the 4th DCA made this point in the linked-to case above.

This case demonstrates [one] type of express disclaimer contemplated by Beal Bank. Bank United provided the Riches with account agreements containing the option of a tenancy by the entireties, but that option was not selected. Rather, the agreements established joint tenancies with right of survivorship. The Riches signed the agreements after having had a chance to review them. Freedom of contract “includes freedom to make a bad bargain.” Posner v. Posner, 257 So.2d 530, 535 (Fla.1972). Florida adheres to the principle that a “party has a duty to learn and know the contents of a proposed contract before he signs” it. Mfrs.’ Leasing, Ltd. v. Fla. Dev. & Attractions, Inc., 330 So.2d 171, 172 (Fla. 4th DCA 1976). Therefore, “[o]ne who signs a contract is presumed to know its contents.” Addison v. Carballosa, 48 So.3d 951, 954 (Fla. 3d DCA 2010). When the Riches signed the account agreements, they “expressly select[ed]” a form of account ownership other than a tenancy by the entireties, within the parameters set by the Supreme Court in Beal Bank.

The trial judge found no express disclaimer of tenancies by the entireties primarily because the bank employee did not discuss or explain the account ownership options with the Riches. As it applies to the mechanics of the bank-customer relationship in the opening of accounts, Beal Bank does not require a bank to explain the legal ramifications of the various account options. Only a handful of attorneys in Florida are able to describe the differences between a tenancy by the entireties bank account and a joint account with right of survivorship. The bank’s obligation is to clearly provide customers with the option of a tenancy by the entireties account, not to assist them in making a considered choice. To paraphrase the old proverb, a bank’s duty under Beal Bank is to lead the horse to water, not to make him drink it.

The parties have not argued the application of section 655.79(1), Florida Statutes (2009), apparently believing it is inapplicable because an amendment to it did not become effective until October 1, 2008. This 2008 amendment provides that “[a]ny deposit or account made in the name of two persons who are husband and wife shall be considered a tenancy by the entirety unless otherwise specified in writing.” Ch. 2008–75, § 8, Laws of Fla. (2008). We note that if the statute were to apply here, the signed account agreements containing the option of a tenancy by the entireties and designating the accounts as “Multiple–Party Account[s] with Right of Survivorship” would satisfy the statutory requirement that an alternative form of account ownership be “specified in writing.”

Lesson learned?

TBE cases involving joint bank accounts will turn on the boilerplate text of the account opening form, regardless of what the parties were actually thinking when they checked the box and signed at the bottom. If you’re thinking about taking one of these cases on, step 1 is to review the account opening form.

Case Study No. 2: Joint Deed (Real Estate)

Bridgeview Bank Group v. Callaghan, — So.3d —-, 2012 WL 1020044 (Fla. 4th DCA March 28, 2012)

What’s interesting about joint real estate cases is that it all boils down to the deed. If the deed doesn’t mention some form of ownership other than TBE, then the real property is deemed to be owned as TBE, and that presumption is NOT rebuttable by evidence of contrary intent. The only way to get around this TBE presumption for deeds is if you can prove it’s the product of fraud. Proving fraud is orders of magnitude more difficult than the evidence-shifting rule applicable to joint bank accounts. In other words, once the presumption of TBE ownership is triggered by the deed . . . your case is probably over. Here’s how the 4th DCA articulated this point in the linked-to case above.

Beal recognized the rule with respect to real property, stating “[w]here real property is acquired specifically in the name of a husband and wife, it is considered to be a ‘rule of construction that a tenancy by the entireties is created, although fraud may be proven.’” 780 So.2d at 54 (quoting First Nat. Bank of Leesburg v. Hector Supply Co., 254 So.2d 777, 780 (Fla.1971)). Beal also cited with approval to In re Suggs’ Estate, 405 So.2d 1360, 1361 (Fla. 5th DCA 1981), that “‘[a] conveyance to spouses as husband and wife creates an estate by the entirety in the absence of express language showing a contrary intent.’” 780 So.2d at 54 (emphasis supplied).

Based upon the foregoing, the conveyance to Daniel and Milea created a tenancy by the entireties, and no express language in the deed showed a contrary intent. Therefore an estate by the entireties is presumed. That presumption is not rebuttable, according to [Losey v. Losey, 221 So.2d 417 (Fla.1969)], although it could be set aside if fraud were proven. Bridgeview did not even attempt to prove fraud in this case with respect to the creation of the tenancy by the entirety in 2004.

Beal does not change this result. First and foremost, Beal did not overrule Losey, and the supreme court does not intentionally overrule itself sub silentio. Puryear v. State, 810 So.2d 901, 905 (Fla.2002). Second, Beal involved personal property in the form of bank accounts. . . . . [In Beal] the court established a rebuttable presumption for bank accounts, involving the burden of proof, not the rule of construction established in Losey for real property.

Applying a rule of construction for real property instead of a burden-shifting presumption can be explained by the real property transaction itself. The use of a rebuttable presumption applied to the title to real property would cause significant problems with titles, which are recorded and serve as notice to the world of the ownership of property. Which title insurer could feel secure in insuring property having a conveyance to a husband and wife in the chain of title, if that title could be rebutted by evidence extrinsic to the deed itself? The integrity of the title to real property could be called into question when titles could be overturned in litigation by rebuttable presumptions.

Lesson learned?

In a TBE case involving real estate, it’s all about the deed. If it names husband and wife, the TBE presumption is irrevocably triggered in the absence of fraud (which is never easy to prove). When one of these cases comes your way, you won’t know enough to figure out the fraud question until you’ve dug into the facts, but by simply knowing what question to ask (“is there fraud?”), you’ve won half the battle. What you don’t want to do is find yourself on the losing end of one of these cases because you didn’t even know fraud was an issue, which is apparently what happened to the creditor in the linked-to case above. As noted by the 4th DCA, “Bridgeview did not even attempt to prove fraud in this case.” Oops!

The popularity of revocable trusts and pour-over wills as “package deals” creates interesting strategic choices when challenging their validity; all of which revolve around legitimately exploiting the procedural and substantive differences between probate actions (think will contest) and tort actions (think trust contest). As I recently wrote here, although the public policy merits of this kind of forum shopping potential remain very much in dispute among academics, it’s a fact of life working probate litigators can’t ignore. The Pasquale case is another example of that dynamic.

Pasquale v. Loving, — So.3d —- 2012 WL 933030 (Fla. 4th DCA March 21, 2012):

In this case the defendants tried to turn the probate vs. tort action forum-shopping tactic on its head with the following elegant argument:

  1. If the decedent executed a pour-over will and revocable trust (she did), and
  2. if the decedent’s trust was incorporated by reference into her will if needed to give it effect (it was), and
  3. if the plaintiffs filed suit challenging only her trust, but not her will (the appeal turned on this question), and
  4. if the plaintiffs are now time barred by the probate rules from challenging the will (they are),
  5. then even if the plaintiffs challenging the revocable trust win their case, the now bullet proof pour-over-will will in all events “save” the trust and give it effect.
  6. Ergo: the trust contest should be dismissed.

The trial court judge accepted this argument and dismissed the trust contest with prejudice.

Can you challenge the validity of a revocable trust without also contesting the pour-over will? NO

What’s most interesting about this case is that the 4th DCA does not reject the underlying logic of the argument resulting in dismissal. Instead, the 4th DCA read the operative complaint in the most expansive terms possible, allowing them to “see” a will contest hidden within its four corners, thus saving the plaintiffs from dismissal of their case on pleading grounds alone (something courts try to avoid whenever possible).

We note, first, that the Pasquales could not challenge the validity of the trust without also contesting the will. The trust was incorporated by reference into the 2005 will. See Lewis v. SunTrust Bank, Miami, N.A., 698 So.2d 1276, 1277 (Fla. 3d DCA 1997) (“A writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit identification.”) (quoting section 732.512(1), Florida Statutes (1995)). …

While the complaint at issue is not a model of clarity, we find that it adequately constituted a will contest. “A petition for revocation of probate shall state the interest of the petitioner in the estate and the facts constituting the grounds on which revocation is demanded.” Fla. Prob. R. 5.270(a). “All technical forms of pleadings are abolished” and “[n]o defect of forms impairs substantial rights.” Fla. Prob. R. 5.020(a). Though the complaint does not specifically identify the 2005 will, count I challenges the validity of all testamentary documents executed after 2000[, thus by implication challenging the 2005 will] . . . Additionally, the complaint was filed in response to the notice of administration of the 2005 will, wherein the decedent completely revoked the Pasquales’ interest in the trust. Compare Feather v. Sanko’s Estate, 390 So.2d 746, 747 (Fla. 5th DCA 1980) (interpreting older version of probate code, finding that pleading filed by decedent’s disinherited child, entitled “Notice of Appearance,” was sufficient to contest will where pleading stated that she had interest in estate, and the will at issue disinherited her, making it clear that she opposed it). …

Lesson learned?

If you’re playing offense and your client hires you to challenging a revocable trust, always check the residuary clause of the underlying pour-over will as well. It will almost certainly contain a sentence incorporating the trust into the will if needed to give it effect. I don’t think I’ve ever read a Florida pour-over will that didn’t contain this boilerplate savings language in its residuary clause. Here’s the residuary clause from the pour-over-will at issue in this case, which contains the typical savings language.

I give all the residue of my estate, including my homestead, to the Trustee then serving under my revocable Trust Agreement dated October 26, 1999, as amended or hereafter amended (the “Existing Trust”), as Trustee without bond . . . The residue shall be added to and become a part of the Existing Trust, and shall be held under the provisions of said Agreement in effect at my death, or if this is not permitted by applicable law or the Existing Trust is not then in existence, under the provisions of said Agreement as existing today. If necessary to give effect to this gift, but not otherwise, said Agreement as existing today is incorporated herein by reference.

As noted by the 4th DCA, these clauses are statutorily sanctioned by F.S. 732.512(1). Lesson learned? When in doubt, always challenge both the pour-over will and revocable trust.

If you’re playing defense and only the trust is challenged, you may want to take another shot at the argument employed by the defendants in this case. Although the argument eventually failed on appeal, it worked at the trial court level and its underlying logic seemed to be accepted on appeal by the 4th DCA. Food for thought.

Morey v. Everbank, — So.3d —-, 2012 WL 3000608 (Fla. 1st DCA July 24, 2012)

Florida has a well earned reputation for being almost ridiculously generous when it comes to creditor protection. Our unlimited homestead protection usually gets most of the attention, but the goodies don’t end there. For example, under F.S. 222.13 Florida residents can leave their heirs unlimited amounts of life insurance money . . .  without a penny going to their creditors. In other words, a Florida resident can die bankrupt, but leave his heirs millions in creditor-exempt life insurance proceeds. This exemption applies regardless of whether the insurance proceeds are paid directly to your heirs or go to them via a revocable trust. See F.S. 733.808(4).

But is it possible to blow this valuable creditor-protection statute? YES! It’s a free country, and if you want to hand otherwise protected funds over to your creditors, no one’s going to stop you. In fact, that’s exactly what happened in this case.

Case Study:

This case involves a multimillion dollar estate . . .  that’s bankrupt. Back in 2000 the decedent purchased life insurance and named his revocable trust as the beneficiary of the insurance proceeds. So far so good. However, for reasons that in retrospect turned out to be mistaken, the decedent’s revocable trust stated that his life insurance proceeds could be used to pay his creditors.

After the decedent’s death in 2008, the trustee of his revocable trust (his brother) asked the court if the life insurance proceeds remained creditor protected. Answer: NO. Why? Because the decedent waived the creditor-protection shield by the terms of his own revocable trust (oops!).

While life insurance proceeds are not payable directly to the estate or subject to obligations of the estate merely by virtue of being directed to a grantor trust, here the clear and explicit terms of the trust make the policy proceeds available to satisfy obligations of the estate, pursuant to section 733.808(1).

. . .

An insurance policy is a contract. The right to select the beneficiary of a life insurance policy is an aspect of the freedom to contract. The statutory exemption does not purport to restrict that freedom. The owner of an insurance policy may waive the section 222.13 exemption [1] merely by designating the insured or one or more of the insured’s creditors as a beneficiary or beneficiaries, [2] by naming the insured’s estate as a beneficiary of the policy or, as here, [3] by naming as beneficiary a trust whose terms direct distribution of the trust assets to the personal representative, if requested.

At my firm we use the Lawgic drafting software for our wills and trusts. When drafting revocable trusts, Lawgic provides the following standard clauses designed to make sure life insurance proceeds paid to a revocable trust don’t lose their creditor-exempt status. If the revocable trust at the heart of this case contained similar clauses, there never would have been a problem.

Standard Insurance Clauses:

Allocation of Death Benefits. If any life insurance proceeds . . . included in my gross estate for federal estate tax purposes become payable to the Trustee, those proceeds are to be allocated between the Marital Trust and the Family Trust according to the formula [contained herein], and to be made available for the payment of expenses of administration and taxes. These proceeds may not be used for payment of claims against my estate. . . .

Excluded Property. If any funds become available to the trustees of any trust, including without limit, life insurance . . . and those funds are not otherwise included in my gross estate for federal estate tax purposes, then none of those funds may be used to pay, directly or indirectly, any debts, taxes, or expenses of mine or my estate.

For more on how simple but effective drafting techniques can be used to ensure none of your clients ever end up in the same mess as the estate in this case, you’ll want to read Morey v. Everbank: Three Drafting Tips to Avoid a Troubling Decision by George D. Karibjanian.

If in hindsight the trust’s waiver language turns out to be a mistake, what about judicially modifying the trust agreement to fix the problem?

It’s safe to assume that back in 2000, when the decedent signed his revocable trust and years before his death in 2008, he didn’t expect to die bankrupt. If he knew then what his trustee knows now, he obviously would have done things differently. Hindsight is 20/20: why not just ask the Court to judicially modify the trust agreement to fix the problem?

This is actually the most interesting question raised by this opinion, and it’s governed by F.S. 736.0415 (which I’ve previously written about here). It’s the type of question lawyers should expect to get asked any time their clients find themselves in a mess caused by drafting we all agree – in hindsight – would have been done differently if the decedent knew then what we know now. Here’s the problem: you don’t get a “do over” if the facts don’t pan out as planned; the types of drafting “mistakes” court’s are authorized to fix are mistakes based on facts existing at the time the document was signed . . .  not years later. Strike two for trustee:

Reviewing the record in the present case, it is clear that a reasonable trier of fact could have been left—as the learned trial judge was—without a firm belief or conviction that the trust terms were contrary to the decedent’s intent at the time he executed the (last amendment to the) trust declaration.FN11

FN11. The time the governing documents were executed is the pertinent point in time. The Restatement provides the following illustration:

3. G’s will devised his government bonds to his daughter, A, and the residue of his estate to a friend. Evidence shows that the bonds are worth only half of what they were worth at the time of execution of the will and that G would probably have left A more had he known that the bonds would depreciate in value.

This evidence does not support a reformation remedy. G’s mistake did not relate to facts that existed when the will was executed.

Restatement (Third) of Prop.: Wills & Other Donative Transfers § 12.1 cmt. h, illus. 3 (2003).

. . .

“A reformation relates back to the time the instrument was originally executed [or amended] and simply corrects the document’s language to read as it should have read all along.” Providence Square Ass’n, Inc. v. Biancardi, 507 So.2d 1366, 1371 (Fla.1987).

. . .

The trial court did not err in ruling that deterioration in the decedent’s financial circumstances between the time he executed estate planning documents and the date of his death —which in the event resulted in a lack of any residuum with which to fund the Morey Family Trust—did not constitute a “mistake” requiring reformation of the trust documents. Reformation is not available to modify the terms of a trust to effectuate what the settlor would have done differently had the settlor foreseen a change of circumstances that occurred after the instruments were executed. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers. at cmt. h (2003) (Reformation is not “available to modify a document in order to give effect to the donor’s post-execution change of mind … or to compensate for other changes in circumstances.”).

 

I’ve been a fan of T&E Harvard Law professor Robert Sitkoff‘s work since he co-authored a groundbreaking article in 2005 entitled Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, using banking data to demonstrate how states (including Florida) compete with each other for billions in new trust business by tailoring their trust legislation to attract this business. (I wrote about that article here.)

Prof. Sitkoff has now teamed up with fellow Harvard law professor John Goldberg, an expert in tort law, to argue for abolishment of the interference-with-inheritance tort in a provocative article entitled Torts and Estates: Remedying Wrongful Interference with Inheritance. If you’re a busy probate litigator with time to read only one academic paper this year, make it this one. Here’s the abstract:

This paper examines the nature, origin, and policy soundness of the tort of interference with inheritance. We conclude that the tort should be repudiated because it is conceptually and practically unsound. Endorsed by the Restatement (Second) of Torts and recognized by the U.S. Supreme Court in a recent decision, the tort has been adopted by the courts of nearly half the states. But the tort is deeply problematic from the perspectives of both inheritance law and tort law. It undermines the core principle of freedom of disposition that undergirds all of American inheritance law. It invites circumvention of principled policies encoded in the specialized rules of procedure applicable in inheritance disputes. In many cases, it has displaced venerable and better fitting causes of action for equitable relief. It has a derivative structure that violates the settled principle that torts identify and vindicate rights personal to the plaintiff. We conclude that the emergence of the interference-with-inheritance tort is symptomatic of two related and unhealthy tendencies in modern legal thought: the forgetting of restitution and equitable remedies, and the treatment of tort as a shapeless perversion of equity to provide compensation for, or deterrence of, harmful antisocial conduct.

No matter what the public policy merits (or lack thereof) of the interference-with-inheritance tort action may be; it’s here for now, it’s a fact of life, and working probate litigators ignore it at their peril [click here]. So the question is: can you use this oddball tort to legitimately advance your client’s objectives in a way pure probate actions can’t? Answer: MAYBE. Not only does this tort action open up possible avenues for redress otherwise foreclosed under traditional inheritance law, it may also deliver tactical advantages you usually don’t get in Florida probate proceedings: such as having your claim tried before a jury [see inset article], having your claim tried in a federal court [click here], or recovering compensatory damages (including pain and suffering damages) and possibly even punitive damages.

Practical Application Case Study: Lost Will Probate Proceeding vs. Tort Action:

I recently wrote here about Smith v. DeParry, a lost-will (codicil) case out of the 2d DCA demonstrating the specialized doctrines and procedures applicable only in probate proceedings. As the losing side in Smith v. DeParry learned, these specialized doctrines and procedures can produce harsh results. What if the losing side could simply call a “do over” after losing its lost-will case under the probate rules by  litigating the same case all over again as an interference-with-inheritance tort action? Is this possible? YES. In fact, that’s exactly what happened in Estate of Hatten, 880 So.2d 1271 (Fla. 3d DCA 2004), discussed as follows in Torts and Estates: Remedying Wrongful Interference with Inheritance:

In Hatten, decided in 2004 by a Florida appellate court, the plaintiffs alleged that immediately after the testator’s death, the defendant located and then destroyed the testator’s will. The defendant had a strong motive to do so. Under the will, the decedent was to inherit just one dollar, whereas if the decedent had died intestate, the defendant would receive $100,000.

In most states, a lost will that was not properly revoked by the testator is entitled to probate if its contents can be proved—for example, by a copy retained in the drafting lawyer’s files. In Florida, however, a statutory rule requires proof “by the testimony of two disinterested witnesses, or, if a correct copy is provided, … by one disinterested witness.” The plaintiffs in Hatten did not have such evidence. They had only their own testimony about what the testator had told them and what one of them recalled from reading the will. Because “the only available testimony would come from the three plaintiffs, all of whom are ‘interested’ under the terms of the Probate Code,” the court held that the statute foreclosed relief in probate.

Plainly this statute reflects a legislative policy judgment, not unique to Florida, that interested testimony should be excluded categorically rather than left to the trier-of-fact for a case-by-case determination of credibility. Although the trend in the modern law of inheritance is to the contrary, the Florida statute is consistent with an older tradition of barring interested testimony in inheritance matters. To get around the statute, the plaintiffs sued in tort, and the court allowed the claim. The court reasoned that “relief is unavailable to [the plaintiffs] under the Probate Code.” But the court did not consider why relief was unavailable—namely, a specialized rule of evidence for inheritance disputes that rests on a principled (if contestable) policy choice to bar the plaintiff’s evidence. Commentators who have argued for the tort likewise praise its utility in circumventing inheritance law rules that limit interested testimony.

Lesson learned?

As noted by Prof’s Sitkoff and Goldberg, “we are in the midst of a massive intergenerational transfer of wealth,” with the current estimate being that between 1998 and 2052, $41 trillion will be transferred in the U.S. alone [click here]. If you’re a working probate litigator you won’t stay competitive in this environment by doing things the way you’ve always done them. You constantly need to step up your game. One way to do that is read articles like Torts and Estates: Remedying Wrongful Interference with Inheritance.

It says it right in the trust code: trust litigation must be conducted like any other form of civil litigation. F.S. § 736.0201(1). The problem is that many of these cases are litigated before probate judges, who on a day-to-day basis adjudicate un-contested probate matters governed by the less stringent probate rules. Result? Basic due process protections assumed to apply in any piece of civil litigation are often brushed aside in trust cases [see here, here, here.]

Kountze v. Kountze, — So.3d —-, 2012 WL 3111681 (Fla. 2d DCA August 01, 2012)

In this case the trustee apparently did a good job of upsetting the probate judge, which resulted in the trustee’s summary removal. Can the judge do this in the absence of evidence, adduced at a properly noticed evidentiary hearing? NO

Section 736.0706(1), (2)(c), Florida Statutes (2010), provides that “a trustee may be removed by the court on the court’s own initiative … if … [d]ue to the unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries.” The statute therefore suggests that a factual finding must be made by the trial court as to the trustee’s unfitness, unwillingness, and persistent failure to administer the trust effectively.

On appeal, Edward Kountze argues that it was error for the trial court to make such a finding and remove him as Trustee without providing him notice and an opportunity to be heard. We agree. Edward was put on notice of a hearing on Charles’ motion to compel discovery. In that motion, Charles did seek a sanction against Edward for his failure to comply with discovery, but that sanction—the only sanction of which Edward was aware—was the imposition of an attorney’s fee award, not removal as Trustee. Additionally, in a prior contempt order entered in this case, the trial court had given Edward twenty days to comply with the discovery request then at issue and had stated that if he failed to do so “Defendant shall pay to Plaintiff $100.00 per day beginning the day after such items are due, and shall continue to pay Plaintiff $100.00 each day until Defendant has fully complied with this order.” There is nothing in the record to put Edward on notice that removal as Trustee was a possible sanction. As such, Edward had no reason to be prepared to defend against such a sanction.

Furthermore the trial court’s order expressly states that this sanction is being imposed not only for Edward’s failure to provide Charles with the requested trust accounting but also for failing to comply with previous court orders. As such, the sanction is analogous to an indirect civil contempt order, which does require notice and an opportunity to be heard. See Bresch v. Henderson, 761 So.2d 449, 451 (Fla. 2d DCA 2000) (“[A] person facing civil contempt sanctions is … entitled to a proceeding that meets the fundamental fairness requirements of the due process clause…. Such fundamental fairness includes providing the alleged contemnor with adequate notice and an opportunity to be heard.”); Whitby v. Infinity Radio, Inc., 961 So.2d 349, 355 (Fla. 4th DCA 2007) (reviewing order finding appellant in indirect civil contempt and concluding that “[a] person facing civil contempt sanctions is entitled to notice and an opportunity to be heard”).

Lesson learned?

First, the due process issues at the heart of this trustee-removal case also come up all the time in personal-representative removal cases, and (fortunately) the law is the same: you can’t boot the PR out of office in the absence of a trial on the merits [see here]. Bottom line: people have a right to pick who their fiduciaries are going to be, and that choice can’t be brushed aside lightly.

Second, if you’re already in front of a probate judge and it looks like a related trust may be affected by the probate litigation, you need to anticipate the procedural issues unique to trust cases and make a choice: either file a petition getting your trust in front of the same probate judge or file a separate trust action in the general-jurisdiction division of the circuit court and get your trust in front of a different judge. There are pros and cons to either choice, but at least you’ve dealt with the procedural issues head on.

Listen to this post

This is a lost will case. The pitfalls lurking under the surface of these often seemingly simple cases can trip up the best of us. See here, here. For those brave souls willing to take one of these cases on, here’s a short recap of the controlling law:

  1. When an original will that is known to have existed cannot be located after the death of the decedent, the presumption is that the testator destroyed the will with the intent to revoke it.
  2. The proponent of the lost will has the burden of introducing competent, substantial evidence to overcome the presumption of revocation. That process is governed by F.S. 733.207, which provides as follows: “Any interested person may establish the full and precise terms of a lost or destroyed will and offer the will for probate. The specific content of the will must be proved by the testimony of two disinterested witnesses, or, if a correct copy is provided, it shall be proved by one disinterested witness.”
  3. See also Fla. Prob. R. 5.510 (stating additional requirements for the establishment and probate of a lost or destroyed will).

Case Study

Smith v. DeParry, — So.3d —-, 2012 WL 1521541 (Fla. 2d DCA May 2, 2012)

The decedent in this case owned two fox red Labrador Retriever dogs. On October 24, 2007 he executed a codicil to his will providing for a $40,000 bequest to establish a pet trust for the health, care, and welfare of his dogs. The decedent’s estate planning attorney, who was also one of his co-personal representatives, subsequently lost the originally executed copy of the codicil. The initial trustee of the pet trust was also one of the co–personal representatives. By the time the co–personal representatives filed a petition to establish the lost codicil; $40,000 of the estate’s money had already been transferred to fund the pet trust. The GAL appointed to represent the decedent’s minor grandson contested the petition to establish the lost codicil.

The petition to probate the lost-codicil was denied on two grounds: [1] probate judge ruled a computer copy is categorically excluded from the definition of “correct copy” under F.S. 733.207; and [2] because personal representatives are by definition always “interested persons” of an estate under F.S. 731.201(23), probate judge ruled they are categorically excluded from the definition of “disinterested witness” under F.S. 733.207. Wrong answer, on both points. But none of that mattered because, according to the 2d DCA, even though the probate judge pretty much got every legal issue in this case wrong, the judge still managed to reach the correct result. Why? Because there weren’t enough disinterested witnesses to prove up the lost codicil.

Does an unsigned document stored on your computer count as a “correct copy” under F.S. 733.207? YES

The probate court ruled the unsigned copy of the codicil generated from the drafting attorney’s office computer did not qualify as a “correct copy” under F.S. 733.207 based on a 1980 Florida Supreme Court decision defining a “correct copy” as follows:

The word “copy,” then, means a double of an original instrument, such as a carbon or photostatic copy. The word “correct” modifies and qualifies the word “copy.” It strengthens the already strong word “copy.” We therefore conclude that the words “correct copy” means a copy conforming to an approved or conventional standard and that this requires an identical copy such as a carbon or photostatic copy.

See In re Estate of Parker (Parker II), 382 So.2d 652 (Fla.1980).

Just because carbon copies and photo copies were the dominant form of document retention in 1980, doesn’t mean we’re supposed to be frozen in time. A lot’s changed since 1980, of course computer copies are acceptable in today’s digital world. Did we really need an appellate decision to establish this obvious point? Anyway, this is the kind of basic law you’ll want to keep handy for your practice. Here’s how the 2d DCA put it:

[First], the probate court misconstrued the portion of the supreme court’s holding in Parker II referring to the requirement of “an identical copy such as a carbon or photostatic copy.” 382 So.2d at 653. Both the probate court and the GAL read this language as exclusive. In their view, the only type of copy that can be used to prove the content of a lost will or codicil under the statute is a carbon copy or a photocopy. Such an interpretation would preclude the use of a computer-generated copy. However, the supreme court’s language in Parker II is not so restrictive. In the court’s reference to “an identical copy such as a carbon or photostatic copy,” the carbon copy and the photostatic copy are merely examples of identical copies. See The American Heritage Dictionary of the English Language 1729 (4th ed. 2000) (defining the idiom, “such as” to mean “[f]or example”). However, the carbon copy and the photocopy are not the only kind of copy that can qualify as an identical copy of an original document. Unquestionably, a copy of a document generated on a computer can be identical to—and indistinguishable from—the original.

[Second], the supreme court decided the Parker II case in 1980. Although some personal computers were sold in the late 1970s, the personal computer did not come into general use in law offices and other businesses until the 1980s, after Parker II was decided.[FN3] We do not think that the supreme court’s reference in 1980 to carbon copies and photostatic copies as examples of “an identical copy” was intended to limit for all time the types of copies that could be used to establish the contents of a lost instrument, regardless of future technological developments. Indeed, the legal profession in Florida is now reported to be on the brink of a transition to the paperless office and the paperless courthouse. See Gary Blankenship, E-filing’s Time is Now, Fla. B. News, Jan. 15, 2012, at 1; Gary Blankenship, E-filing’s Proponents: Get Ready, It’s Coming, Fla. B. News, Dec. 1, 2011, at 1. As we face this transition, it would be an anachronism to adopt a rule that a copy of a lost will or codicil retrieved from the hard drive of a computer or from a cloud database[FN4] cannot be a “correct copy” within the meaning of section 733.207.

FN3. See History of personal computers (Jan. 26, 2012, 8:38 p.m.), http://en.wikipedia.org/wiki/History_of_personal_computers.

FN4. “A cloud database is a database that typically runs on a Cloud Computing platform, such as Amazon EC2, GoGrid and Rackspace.” Cloud database (Jan. 11, 2012, 7:00 p.m.), http://en.wikipedia.org/wiki/Cloud_database. “Cloud computing is the delivery of computing as a service rather than a product, whereby shared resources, software, and information are provided to computers and other devices as a metered service over a network (typically the Internet).” Cloud computing (Feb. 6, 2012, 4:38 a.m.), http://en.wikipedia.org/wiki/Cloud_computing.

By the way, the 2d DCA also pointed out that a “correct copy” doesn’t have to be signed:

A copy need not be conformed to qualify as a correct copy under the statute. In other words, there is no requirement that the copy bear the signature of the testator or the signatures of the witnesses. Carlton v. Sims (In re Estate of Carlton), 276 So.2d 832, 833 (Fla.1973); Stewart v. Johnson, 142 Fla. 425, 194 So. 869, 872 (1940); Brittingham v. Jarvis (In re Estate of Maynard), 253 So.2d 923, 924 (Fla. 2d DCA 1971); Bury, 591 So.2d at 676–77.

Can a personal representative be a “disinterested witness” under F.S. 733.207? YES

The probate judge got this one wrong too. In one section of our probate code the word “interested” is used to establish who has standing to participate in a particular probate proceeding. That’s how the word is used in the definition of “interested persons” found in F.S. 731.201(23). In another section of our probate code, the word “interested” is used to distinguish between witnesses who have a personal stake in the outcome of a trial, and those we would otherwise consider to be neutral (and thus more trustworthy). That’s how the word is used in F.S. 733.207 when referring to a “disinterested witness.” This is an important distinction, which the 2d DCA does a good job of explaining.

There is a significant distinction between the concept of an “interested person” under section 731.201(23) and the concept of “disinterested witnesses” as used in section 733.207. Under the Probate Code, the term “interested person” refers to a person’s or entity’s standing, i.e., the right to notice and an opportunity to be heard in a particular proceeding pending in a probate or guardianship matter. See Hayes v. Guardianship of Thompson, 952 So.2d 498, 507–08 (Fla.2006).

On the other hand, a person may be described as “disinterested” when he or she is “[f]ree from bias, prejudice, or partiality; not having a pecuniary interest.” Black’s Law Dictionary 536 (9th ed. 2009). It follows that a “disinterested witness”—as the term is used in section 733.207—refers to a person “who has no private interest in the matter at issue.” Black’s Law Dictionary 1740 (9th ed. 2009). To put it differently, a “disinterested witness” has no stake in the outcome of the matter in which he or she offers evidence. See The American Heritage Dictionary of the English Language 519, usage note (4th ed. 2000) (“In traditional usage, disinterested can only mean ‘having no stake in an outcome,’….”). The probate court’s ruling erroneously assumed that an “interested person” under the Probate Code could not simultaneously be a “disinterested witness.”

. . . Thus the personal representative can be an interested person but still participate in a proceeding as a disinterested witness. In reaching its ruling in this case, the probate court overlooked this significant distinction.

Did drafting attorney qualify as a “disinterested witness” under F.S. 733.207? NO

So why did the co-personal representatives lose this case, even though the 2d DCA disagreed with every legal ruling made by the probate judge? No evidence. Or more precisely, there weren’t any “disinterested witnesses” available to prove up the lost codicil. But, you might ask, what about the drafting attorney (“Mr. Allen”)? Why couldn’t he testify? Due to bad luck or lack of foresight, by the time the lost-codicil petition got to trial, Mr. Allen (who was also one of the co-personal representatives) had his own problems to worry about. According to the 2d DCA, depending on how the trial came out, he was facing at least two different law suits.

Mr. Allen’s personal interest in the outcome derives from at least two factors. First, Mr. Allen was directly responsible for the loss or destruction of the codicil from which Mr. Smith was to benefit. An adverse ruling on the petition might result in a claim by [the estate] against Mr. Allen for damages. . . . Second, if [the other co-personal representative] failed to return the $40,000 to the estate with interest, the beneficiaries might make a claim against Mr. Allen, as Co–Personal Representative, predicated on the default of his fellow fiduciary. . . . Thus Mr. Allen . . . did not qualify as a disinterested witness because of his direct stake in the outcome of the pending proceeding.[FN5]

FN5. Of course, we express no opinion on the merits of either of the potential claims against Mr. Allen. The possibility that such claims could be advanced and plausibly maintained is sufficient to give him a “private interest in the matter at issue.” See Black’s, supra (defining a disinterested witness as a person with no such interest).

But what about the typist who wrote up the lost codicil, or the lady who witnessed the decedent’s execution of the document?

This last point is especially important for practicing probate litigators. In order to prove up a lost will, F.S. 733.207 sets two conditions for your witnesses: [1] they have to be “disinterested,” and, just as importantly, [2] they need to have firsthand knowledge of the “content” of the lost document and the decedent’s acceptance of this content. Once the drafting attorney was knocked out as a potential witness, the rest of the case quickly caved in. Here’s why:

The remaining witnesses were unable to prove the content of the lost codicil as required by section 733.207. Deborah Stegmeier, Mr. Allen’s office assistant, prepared the codicil, as well as several other documents for execution by the decedent, on her computer in Mr. Allen’s Orlando office. However, Ms. Stegmeier did not accompany Mr. Allen to St. Petersburg for the execution of the codicil. She remained behind at his Orlando office. Thus, as the probate court observed, Ms. Stegmeier did “not have firsthand knowledge of what document may or may not have been presented to the [d]ecedent for his signature.” Instead, Ms. Stegmeier’s knowledge was limited to the documents prepared on her computer.

Jennifer Torres was one of the witnesses to the execution of the codicil and to a separate trust agreement. Ms. Torres candidly admitted that she did not read any of the documents to which she was a witness. Thus Ms. Torres could not testify to the content of the codicil signed by the decedent. Cf. Bury, 591 So.2d at 677 (holding that the testimony by a witness to the execution of a will that the carbon copy produced at the hearing was identical to the original will executed by the decedent was sufficient to meet the requirements of a “correct copy” under the statute for proving the content of the lost original). The Co–Personal Representatives did not call the other witness to the execution of the will to testify at the hearing.

To summarize, the Co–Personal Representatives proffered a “correct copy” of the lost codicil in support of their amended petition. However, they failed to prove the content of the lost codicil with the testimony of at least one disinterested witness as required by section 733.207.

 

In 1951 Florida enacted a statute automatically cutting divorced spouses out of each other’s wills (currently at F.S. 732.507(2)). In 1989 Florida enacted a similar statute for revocable trusts (currently at F.S. 736.1105). These statutes were all we needed when most people relied on a will or revocable trust to provide for their heirs.

Times have changed. Today, life insurance and other beneficiary-designated non-probate assets such as annuities, pay-on-death accounts, and retirement planning accounts have become the dominant wealth transfer mechanism for most middle class families (wills and trusts remain dominant for the wealthy). As reported by Tampa attorney Suzanne Glickman in A Fair Presumption: Why Florida Needs a Divorce Revocation Statute for Beneficiary-Designated Nonprobate Assets:

Life insurance and other nonprobate assets such as annuities, pay-on-death accounts, and retirement planning accounts have become increasingly popular as estate planning tools. In 2004, Americans purchased $3.1 trillion in new life insurance coverage, a ten percent increase from just ten years before. Purchases made by Floridians accounted for nearly $154 million of this national total. At the end of 2004, there was $17.5 trillion in life insurance policy coverage in the United States.

Against this backdrop, it was inconsistent and illogical to have automatic post-divorce revocation statutes for wills and revocable trusts, but not for beneficiary-designated non-probate assets. As I reported here, attempts to fill this gap in the courts failed. The problem needed a legislative fix. Now we have one.

As reported in this Florida Senate Legislative White Paper, effective July 1, 2012 new F.S. 732.703 came into effect, accomplishing the following:

[F.S. 732.703] generally nullifies upon divorce or annulment the designation of a spouse as a beneficiary of nonprobate assets such as life insurance policies, individual retirement accounts, and payable on death accounts. State-administered retirement plans are exempt from [F.S. 732.703]. If the provisions of [F.S. 732.703] apply, an asset will pass as if the former spouse predeceased the decedent.

[F.S. 732.703] also specifies criteria for a payor of a nonprobate asset to use in identifying the appropriate beneficiary. [F.S. 732.703] specifically provides that the payor is not liable in some circumstances for transferring an asset to the beneficiary identified through the bill’s criteria.

*****

[F.S. 732.703] voids the designation of a former spouse as a beneficiary of an interest in an asset that will be transferred or paid upon the death of the decedent if: [1] The decedent’s marriage was judicially dissolved or declared invalid before the decedent’s death; and [2] The designation was made before the dissolution or order invalidating the marriage.

Click here for a link to the Florida Senate’s webpage for this new legislation and links to the actual text of the bill.

F.S. 732.703 is not all encompassing, it only applies to the following beneficiary-designated non-probate assets:

  • a life insurance policy, qualified annuity, or other similar tax-deferred contract held within an employee benefit plan;
  • an employee benefit plan;
  • an individual retirement account;
  • a payable-on-death account;
  • a security or other account registered in a transfer-on-death form; and
  • a life insurance policy, annuity or other similar contract that is not held within an employee benefit plan or tax-qualified retirement account.

F.S. 732.703 does NOT apply:

  • to the extent federal law provides otherwise;
  • if the governing instrument as defined in the bill expressly provides that the interest will be payable to the designated former spouse after the order of dissolution or order declaring the marriage invalid and the instrument expressly provides that benefits will be payable to the decedent’s former spouse;
  • to the extent the disposition of the assets are governed by a will or trust;
  • if a court order required the decedent to acquire or maintain the asset for the benefit of the former spouse or children of the marriage;
  • if under terms of the order of dissolution or order declaring the marriage invalid, the decedent did not have the ability to unilaterally terminate or change the beneficiary or pay-on-death designation;
  • if the designation of the decedent’s former spouse as beneficiary is irrevocable under applicable law;
  • if the contract or agreement is governed by the laws of another state;
  • to an asset held in two or more names as to which the death of one co-owner vests ownership of the asset in the surviving co-owner or co-owners [i.e., joint accounts]; or
  • if the decedent remarries the person whose interest would otherwise have been revoked as a former spouse under the bill and the decedent and that person are married to one another at the time of the decedent’s death.

Trap for the unwary #1: joint survivor accounts:

The F.S. 732.703 exception probate lawyers will want to focus on is for joint survivor accounts. Here’s what Jeff Baskies, one of Florida’s preeminent estate planning gurus, had to say about this issue:

Obviously, the most important and potentially controversial exception relates to joint accounts. A decision was made not to address those accounts in this context. While I believe Florida law currently provides that tenancy by the entireties accounts (which might otherwise be covered by [the joint-account exception] above) are converted to tenancies in common upon a divorce, I do not believe there is a similar rule for joint accounts with rights of survivorship. If this issue creates ongoing problems or a trap for the unwary, perhaps subsequent “clean-up” legislation will address joint accounts.

[Click here for Jeff’s entire commentary on the new statute].

Trap for the unwary #2: catch me if you can:

The second big point probate lawyers will want to keep in mind is enforcement. F.S. 732.703 is specifically designed to keep banks and insurance companies out of the line of fire if a family dispute erupts over any beneficiary-designated non-probate asset covered by the statute. If an ex-spouse swoops in and improperly cashes a life-insurance check before anyone is the wiser, you won’t be able to sue the insurance company, you’ll have to chase down the ex-spouse and sue him or her directly to get the money back.

Here’s how the statute’s “payor” immunity is described in this Florida Senate Legislative White Paper:

[F.S. 732.703] provides that in the case of pay-on-death accounts, securities or other accounts registered in transfer-on-death form, and life insurance policies, annuities or other similar contracts not held within an employee benefit plan or a tax-qualified retirement account, the payor is not liable for making any payment on account of, or transferring any interest in, such assets to any beneficiary.

A payor’s immunity for making a payment in accordance with the criteria in [F.S. 732.703] applies notwithstanding the payor’s knowledge that the person to whom the asset is transferred is different from the person who would own the interest due to the dissolution of the decedent’s marriage or declaration of the marriage’s validity before the decedent’s death. As such, a secondary beneficiary will have a cause of action against the former spouse who receives the payment or transfer of the assets described in [F.S. 732.703] if the beneficiary designations was made void upon divorce or annulment.

Trap for the unwary #3: ERISA trumps FL’s revocation statute:

And finally, the last trap to keep in mind: a beneficiary designation in a pension plan or life insurance policy subject to federal regulation under the Employee Retirement Income Security Act (ERISA), is NOT subject to Florida’s new automatic revocation statute. For an in depth explanation — and critique — of the current state of the law on this point you’ll want to read Destructive Federal Preemption of State Wealth Transfer Law in Beneficiary Designation Cases: Hillman Doubles Down on Egelhoff, by Yale law Prof. John H. Langbein. Here’s an excerpt:

In Egelhoff v. Egelhoff, 532 U.S. 141 (2001), the Supreme Court held that when the instrument of transfer is a beneficiary designation in a pension plan or life insurance policy subject to federal regulation under the Employee Retirement Income Security Act (ERISA), the otherwise applicable state divorce revocation statute is preempted, even though ERISA makes no mention of divorce revocation. The Court reasoned that enforcing the state divorce revocation statute would “interfere with nationally uniform plan administration.”

Because the result in Egelhoff allowed supposed plan-level administrative convenience to defeat the principled objective of the divorce revocation statutes, a number of courts reacted by allowing so-called post-distribution relief, in some cases pursuant to a state statute so providing. Obeying Egelhoff, these courts preempted the state divorce revocation law at the plan level, thereby permitting the ex-spouse to receive the designated benefit from the plan, but allowing the person(s) entitled under the divorce revocation statute to recover those proceeds from the ex-spouse in a subsequent state-court action based on unjust enrichment. In a 2013 decision, Hillman v. Maretta, involving an insurance policy purchased under a program for federal employees, the Supreme Court extended preemption to forbid such post-distribution relief.

United States v. MacIntyre, ___ F.Supp.2d ___, 2012 WL 2403491 (S.D. Tex. June 25, 2012)

A personal representative (“PR”) is personally liable for paying the decedent’s remaining tax bills, be they income taxes, gift taxes or estate taxes. That’s right, when you say “yes” to serving as someone’s PR, you also say “yes” to personally guaranteeing their back taxes are paid up. Not to worry though, as I previously wrote here, if you take advantage of the risk-management tools built into the tax code, this is a problem no one need lose sleep over. But get this wrong, and things can turn ugly real fast.

Is the IRS bound by your bad legal advice? NO

In 1995, J. Howard Marshall, II made a $35 million taxable gift to certain family members, including his ex-wife Eleanor Pierce Stevens (“Stevens”). For better or worse, Marshall Sr is probably best known for having been married to Anna Nicole Smith during the last 14 months of his life. If you’re a trusts and estates lawyer, you can thank the Marshall estate and Anna Nicole Smith for some of the most high profile probate litigation in years [click here, here]. The Marshall name is shaking up the probate world again: this time around it’s fiduciary liability for a decedent’s unpaid taxes.

Marshall Sr never paid the tax due on his $35 million gift, and neither did his estate. By operation of law liability for Marshall Sr’s tax liability shifted to the gift’s recipients or “donees,” including Stevens [click here for the back story]. Stevens died in April 2007, shifting her tax liability to her estate. E. Pierce Marshall, Jr. (“Marshall Jr”) became the sole executor of her estate and Finley L. Hilliard (“Hilliard”) was the trustee of her revocable trust. By its terms, Stevens’ revocable trust was liable for her estate’s taxes.

So what went wrong?

At some point Marshall Jr and Hilliard were told by their lawyers the IRS couldn’t collect on the estate’s unpaid gift-tax liability, so they went ahead and distributed estate assets without paying the tax. When the IRS came after them personally for the estate’s unpaid taxes, they claimed ignorance. Not because they didn’t know the gift-tax liability existed, but because they relied on their lawyer’s bad tax advice. Wrong answer. Legal opinions are great ways to shift risk to your lawyers, but that’s all you’re doing. Tax opinions aren’t shields against tax claims; the IRS isn’t bound by your bad legal advice.

The Tax Court has articulated the elements of § 3713 liability as (1) a fiduciary; (2) distributed the estate’s assets before paying a claim of the United State and (3) knew or should have known of the United States’ claim. Huddleston v. Comm’r, T.C. Memo.1994–131, 1994 WL 100520 at *6 (U.S. Tax Ct.1994); see also Leigh v. Comm’r, 72 T.C. 1105, 1110 (U.S. Tax Ct.1979). “[I]n order to render a fiduciary personally liable under 31 U.S.C. [§ 3713], he must first be chargeable with knowledge or notice of the debt due to the United States….” Leigh, 72 T.C. at 1109 (construing a virtually identical earlier version of the statute). “The knowledge requirement … may be satisfied by either actual knowledge of the liability or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States.” Id. at 1110.

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As explained above, the knowledge requirement is not actual knowledge. Leigh, 72 T.C. at 1110. It is sufficient to show that the fiduciary had “notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the unpaid claim.” Id. Neither Marshall nor Hilliard contend that they were never told that the IRS might try to make a claim against Stevens for the unpaid gift taxes on the Gift. In fact, they admit that they were both told that the IRS might try to assert a claim against Stevens’s Estate for donee liability on the Gift. Instead they argue that they did not believe the IRS’s claim against Stevens was valid for various reasons. But, as the government points out, Marshall and Hilliard’s belief in the validity of the government’s claim is not the test. Marshall and Hilliard had sufficient notice of the claim to put a reasonably prudent person on notice. It is regrettable that they received incorrect advice on that point, but poor legal advice is not a defense. Despite their belief that the government’s claim was not valid, Marshall and Hilliard were required by § 3713 to preserve the funds to pay the government’s claim-should it be proved valid. Accordingly, Marshall and Hilliard both meet the test for individual liability under § 3713 and are therefore personally liable for distributions made from Stevens’s Estate and Trust.

Is failing to pay taxes a breach of fiduciary duty? YES 

This probably comes as a surprise to most PR’s, but a decedent’s unpaid creditors, including the IRS, have standing to sue you for breach of fiduciary duty if you screw up. And not paying taxes qualifies as a major screw up. So to make matters worse, if you muck up an estate’s taxes, not only are you personally on the hook for this mess, you may also get sued for breach of fiduciary duty. That’s what happened in this case.

The government argues that Marshall, as Executor of Stevens Estate, breached his fiduciary duty to pay the taxes due the IRS on the estate in the order and manner they were due. In effect, it urges that Marshall’s breach is coterminous with his personal liability under § 3713. The court agrees. Insofar as the court held above that Marshall was individually liable to the government pursuant to § 3713, he has also breached his fiduciary duty as an Executor under state law. See In re Tomlin, 266 B.R. 350, 354 (N.D.Tex.2001).

The question is, why would the IRS go through the trouble of suing you for breach of fiduciary duty if you’re already personally liable as a matter of federal tax law? Answer: to make sure you don’t dodge this bullet by declaring bankruptcy. As I previously wrote here, a breach-of-duty judgment against a PR (or trustee) is NOT dischargeable in bankruptcy. Why? Because under bankruptcy code section 523(a)(4) this kind of judgment is deemed the product of “fraud or defalcation while acting in a fiduciary capacity.”

Lesson learned? Forewarned is forearmed:

The best way to win a tax case is to not get sued by the IRS in the first place. You can’t do that with a legal opinion. You can do that by making the IRS tell you in advance if there are any unpaid taxes. How do you do that? Click here. Forewarned is forearmed.

“The truly wise man, we are told, can perceive things before they come to pass; how much more than those that are already manifest.”

Sun Tzu, The Art of War