The last time I wrote about the Reid case the issue was whether a trustee, acting solely in her capacity as trustee, had standing to bring a trust reformation action under F.S. 736.0415 (Reformation to correct mistakes). Trial court said no, 3d DCA said YES.

After having won the right to bring her trust reformation action, the trustee is now back before the 3d DCA because the same judge who didn’t think she had standing subsequently ruled against her on the merits, denying her claim for trust reformation under F.S. 736.0415 . . . even though the uncontroverted evidence of the drafting attorney and the testator’s doctor (the only two witnesses to testify) unequivocally stated the trust contained a drafting mistake and the requested reformation was needed to carry out the testator’s intent.

Reid v. In re Estate of Sonder, — So.3d —-, 2011 WL 1007137 (Fla. 3d DCA Mar 23, 2011):

In this case the testator wanted the nurse who had cared first for his late wife and then for the testator himself to have the condo he lived in. Unfortunately, there wasn’t enough cash left in the estate to satisfy all of the testator’s cash gifts or “devises”, including a $125,000 gift to the Hebrew Union College Jewish Institute of Religion. When this happens all gifts of equal priority are supposed to be reduced or “abated” equally. For example, if two people are each supposed to receive $100 and there’s only $100 left in the estate, both devises are abated down to $50. Things are more complicated if one of the gifts is real property. In those cases you have to sell the property to abate it.

The order in which devises abate is governed by F.S. 733.805. This complex statute is a classic example of a “rule of construction” applicable to all Florida wills and trusts that is NOT part of the actual text appearing within the document the client signs.

In this case the trustee filed a petition under F.S. 736.0415 asking the trial court to fix a drafting error in the trust agreement. The requested fix would ensure the testator’s condo was NOT subject to abatement, so it could be devised intact to the nurse. The trial court said NO, sell the condo, and on appeal the 3d DCA agreed. To make sense of the 3d DCA’s ruling you need to read it against the backdrop of classic legal theory: we always presume testators understand and consent to every word in their wills or trusts.

[T]here is no evidence Sonder would not have been capable of understanding the trust as written. In fact, nothing in the record explains why Sonder, an articulate and precise businessman, would have approved the plain and simple trust terms if they did not reflect his intent.

Theory vs. Reality:

Is it fair to assume that a testator reading the “plain and simple” text of his trust agreement would also understand that if years in the future he died with less cash in the bank then he assumed on the date he signed his trust that Florida’s rule of abatement (F.S. 733.805) would mean the gift of his condo to his nurse would no longer be effectuated? Of course not.

A lay person cannot be expected to read and “understand” a trust agreement the same way a lawyer with years of experience and specialized training can. So even if we assume a client has read his trust agreement, it is not fair to assume this same client was aware of and consented to any drafting mistakes that may be contained within the “plain and simple” text of the document — especially if it’s an error of “omission” (i.e., attorney accidentally leaves out clause that should have been included in trust agreement handed to client). Here’s how the authors of A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities explain this point as applied to consumer contracts in general:

To understand a contract, or even to know that they should look for certain pieces of information, consumers need some background knowledge. In particular, they need to know how contracts of this type—be they mortgage contracts, rental agreements, life or health insurance policies, etc.—are typically structured, the types of information and agreements that are typically codified in these contracts, and the alternative forms that these agreements can take. Cognitive psychologists call mental data structures that code information of this type “schemas,” and consumers need to have specific schemas to understand a mortgage contract, a rental agreement, a life or health insurance policy, and so forth. When consumers read contracts without this knowledge, they will not necessarily be able to identify when something is unusual or amiss.

Did the dissent get this one right? YES

In her dissent Judge Wells argued the majority got this one wrong and stated she would have granted the requested trust reformation. I found Judge Wells’ analysis convincing and agree with her.

Florida’s legislature adopted F.S. 736.0415 so judges could re-write trust agreements to correct mistakes. These mistakes go beyond simply fixing “typos”. We know this because the statute says a judge can reform a trust agreement even if the text is unambiguous, if the end result is not consistent with the client’s intent. For example, failing to account for Florida’s statutory abatement statute is a mistake of omission. In order to counter Florida’s default abatement rules the drafting attorney would have to add special language to the trust agreement. This is the type of mistake a lay person can’t possibly be expected to catch by simply reading the clear text of his trust agreement. The 3d DCA’s majority opinion fails to grasp this point. The dissent did not. Here’s how Judge Wells explained this statutory construction point, which I believe is the better analysis:

The express purpose of section 736.0415 is to permit reformation of an otherwise clear, unambiguous written trust signed by a settlor where evidence exists that the “plain meaning of the trust instrument” does not evidence the settlor’s intent. Thus the fact that this articulate, ninety-three-year-old former businessman signed a document that did not on its face encompass what he wanted is non-determinative.[FN5] The record is that this settlor knew what he wanted, questioned his attorney as to whether the document he signed encompassed that desire, and was repeatedly but incorrectly assured that it did.

Of course, a client is entitled to rely on the skill of his attorney to draft an agreement that encompasses his intent. In this case, the record confirms that this astute but elderly businessman, who was not a lawyer, retained a probate and estate lawyer not only to draft a new will after his wife died, but also to create a trust and then to have that same lawyer revise it at least four times. The record also confirms that between 1998 when the relationship began and 2005 when he died, this settlor frequently wrote to, spoke to, and met with his attorney, both at his home and at his attorney’s offices. Most importantly, the record—without contradiction—is that this settlor told his attorney what he wanted, questioned his lawyer as to whether he was getting it, and was repeatedly assured by that lawyer—who himself had no idea that he had not accomplished his client’s goals—that the settlor was getting what he wanted.[FN6] Therefore, the fact that this settlor was intelligent and precise, and the trust clear and unambiguous, does not support the instant denial of reformation under section 736 .0415 of the Florida Statutes.

***************************

[FN5]. As the Restatement (Third) of Property: Wills & Other Donative Transfers § 12.1 (2003), confirms, execution of a document, following review by a settler, should, for a number of reasons, carry no conclusive effect:

l. Donor’s signature after having read document does not bar remedy. Proof that the donor read the document or had the opportunity to read the document before signing it does not preclude an order of reformation or the imposition of a constructive trust. The English Law Reform Committee, in recommending the adoption of a reformation doctrine for wills, stated well the rationale for this position:

We have also considered whether any special significance ought to be given to cases in which the will has been read over to the testator, perhaps with explanation, and expressly approved by him before execution. In our view it should not. Some testators are inattentive, some find it difficult to understand what their solicitors say and do not like to confess it, and some make little or no attempt to understand. As long as they are assured that the words used carry out their instructions, they are content. Others may follow every word with meticulous attention. It is impossible to generalise, and our view is that reading over is one of the many factors to which the court should pay attention, but that it should have no conclusive effect.

Law Reform Committee, Nineteenth Report: Interpretation of Wills, Cmnd. No. 5301, at 12 (1973).

[FN6]. The question and the testifying attorney’s response confirmed the settlor’s reliance on his counsel:

Q. This precise, articulate, strong-willed man could read and write English, and as you sit here today you have no reason to say that he didn’t understand what you were doing?

A. That’s not true. Sir, as I have testified over and over, Mr. Sonder told me what he wanted and he depended on me to put it in the correct document and phrase it correctly.

 

Habeeb v. Linder, — So.3d —-, 2011 WL 613392 (Fla. 3d DCA Feb 09, 2011)

UPDATE: This case was settled, prompting the 3d DCA to enter this order withdrawing its opinion. Trust and estates lawyer extraordinaire, Jeff Baskies, once again provides excellent commentary on this turn of events and what it all means for Florida homestead law.

Under Florida law a surviving spouse’s rights in the couple’s marital homestead residence are spelled out in Art. X, § 4(c) of the Florida Constitution, and F.S. 732.401. Spouses are free to contractually waive these rights, and often do for estate planning purposes (especially in second marriages where each spouse has children from a prior marriage). The specific statutory authority governing these types of estate planning marital agreements is found in F.S. 732.702. This statute is often the subject of litigation (and commentary on this blog, click here, here), and is at the heart of the linked-to opinion above.

The 3d DCA’s opinion in this case has caused quite a stir in estate planning/probate circles. (For an excellent discussion see Jeff Baskies’ commentary). Why? Because it’s a great example of how NOT to draft a valid marital agreement under F.S. 732.702, and yet the court upheld the contested homestead-waiver. What happened?

The 3d DCA was asked to decide if a store bought form deed signed by a husband and wife could qualify as a valid marital agreement under F.S. 732.702, resulting in a valid waiver of the husband’s homestead rights. There were two pivotal issues at play in this case:

[1] Fair Disclosure?

A homestead-waiver agreement executed after a couple has married is not valid unless each spouse provides the other with “fair disclosure” of his or her assets or “estate”. F.S. 732.702(2). There was no formal financial disclosure between the spouses in this case. At issue was whether “fair disclosure” could be inferred from the facts and circumstances of their long-term marriage. Both the trial court and the 3d DCA said YES based on the following record:

[1] The 1979 deed was signed by both spouses many years into a long-term marriage and at a time when both occupied the condominium in question. [2] The deed was prepared for them by a Florida attorney. [3] Each spouse signed the instrument before two subscribing witnesses and a notary public. [4] The spouses also later prepared last wills and testaments reflecting the intended disposition of their respective assets based on the assumption that the 1979 deed effectively relinquished Mitchell’s property rights, including homestead interests, in the condominium.

[5] A month after Virginia passed away in November 2008, Mitchell executed under oath a petition for administration of Virginia’s estate and a petition to determine the continued homestead status of the condominium property. These documents further illustrated Mitchell’s understanding that the 1979 deed had validly transferred all of his rights in the property to Virginia at that time, with the result that the devise of the property in her later will was also valid and effective.FN3

[6] FN3: Only when Mitchell passed away in January 2009 was it suggested that the 1979 deed failed to relinquish to Virginia, or waive, Mitchell’s homestead rights.

From this record, the trial court properly concluded that the spouses made “fair” disclosure to each other, and there is certainly no evidence to the contrary.

By the way, there’s all sorts of good law that says fair disclosure in the marital agreement context can be inferred from the facts and circumstances. See, e.g., Del Vecchio v. Del Vecchio, 143 So.2d 17 (Fla. 1962) (Basic issue as to validity of antenuptial agreement is concealment, not absence of disclosure by husband, and wife may not repudiate it if she is not prejudiced by lack of information.)

If you’re drafting a marital agreement you NEVER want to rely on facts and circumstances to uphold the validity of your client’s document; but if you’re a litigator trying to uphold an improperly drafted agreement in court, the facts and circumstances of the couple’s relationship just might win the day for you. It worked in this case.

[2] Legally Sufficient Waiver?

A homestead-waiver agreement is valid if it provides for a waiver of “all rights” or equivalent language. The form deed signed by the couple in this case way back in 1979 was described as follows by the 3d DCA:

The warranty deed, a “Ramco Form 01,” was a pre-printed form widely used by Florida practitioners in the days when “word processors” were human typists rather than compact machines.

Needless to say, the deed didn’t contain any explicit homestead waiver language, but it did contain sweeping, boilerplate transfer language you find in old forms (such as a conveyance of all “heriditaments”). At issue was whether this sweeping boilerplate language satisfied the statute’s waiver requirement. Again, both the trial court and the 3d DCA said YES. Here’s an excerpt of the 3d DCA’s analysis:

In this case . . . section 732.702 provides . . . specific guidance regarding the waiver of the particular constitutional rights involved, namely, the constitutional rights of one spouse in a marital homestead. The statute establishes, and the warranty deed satisfied, the requisite elements of a valid waiver as a matter of law.

The statute itself contemplates that a “written contract, agreement, or waiver” may be used to memorialize a relinquishment of a spouse’s homestead rights. These alternatives demonstrate that “waive” is not a talismanic word within the statute, so that a contract or agreement may accomplish the same result. Neither the statute nor any interpretation of the statute supports the appellant’s argument that Mitchell was required to execute a second “contract, agreement, or waiver” after (1) title had vested exclusively in Virginia’s name, (2) she “formed the intention that the property would be her domicile or permanent residence,” and (3) he survived her. To the contrary, the Florida Supreme Court has concluded that a spouse’s single agreement under section 732.701(1) “is the legal equivalent of predeceasing the decedent, for purposes of article X, section 4(c).” City National Bank of Florida v. Tescher, 578 So.2d 701, 702 (Fla.1991). In that case, as here, the surviving spouse had waived homestead previously and no minor children survived the decedent.

.  .  .

Article X, section 4(c) of the Florida Constitution expressly authorizes a husband and wife to alienate their homestead property “by mortgage, sale or gift,” and that is what both spouses did in 1979. In this case the term “heriditaments” in the 1979 warranty deed encompasses the homestead rights of each grantor as survivor. The term includes “anything capable of being inherited, whether it is corporeal, incorporeal, real, personal, or mixed.” 42 Fla. Jur.2d Property § 7 (2010).

The best way to make sense of this opinion is to read it from a litigator’s point of view, not as an estate planner:

For litigators, this case underscores a truism that’s repeated so often it’s become a cliche: trials turn on their facts, not abstract legal principles. The winning side in this case put on a compelling, fact-intensive case, that compensated for the obvious legal deficiencies created by the couples’ reliance on a store bought form document executed over 20 years ago.

For estate planners, the take-away from this case is that the family could have avoided the rancor, costs and delays inherent to any estate dispute pitting family members against each other with a minor investment in competent estate planning back in 1979, versus pouring huge sums of money into a trial and appellate proceeding in 2011. Whatever this litigation cost the family, I can guarantee you it’s several orders of magnitude greater than what husband and wife would have paid a qualified estate planner back in 1979 to properly document their intended homestead waiver.

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As I previously wrote here, irrevocable dynasty trusts are all the rage in estate planning circles, and for good reason. They’re good tax planning and offer excellent asset protection benefits. Although a rouge plaintiff’s lawyer is the boogeyman most people think about when they hear asset protection, the real threat to family wealth is divorce. The odds of your children or grandchildren getting targeted by some frivolous lawsuit are maybe 1 in a 1,000, the odds of them getting divorced: 50/50.

So how secure are assets held by irrevocable dynasty trusts in the event of a Florida divorce?

Most estate planners would answer that question by focusing on whether the trust can be pierced to pay post-divorce judgments for alimony or child support. In other words, ex-spouses would be viewed as creditors. From this perspective the answer is relatively clear: under F.S. § 736.0503(3) a claim against an irrevocable trust by a beneficiary’s child, spouse, or former spouse is permitted only as a last resort upon a showing that traditional methods of enforcing the claim are insufficient. The “last resort” requirement can be traced directly to Bacardi v. White, 463 So. 2d 218 (Fla. 1985), the 1985 Florida Supreme Court decision that has defined this area of the law in Florida ever since.

But what about equitable distribution?

Could a fully discretionary, spendthrift-protected irrevocable trust funded with non-marital assets by a beneficiary’s parent (or grandparent or great-grandparent) that is otherwise valid in all respects be counted as part of the beneficiary’s marital estate for equitable distribution purpose? Florida’s Trust Code doesn’t address this question, and as far as I can tell it’s never been dealt with directly by a Florida appellate court.

For lawyers (especially estate planners!), uncertainty is a bad thing. Which is why I found a recent New Hampshire case reported on in the Wills, Trusts & Estates Prof Blog so interesting. In this blog post Prof. Beyer discusses the outcome of the New Hampshire Supreme Court case In re Goodlander, 20 A.3d 199 (N.H. 2011). In that case the court considered whether a beneficiary’s interest in a discretionary irrevocable trust created and funded for her benefit by her father should be considered a marital asset subject to division. Both the trial court and the supreme court said NO. Why? Because the beneficiary didn’t have a property right in any future trust distributions, all she had was a “mere expectancy.” The New Hampshire Supreme Court based its holding largely on a provision of that state’s trust code, RSA 564-B:8-814(b), that statutorily excludes a beneficiary’s interest in a discretionary irrevocable trust from the definition of “property”:

. . . if a distribution to or for the benefit of a beneficiary is subject to the exercise of the trustee’s discretion, whether or not the terms of a trust include a standard to guide the trustee in making distribution decisions, then the beneficiary’s interest is neither a property interest nor an enforceable right, but a mere expectancy.

Based on this statute, the New Hampshire Supreme Court ruled as follows in In re Goodlander, 20 A.3d 199 (N.H. 2011):

Because the trustee of the EMT Trust has the sole discretion to distribute funds to the beneficiaries, including Tamposi, any interest Tamposi has in future distributions fits squarely within the definition provided by the UTC for a “mere expectancy.” RSA 564-B:8-814(b). That is, any distribution to or for the benefit of Tamposi “is subject to the exercise of the trustee’s discretion, whether or not the terms of a trust include a standard to guide the trustee in making distribution decisions.” Id. Accordingly, Tamposi’s interest in future distributions of the EMT Trust “is neither a property interest nor an enforceable right, but a mere expectancy.” Id.

POSTSCRIPT: The “aha!! insight” … “All-property” states (such as NH) vs. “Marital Property” states (such as FL) & why it matters in this case

This blog post generated a good amount of interest. One careful reader, Leonard J. Adler, a Florida-licensed attorney and Managing Director at Bessemer Trust in Palm Beach, suggested that the key to understanding the NH court’s ruling is to NOT focus on the “mere expectancy” clause in that state’s trust code, but to instead focus on the fact that NH law makes no distinction between marital and nonmarital assets in divorce proceedings.

“Property,” for purposes of equitable distribution under NH law (RSA 458:16-a), includes all property — regardless of how titled or when or how acquired (including gifts and inheritances). That is why the determination that the interest in the NH trust was a “mere expectancy” and thus not “property” was crucial in In re Goodlander, 20 A.3d 199 (N.H. 2011). The fact that assets are acquired by gift, devise or descent, is but 1 of 15 factors for a NH divorce court to consider under RSA 458:16-a when determining if a divorcing couple’s assets should be divided unequally, but all such assets are still subject to division. A Florida court would not have to make this determination because uner F.S. 61.075(6)(b)2 assets acquired by gift, devise, or descent (and assets acquired in exchange for such assets) are statutorily excluded from the definition of marital property, and thus not subject to division.

Mr. Adler was also kind enough to point me to a 2004 NH Bar Journal article entitled Division of the Pre-Marital Trust or Inheritance, which does a good job of explaining how assets inherited in trust are treated very differently in divorce proceedings litigated in “all-property” states like NH vs. “marital property” states like FL:

An outstanding yet difficult issue to be confronted under New Hampshire divorce law is how to apportion a multi-million dollar inheritance, trust or business that pre-exists a long-term marriage. . . .

In fashioning property settlements in divorce, states are divided into three main categories: [1] “community property” states, [2] “marital property” states [like FL] and [3] “all-property states.” New Hampshire is an “all-property” state that gives the court the authority to divide all property of the parties (however or whenever acquired) in an equitable manner. A court is required to view the parties’ property as a whole and then make an equitable distribution. Whether property is individually or jointly owned, it is still considered a marital asset.

Lauritsen v. Wallace, — So.3d —-, 2011 WL 1195873 (Fla. 5th DCA Apr 01, 2011)

The general rule is that your heirs are last in line when it’s time to distribute your estate. Before they get theirs, the costs of administering your estate (think PR fees, accounting and legal expenses), taxes, and creditor claims all have to be paid with assets of the estate. What’s left over goes to your heirs.

For example, if your estate consists of $100,000 and the costs of administering your estate, taxes, and creditor claims all add up to $50,000, your heirs only get $50,000. Things get tricky when estates are insolvent. Assume again your estate has a value of $100,000, but the debts of your estate amount to $120,000. In that case your heirs get nothing and the estate’s administration expenses, taxes and creditor claims are paid in the order of priority listed in F.S. 733.707.

Insolvent Estates: Case Study:

The linked-to case is an interesting example of the general principal that administrative expenses and creditor claims have priority over distributions to heirs. In this case the testator’s son signed a promissory note agreeing to repay funds loaned to him by his dad. This promise of funds has value and is obviously an asset of dad’s estate. Dad’s will forgave son’s debt. This is a common clause and usually isn’t a problem. Unfortunately, in this case dad’s estate was insolvent. The issue became whether the debt forgiveness clause in dad’s will was enforceable. Here’s how the PR teed up the issue for the probate court and how the court ruled:

The personal representative filed in the probate court a Motion to Determine Ownership of the Note and Status of Forgiveness under Decedent’s Will. The personal representative argued that the decedent’s one-half ownership of the note must be utilized to pay the estate’s debts, taxes, and expenses before the balance could be forgiven. The probate court ruled that the note was forgiven at the moment of the decedent’s death.

On appeal the 5th DCA reversed the probate court in a detailed opinion that does a great job of summarizing how Florida’s Probate Code deals with insolvent estates. If you’re working with an insolvent estate, you’ll want to read this opinion in its entirety. Here’s an excerpt:

Several sections of the probate code support the conclusion that a devise cannot be elevated over administrative expenses and the rights of creditors. Section 731.201(10), Florida Statutes (2007), provides that “[a] devise is subject to charges for debts, expenses, and taxes[.]” Section 733.805(1) provides that “[f]unds or property designated by the will shall be used to pay debts, family allowance, exempt property, elective share charges, expenses of administration, and devises to the extent the funds or property is sufficient.” If no provision is made or the designated fund or property is insufficient, the statute sets forth a priority scheme on how devises abate. § 733.805, Fla. Stat. (2007). Section 733.707(1) provides that “[t]he personal representative shall pay the expenses of the administration and obligations of the decedent’s estate in the following order . . . .” The statute then identifies the eight classes of expenses and obligations and the order in which each is paid. The ruling by the lower court elevates the gift of forgiveness of an obligation to a superior status over the rights of legitimate creditors of the decedent, contrary to the priorities established in the Probate Code.

* * *

Therefore, we hold that a decedent can release a debt owed to the decedent through a testamentary devise only to the extent that the decedent’s estate is solvent to pay all debts and administrative costs of the estate.

Lesson learned?

Times are tough. Insolvent estates are now part of the landscape. If you’re working with an insolvent estate, you need to make sure everything you do is guided by the payment priorities listed in F.S. 733.707 and the order of abatement listed in F.S. 733.805. If you’re advising the PR, when in doubt, don’t assume the risk of a wrong decision, do what the PR did in the linked-to case above: file a motion, serve it on all interested parties, and ask your probate judge for guidance.

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The statue at the heart of the Figel case is F.S. 518.11, Florida’s version of the Uniform Prudent Investor Act or “UPIA.” The UPIA’s primary purpose is to empower trustees to invest trust assets in accordance with modern portfolio theory.

If all trustees had to do was worry about maximizing investment returns, that would be hard enough. But we all know it’s a lot more complicated than that. Why? Because trustees also have simultaneous and equally important duties to make sure their trusts are generating enough cash to provide for their current beneficiaries’ immediate payment needs while also ensuring trust assets are properly preserved for remaindermen [click here for how savvy use of Florida’s Principal and Income Act can help trustees make this all work].

Recognizing that perfection is not the standard by which trustees are judged, all the law demands of them is “prudence” in how they go about balancing their complex, and sometimes conflicting, fiduciary duties. This is a test of conduct, NOT performance.

It’s not whether you win or lose, it’s how you play the game

Coming back to F.S. 518.11. Under this statute trustees aren’t expected to be investment geniuses, just prudent. In this context being “prudent” = exercising “reasonable business judgment regarding the anticipated effect on the investment portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action.” In other words, if the trustee exercises “reasonable business judgment” and takes all the steps a reasonable investor would take to properly manage his investment portfolio, it doesn’t matter if the trust’s stocks crater in value, he’s done his job and can’t be sued for damages.

Case Study

Figel v. Wells Fargo Bank, N.A., 2011 WL 860470 (S.D.Fla. Mar 09, 2011)

The linked-to case above tests this basic proposition. Here’s how the court summarized the beneficiary’s key claim:

Essentially, Plaintiffs claim that Wells Fargo could have earned a [$3-4 million] higher rate of return on the Figel Trust if it had invested the Figel Trust differently. Plaintiffs offer no other grounds for their claims. Importantly, Plaintiffs offer no evidence that Wells Fargo took any action in contravention of the terms of the Figel Trust.

If a trust beneficiary came to you with this kind of claim, you might be tempted to prove the trustee was a really lousy investor. That would be a mistake. In the trust context your focus needs to be on process, not performance. In this case the beneficiaries tried to win their case by proving that the trustee’s ineptitude as an investor cost them $3-4 million. Not surprisingly, this argument didn’t get them very far. The court concluded that even if they were right on the facts, as a matter of law their lawsuit failed. Here’s why:

The Florida Probate Code provides that a “trustee shall invest trust property in accordance with chapter 518.” Fla. Stat. § 736.0901. Section 518.11 provides that a trustee has “a duty to invest and manage assets as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust.” Fla. Stat. § 518.11(1)(a). “No specific investment or course of action is, taken alone, prudent or imprudent .” Id. § 518.11(1)(b). Rather, “investment decisions and actions are to be judged in terms of the fiduciary’s reasonable business judgment regarding the anticipated effect on the investment portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action.” Id. This is “a test of conduct and not of resulting performance.” Id.

…

No relevant disputed issues of fact exist in this case. Rather, the parties dispute the legal significance of the facts. In their supplemental brief, Plaintiffs submit the following:

Had Wells Fargo maintained a 70/30 split in asset allocation, with 70 percent in conservative investments, and 30 percent in equities, the Trust would have a market value of between approximately $3-4 million more than the value it currently has, and would have distributed approximately the same amount of money to Terry Figel.

DE 129 at 9.FN2 Accepting this fact as true, however, does not evidence a breach of trust. The record is replete with evidence that shows Wells Fargo invested the corpus of the Figel Trust in equities and other securities (i.e., in a manner consistent with the terms set forth in the Figel Trust and pursuant to Wells Fargo’s buy list). The record is also replete with evidence that Wells Fargo sent Terry Figel quarterly account statements that revealed the state of the Figel Trust. Indeed, the undisputed facts show that Wells Fargo made the investment decisions that it did in an attempt to provide both income for Terry and growth, both to replace principal distributions and to provide growth to benefit Spencer as the remainderman. Stated differently, Wells Fargo’s investment decisions were made largely to account for Terry’s constant requests for corpus distribution (which were contemplated and authorized by the Figel Trust instrument). Thus, based on the record before the Court, no reasonable fact-finder could find that Wells Fargo failed to exercise “reasonable business judgment regarding the anticipated effect on the investment portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action.”

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Most civil litigators (and judges) spend most of their professional lives involved in cases based on in personam jurisdiction. Probate is different. In probate it’s all about in rem jurisdiction. This fundamental distinction is often glossed over by practitioners and trial judges alike, leading to all sorts of unfortunate rulings. The linked-to opinion is an example of this fact of life.

The jurisdictional distinctions between probate and most other civil litigation come to a head whenever there’s a disagreement involving a probate court’s power over [a] someone’s personal assets (vs. their share of the estate) or [b] over foreigners/non-residents.

Case Study

Henderson v. Elias, — So.3d —-, 2011 WL 710190 (Fla. 4th DCA Mar 02, 2011)

In the linked-to opinion above the question was whether a Florida probate judge had jurisdictional authority to enter a freeze order over the assets of a NY LLC based solely on the allegation that the NY LLC was owned 50% by a FL decedent. The answer, by the way, is NO.

Here’s the jurisdictional allegation made by the estate in support of its freeze-order petition. Note the emphasis on the court’s inherent authority over assets of the estate, which is an in rem argument:

The amended petition is devoid of allegations that Stardale [the NY LLC] committed any act or omission within or directed towards Florida. The sole jurisdictional allegations found in the petition state that Stardale “is a foreign limited liability corporation owned 50% percent by the [e]state and 50% by Henderson” and that the court “has jurisdiction over the parties … pursuant to its inherent jurisdiction to monitor the administration of the estate.”

The 4th DCA didn’t bite on the in rem reference, instead framing its analysis on Florida’s two-part personal jurisdiction test. This is an important point: framing the issue in terms of personal jurisdiction pre-determined the outcome of this appeal. Here’s why:

We hold that these allegations in the amended petition are insufficient to state a basis for personal jurisdiction over Stardale. The estate made no allegations of conduct by Stardale which would subject the corporation to the jurisdiction of a Florida court under section 48.193(1). The fact that the corporation’s two shareholders would be subject to personal jurisdiction in Florida in their individual capacities does not create personal jurisdiction over the corporation. Cf. Beasley v. Diamond R. Fertilizer, Co., 710 So.2d 1025, 1026 (Fla. 5th DCA 1998) (holding that the conduct of business in Florida by a corporation would not subject its shareholders to personal jurisdiction in Florida). The petition contains no allegations that Stardale is Henderson’s alter ego. See, e.g., Nichols v. Paulucci, 652 So.2d 389, 393 (Fla. 5th DCA 1995). Likewise, no allegations of a principal-agent relationship were found in the petition. See, e.g., TRW Vehicle Safety Sys. Inc. v. Santiso, 980 So.2d 1149, 1152-53 (Fla. 4th DCA 2008). As the estate failed to allege facts bringing Stardale within the reach of the long-arm statute, we need not address whether the allegations, if proven, would demonstrate sufficient minimum contacts with Florida.

Because the allegations in the petition are insufficient, the trial court should have dismissed the amended petition as to Stardale without prejudice. See World Class Yachts, Inc. v. Murphy, 731 So.2d 798, 800 (Fla. 4th DCA 1999) (holding that dismissal of a complaint for insufficient jurisdictional allegations should be without prejudice to amend). As such, we need not decide whether the evidence adduced at the hearing was sufficient to establish jurisdiction. See Hall, 980 So.2d at 1291. We reverse and remand for further proceedings.

In re Miller, — B.R. —-, 2010 WL 5184798 (Bkrtcy.S.D.Fla.2010)

Assume Husband “A” and “B” are both recent widowers. Husband “A” inherited $100,000 from his wife. Husband “B” was completely cut out of his wife’s will, but after claiming an elective share of his wife’s estate (30% of the elective estate), he too received $100,000 from his wife’s estate.

Now assume Husband “A” and “B” both declare bankruptcy shortly after their respective wives pass away. Who’s financially better off?

According to the linked-to bankruptcy court opinion, Husband B is clearly better off. Why? Because it’s legal for Husband B to intentionally delay his elective-share election until it’s too late for his creditors to go after these assets, while Husband A’s inheritance is automatically exposed to his creditor claims. Is this good public policy? I have my doubts. But apparently it’s the law. Here’s how the bankruptcy court explained its ruling.

[1] Why Husband A’s inheritance is automatically exposed to creditor claims in bankruptcy:

With limited exceptions, § 541 of the Bankruptcy Code provides that property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Pursuant to § 541(a)(5), this includes property that the debtor “acquires or becomes entitled to acquire within 180 days” of the petition date “by bequest, devise, or inheritance.” 11 U.S.C. § 541(a)(5).

[2] Why Husband B may intentionally time his elective-share election to cut out his creditors:

Under Florida law, the right of election is a personal right of the surviving spouse. See Harmon v. Williams, 615 So.2d 681, 682 (Fla.1993). As such, the “right of election, itself, is not a property interest of the debtor, and thus, not property of the estate.” In re Brand, 251 B.R. 912, 916 (Bankr.S.D.Fla.2000). Moreover, although an elective share interest “would constitute property of the estate[,]” “an elective share interest does not exist until the statutory right of election is properly exercised.” Id. at 915-16; see also In re McCourt, 12 B.R. 587, 589 (Bankr.S.D.N.Y.1981) (“Until the debtor exercises his personal statutory right to the election, no rights in his deceased wife’s property are ascribable to the debtor.”). ……………

Although the Trustee asserts that the Debtor intentionally delayed filing the Election to avoid the 180 day period under § 541(a)(5), a review of the record indicates that the Trustee never filed a motion seeking to require the Debtor to file the Election. Even if the Trustee had filed such a motion, the Trustee cites no authority indicating that the Court has the power to require a debtor to exercise a right of election. Relevant case law indicates that the Court has no such power. See McCourt, 12 B.R. at 589 (denying trustee’s motion to force the debtor to exercise the right of election).

Beane v. Suntrust Banks, Inc., — So.3d —-, 2010 WL 4483472 (Fla. 4th DCA Nov 10, 2010)

Estate planners and probate lawyers come across in-trust-for or “ITF” bank accounts (also known as Totten trusts) all the time. But if you actually try to dig into the Florida law defining these accounts, don’t expect to find much. Which is why this case is interesting: it’s all about what Totten trusts are, and just as importantly, what they’re NOT.

SunTrust was sued for having transferred $150,000 out of a Totten trust account based on the following power of attorney:

In 2002, the decedent, Lillian Wilde, executed a durable power of attorney naming her niece, Deborah Lorenzo, as her attorney-in-fact. The durable power of attorney stated:

I, LILLIAN G. WILDE … do hereby constitute and appoint my niece, DEBORAH LORENZO, my true and lawful attorney-in-fact for me in my name, place and stead and in any way which I myself could do if I were personally present with respect to the following matters:

…

4. To demand, sue for, collect, recover and receive all goods, claims, debts, monies, interest and demands whatsoever now due, or that may hereafter be due, or belong to me….

The next day, Lorenzo, utilizing the power of attorney, transferred $150,000 from Wilde’s Totten trust account at SunTrust Bank, which named Frances Wallin as the beneficiary, to another account in the name of Orson Lorenzo.

Whether SunTrust was on the hook – or not – for the $150,000 transfer depended in large part on whether a Totten trust account was the type of estate-planning instrument covered by F.S. 709.08(7)(b)5. Here’s how the issue was framed by the court:

[T]he appellant relied on section 709.08(7)(b) 5., Florida Statutes (2002), which states that an attorney-in-fact may not “[c]reate, amend, modify, or revoke any document or other disposition effective at the principal’s death or transfer assets to an existing trust created by the principal unless expressly authorized by the power of attorney.” Appellant claimed that a Totten trust is a “disposition effective at the principal’s death.”

The 4th DCA held that a Totten trust account is NOT a “disposition effective at the principal’s death.” Here’s why:

A Totten trust has been defined as “a tentative trust merely, revocable at will, until the depositor dies.” Seymour v. Seymour, 85 So.2d 726, 727 (Fla.1956) (quoting In Re Totten, 179 N.Y. 112, 71 N.E. 748, 752 (1904)). The act of “[p]lacing a bank account in the name of one individual ‘in trust for’ another individual creates a tentative or Totten trust.” Serpa v. N. Ridge Bank, 547 So.2d 199, 200 (Fla. 4th DCA 1989). A Totten trust is different from other trusts in that it is not created with any of the formalities of a trust or will. Further, it is specifically excluded from the provisions and restrictions that apply to revocable trusts under the Florida Trust Code. § 736.0102, Fla. Stat. (2007).

………………

Since an owner of a Totten trust can withdraw from the account without constraint, the prospective Totten trust beneficiary cannot object to the depositor’s withdrawal from the Totten trust. As this court explained:

Like a depositor’s withdrawal of funds from a Totten trust bank account, a settlor/trustee’s withdrawal of funds from a revocable trust is tantamount to a revocation or termination of the trust with respect to the funds withdrawn. It is in this context that [In re Malasky, 290 A.D.2d 631, 736 N.Y.S.2d 151 (N.Y.App.Div.2002)] held that a prospective trust beneficiary has no standing to object to such a disposition of the property; the settlor retained the right to remove the property from the trust for any purpose and for any reason.

Siegel v. Novak, 920 So.2d 89, 95 (Fla. 4th DCA 2006). Because the depositor can change the beneficiary without constraint, and the prospective beneficiary has no standing to object to such changes, we therefore find that merely withdrawing money from the Totten trust does not, as a matter of law, change the “disposition effective at the principal’s death.” The depositor, or in this case the attorney-in-fact, merely changes the amounts within the Totten trust, which is a right retained by the depositor at all times, or by the attorney-in-fact while the durable power of attorney is in force. SunTrust acted in reliance of the power of attorney, so it “must be held harmless by the principal from any loss suffered or liability incurred as a result of actions taken prior to receipt of written notice [of revocation.]” § 709.08(4)(g), Fla. Stat. (2002).

O’Brien v. McMahon, — So.3d —-, 2010 WL 3909644 (Fla. 1st DCA Oct 07, 2010)

In 1990 Calvin Todd purchased a life insurance policy from the Prudential Insurance Company and named his niece, Ms. O’Brien, and his daughter, Madison, as 50/50 beneficiaries.

In 1999 Mr. Todd signed a new beneficiary designation form, removing his niece and adding his newly adopted daughter, Heather, as a 1/2 beneficiary. When Mr. Todd died in 2007 only his two daughters were beneficiaries. Ms. O’Brien sued, claiming she was still a 1/2 beneficiary of her uncle’s life insurance policy because the change-of-beneficiary form he filed in 1999 failed to comply with Prudential’s contractual requirements.

Litigator’s Toolbox:

From a litigator’s point of view, there are two key issues addressed by the 1st DCA in this case that should be helpful for future litigants:

  1. Who has standing to litigate these claims?
  2. Is this a contract dispute or an inter vivos gift lawsuit?

[1] Who has standing to litigate these claims?

The first issue the court addresses is standing: did Ms. O’Brien have the right to file this lawsuit? She’s claiming her uncle didn’t comply with Prudential’s contractual requirements for changing beneficiaries, making his 1999 change-of-beneficiary form invalid. But isn’t that a claim only Prudential could assert? The 1st DCA seems to imply as much, but lets the issue go because it doesn’t change the outcome (and apparently none of the parties raised this objection):

Ms. O’Brien grounds her entire position on Prudential’s putative rights under the contract, rights which as to her are jus tertii. She asserts no rights that Prudential itself could not have asserted (if it had been so inclined) when she argues “that a beneficiary under a life insurance policy may be changed only by strict compliance with the conditions set forth in the policy.” . . . Yet Prudential does not make this argument or in any other way align itself with Ms. O’Brien’s efforts to claim the policy proceeds (or a portion thereof) for herself. .  .  .  Pretermitting the question whether Ms. O’Brien should be heard to urge the rights of a third party who has elected to stand mute, we turn to the pertinent policy language.

Under traditional jus tertii jurisprudence, “In the ordinary course, a litigant must assert his or her own legal rights and interests, and cannot rest a claim to relief on the legal rights or interests of third parties.” Powers v. Ohio, 499 U.S. 400, 410, 111 S.Ct. 1364, 113 L.Ed.2d 411 (1991) (emphasis added). The 1st DCA seems to be hinting that if someone had raised the standing objection, they probably would have ruled Ms. O’Brien lacked standing and killed the lawsuit early.

[2] Is this a contract dispute or an inter vivos gift lawsuit?

How you frame a case will determine in large part what law governs your lawsuit. Sometimes this matters, sometimes it doesn’t. For example, if Ms. O’Brien had framed her case as being about some sort of explicit or implied agreement by her uncle to make an inter vivos gift to her, she could have tapped into the body of law governing challenges to inter vivos gifts [click here, here]. She didn’t do that, as noted by the 1st DCA:

Ms. O’Brien makes no claim here or below that her uncle was under any legal obligation to make or keep her as a beneficiary under the policy. See generally Palm Lake Partners II, LLC v. C & C Powerline, Inc., 38 So.3d 844, 849 (Fla. 1st DCA 2010) (“A ‘promisor and a promisee can by agreement create a duty to a beneficiary which cannot be varied without his consent. But in the absence of such an agreement the parties retain control over the contractual relation they have created.’ ”) (quoting Restatement (Second) of Contracts 311 cmt. f. (1981)).

Instead Ms. O’Brien framed her case as a contract dispute: did her uncle follow Prudential’s contractual requirements for filing a change of beneficiary form? The important take-away from this decision is that this type of lawsuit will likely be governed by the rich body of law dealing with contract disputes, as specifically applied to insurance contracts.

In general, the right of an insured owner to change the beneficiaries of a life insurance policy “depends on the terms of contract between the insurer and insured as expressed in the insurance policy.” Martinez v. Saez, 650 So.2d 668, 669 (Fla. 3d DCA 1995) (quoting Shuster v. N.Y. Life Ins. Co., 351 So.2d 62, 64 (Fla. 3d DCA 1977)).

Listen to this post

This is the second time the 3d DCA has weighed in on this case (I reported on the first appeal here).

In July of 1996 Mr. Aronson deeded his condo (located on Key Biscayne, FL) to his revocable trust.  Upon Mr. Aronson’s death, his revocable trust created a life-time irrevocable marital trust for his spouse, remainder to his sons from a prior marriage. A few months later, in December of 1996, Mr. Aronson deeded this same condo directly to his spouse. This was a lawsuit waiting to happen.

Aronson v. Aronson, — So.3d —-, 2010 WL 4226204 (Fla. 3d DCA Oct 27, 2010)

Back in 2006, Mr. Aronson’s sons scored a victory when the 3d DCA ruled the deed their dad originally executed transferring his condo to his trust controlled, thus ensuring they would receive the condo upon surviving spouse’s death. Surviving spouse promptly fired back, filing suit to enforce all of her rights to the condo under the terms of the marital trust. This time around surviving spouse came out on top.

In the linked-to opinion above spouse sued for reimbursement of all of the condo-related expenses she had paid with her own funds and also for payment of all of her mandatory principal distribution rights under the marital trust. Because the trust owned only one asset (the condo), there’s only two ways spouse could be made whole:

  1. sell the condo and pay her from the sales proceeds, or
  2. transfer a % the condo’s ownership interest to her. The sons wanted to go with option 1 (which would result in wife getting booted out of her home), spouse wanted to go with option 2. The sons won at trial, but lost on appeal.

In an opinion that should be of interest to all estate planners, the 3d DCA ruled homestead property held in a marital trust does NOT lose its creditor protection, even if the creditor you’re protecting against is the spouse:

[T]he trial court reasoned that because any sale would be for the purpose of paying a debt owed to the widow, Article X, Section 4 of the Florida Constitution would not bar the sale. Section 4(b) of Article X specifically states that the exemption from forced sale inures to a decedent’s surviving spouse. There are only three recognized exceptions to this exemption, none of which apply here. See In re Adell, 321 B.R. 562, 571-72 (Bankr.M.D.Fla.2005). Accordingly, since the trial court erred in denying declaratory judgment on the homestead protection, we reverse on this point.

This case is noteworthy because it confirms once again that homestead property held in trust does NOT lose its creditor protection. As I previously explained here, the reason why opinions like this one are especially interesting to estate planners is because they chip away at the precedential value of In re Bosonetto, 271 B.R. 403 (Bankr.M.D.Fla.2001), a much-criticized Middle District Bankruptcy Court opinion ruling that homestead property held in trust lost its creditor protection.