United States v. Guyton, Jr., 2010 WL 1172428 (11th Cir. March 26, 2010)

In this case a father sold his McAlpin, Florida poultry farm in January of 2000 and died six months later. Before his death dad deposited the sales proceeds in a joint account held with his son “Blake.” These joint account funds went directly to Blake after dad’s death. In other words, none of this cash ever became a part of dad’s probate estate. After dad’s death another son, “Guyton”, was appointed personal representative or PR of dad’s probate estate.

As dad’s PR, Guyton was responsible for reporting the farm sale on dad’s “final” 1040 income tax return and paying the income tax triggered by that sale. Along with this responsibility comes personal liability: as dad’s PR, Guyton was personally liable for dad’s unpaid taxes. This is all text book tax law, which I’ve written about here from a risk-management viewpoint and is also summarized nicely in Beneficiary and Fiduciary Liability for Income, Gift and Estate Taxes by Lakewood Ranch, FL estate planning attorney Marc J. Soss.

So what went wrong?

Brother Guyton, who appeared before the court on a pro se basis (in other words, without a lawyer), just could not understand why he was responsible for paying taxes on non-probate funds that went directly to his brother Blake. Unfortunately for Guyton, the IRS didn’t buy his “it’s just not fair” argument. By the time this case got to the 11th Circuit, the unpaid taxes, penalties and interests Guyton was fighting totaled a little over $50,000.

Here’s how the 11th Circuit summarized Guyton’s tax argument:

Guyton argues that, because Guyton, Sr. deposited the proceeds from the sale of his farm into a joint bank account prior to his death, the beneficiary of that bank account, Blake Guyton, is liable for the tax on those proceeds as “income with respect to a decedent,” under 26 U.S.C. § 691.

Income in respect of a decedent (IRD) is the name given to all types of taxable income earned, but not received by the decedent by the time of his or her death. If the farm-sale proceeds were IRD, then Blake would be on the hook for these taxes. If the farm-sale proceeds were NOT IRD, then Guyton is on the hook for paying these taxes . . . irrespective of the fact that this cash never flowed through dad’s probate estate. The 11th Circuit ruled the farm-sale proceeds were NOT IRD:

When a taxpayer dies during the tax year, his personal representative must file a Form 1040 for the tax year in which the taxpayer died. See 26 U.S.C. § 6012(b)(1). That “final” 1040 will contain all gross income realized by the decedent, but only for the period in which the decedent was alive: the tax year effectively ends on the date of the taxpayer’s death. 26 U.S.C. §§ 441(b)(3), 443(a)(2); see also Treas. Reg. § 1.443-1(a)(2) (generally, “the return of a decedent is a return for the short period beginning with the first day of his last taxable year and ending with the date of his death”). Thus, any income realized by the taxpayer after the date of death is “income in respect to a decedent.” See 26 U.S.C. § 691(a), (b); I.R.S. Pub. 559 at 9, 15-16. Accordingly, § 691 is inapplicable for income realized prior to the decedent’s death because such income is properly reported on the decedent’s final Form 1040. 26 U.S.C. § 691(a), (b); I.R.S. Pub. 559 at 9; Treas. Reg. § § 1.691(a)-1(a), (b) (defining “income in respect to a decedent” as income “not properly includible in respect of the taxable period in which falls the date of his death”) (emphasis added).

Because Guyton, Sr., realized a gain from the sale of his farm prior to his death [and actually received the sales proceeds prior to his death], .  .  .  his estate must pay the tax. Blohm v. C.I.R., 994 F.2d 1542, 1549 (11th Cir.1993). Depositing the proceeds into a joint bank account did not relieve or transfer his obligation to pay taxes on that gain. Id. Thus, summary judgment was proper on this issue and we affirm.

Lesson learned?

Although unstated in the 11th Circuit’s opinion, my guess is that Guyton got himself into trouble by distributing most of dad’s estate assets to himself and his siblings prior to being absolutely sure all of the estate’s tax debts were paid up. As I explained here, there’s a lot you can do to limit a PR’s personal tax-exposure risk. But the number one most important lesson all PR’s need to know is this: never ever distribute estate assets to the heirs until you’re absolutely sure you’ve paid all of the decedent’s taxes. Forget that lesson and you’ll find yourself in the same boat as the poor PR in this case.

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According to newspaper accounts this will contest revolved around allegations of undue influence and related attorney ethics violations. The decedent’s attorney wrote himself and his paralegal into a client’s will for what ultimately morphed into a$7.2 million bequest between the two of them, which is a big “no-no” under Fla. Bar Rule 4-1.8(c). That ethics violation played a central role in the outcome of this case. Which shouldn’t be surprising. For a comprehensive list of cases across the country dealing with the same ethics rule, see ACTEC’s Commentary on MRPC 1.8.

Case Study

Carey v. Rocke, 18 So.3d 1266 (Fla. 2d DCA October 23, 2009)

Unfortunately, the 2d DCA’s opinion linked-to above provides zero insight into this extraordinary case, simply affirming “without discussion” the trial-court’s first order and sending it back to the trial-court judge to address one open item. And that’s where for all intents and purposes the public side of this story would have ended but for a lucky break. I had the good fortune of running into Fort Lauderdale probate litigator Lawrence Livoti, who was tangentially involved in the case, and was kind enough to provided me with copies of the trial-court orders [click here, here]. Both orders were authored by Pinellas Circuit Judge Lauren Laughlin, and are discussed below. In terms of work product, these orders rank at the top as the most thoughtful and scholarly probate-court orders I’ve ever come across in my career. They do a fantastic job of dissecting the intersection of Florida law and professional ethics in a will contest involving a possible Rule 4-1.8(c) violation, and should be required reading for anyone involved in a similar case.

First Order: Did ethics violation = undue influence? YES

You can’t get sued because you violate an ethics rule, but it’s powerful evidence against you. That is the crux of Judge Laughlin’s analysis in her first order. Here’s an excerpt:

The issue of whether an attorney may draft a will in which he is named as a beneficiary is not a new or novel question. Under Roman law, the scrivener of a will could not inherit under it. See Dig. 48.15 (supplement to the lex cornelia ordered in edict by Emperor Claudius). Although Florida law does not necessarily prohibit such a practice, an attorney naming themselves a beneficiary of a client’s will opens himself/herself up to a charge of undue influence because of the peculiarly confidential relationship between an attorney and client. “The greatest trust between man and man is the trust of giving counsel”. SIR FRANCIS BACON, Of Counsel, in Essays, Civil and Moral Ch. XX (Charles W. Eliot, ed. 1909-1914), at p. 181 (1846). “The duty to deal fairly, honestly, and with undivided loyalty superimposes onto the attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest over the lawyer’s.” In re Cooperman, 633 N.E. 2d 1069 (N.Y. 1994). Indeed, “the lawyer may not place himself in a position where a conflicting interest may, even inadvertently affect, or give the appearance of affecting, the obligations of the professional relationship.” In re Kelly, 244 N.B. 2d 456. 460 (N.Y. 1968).

The nature of the attorney-client relationship in matters testamentary is a particularly circumspect matter for the courts. The decisions that go into the drafting of a testamentary instrument are inherently private. Because the testator will not be available to correct any errors that the attorney may have made when the will is offered for probate, a client is especially dependent upon an attorney’s advice and professional skill when they consult an attorney to have a will drawn. A client’s dependence upon, and trust in, an attorney’s skills, disinterested advice, and ethical conduct exceeds the trust and confidence found in most fiduciary relationships. Seldom is the client’s dependence upon and trust in his attorney greater than when, contemplating his own mortality, he seeks the attorney’s advice, guidance and drafting skill in the preparation of a will to dispose of his estate after death. These consultations are among the most private to take place between an attorney and his client. “The client is dealing with his innermost thoughts and feelings, which he may not wish to share with his spouse, children and other next of kin.” Kirschbaum v. Dillon, 567N.E. 2d 1291, 1296 (Ohio 1990).

The Florida Bar has adopted ethical standards to provide professional guidelines for lawyers who find themselves in the situation of a client wishing to leave them a bequest.

Gifts to Lawyer or Lawyer’s Family. A lawyer shall not solicit any substantial gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client.

R. Regulating Fla. Bar4-1.8(c)

The Comment to Rule 4-1.8(c) . . . provided a suggested procedure which might be curative of the inherent conflict of interest of an attorney/beneficiary.

If a client offers the lawyer a more substantial gift, subdivision (c) does not prohibit the lawyer from accepting it, although such a gift may be voidable by the client under the doctrine of undue influence, which treats client gifts as presumptively fraudulent. If effectuation of a substantial gift requires preparing a legal instrument such as a will or conveyance, however, the client should have the detached advice that another lawyer can provide and the lawyer should advise the client to seek advice of independent counsel.

R. Regulating Fla. Bar 4-1.8, Comment
“Gifts to Lawyers.”

The court recognizes that a violation of a rule of professional conduct does not constitute per se proof of undue influence. The rule and its comment should be instructive to any lawyer on how to properly effectuate the testamentary wish of a client who wishes to make a gift to their lawyer without encumbering his client’s estate with the time and expense of a will contest. Sadly, these suggestions were not followed in this case.

*     *     *     *     *

The respondent has argued that a violation of the Rules of Professional Conduct does not provide a basis for a finding of undue influence in this case. This court agrees. In Florida, a violation of the Rules does not directly prove undue influence. The attorney-client relationship simply establishes one element of undue influence. The Rules establish a standard of conduct which, if followed, might avoid allegations of undue influence. To ignore that established standard of care when, in fact, the Rules are common knowledge within the profession, and one has been advised of the ethical problems, demonstrates a consciousness of the conflict of interest. The behavior demonstrated by the alleged undue influencers, in the face of knowledge of the curative steps which could have been taken to insure a valid bequest, was no more than a halfhearted attempt to comply with the ethical standard expected of the legal profession. This bears on the credibility of the testimony and the knowing, planned and measured conduct of the two beneficiaries in question: Jack Carey and his legal, assistant, Gloria DuBois.

It is difficult to completely separate the allegation of undue influence from the disciplinary rule because of the inherently confidential nature of the attorney-client relationship, which is an element of undue influence. Additionally, the attorney whose bequests are at issue in this case was himself sixty-eight years old and retired at the time of the 1994 will. This court must acknowledge that Mr. Carey has had an exemplary career in the legal profession. He enjoys a reputation as an honest professional and a civic-minded citizen of great integrity. For this reason, deciding the facts and issues in this case has been especially painful and troubling. The court cannot help but speculate on whether the lawyer made a cost/benefit analysis, weighing the risks of being charged with a disciplinary infraction (having no intention of continuing to practice law) against the economic benefits to be derived from the conduct. 

Second Order: Does the doctrine of “dependent relative revocation” always apply? NO

On remand the 2d DCA asked Judge Laughlin to enter a second order explaining why her original ruling resulted in the $7.2 million residuary value of this estate passing by intestacy rather than pursuant to the residuary clause of one of the decedent’s multiple prior wills. Here again Judge Laughlin does a masterful job of deconstructing Florida law, this time focusing on the “dependent relative revocation” doctrine and explaining why it did NOT apply in this case. The key point here is that this doctrine should only apply if the decedent’s prior will was NOT materially different from the will that’s being set aside. If that’s not the case (and for most serial testators it often isn’t), then the doctrine doesn’t apply. Here’s how Judge Laughlin summarized the law on this point:

The doctrine of dependent relative revocation (DRR) is essentially based upon a fiction: ” … where a testator revokes a valid will, and the new will is found to be invalid, the prior will may be re-established on the ground that the revocation was dependent on the validity of the new will, and the testator would have preferred the earlier will to intestacy.” Denson v. Fayson, 525 So. 2d 432 (Fla. 3d DCA 1988). It is not a rule of law, but rather, a rule of presumed intention. That presumption is rebuttable and can be overcome if contrary evidence concerning the testator’s intent is admitted. In re Lubbe’s Estate, 142 So. 2d 130, 135 (Fla. 2d DCA 1962). Application of DRR is dependent upon a showing that the testator only conditionally revoked the old will believing the new will would be effective. The proper application of the doctrine depends upon a sufficient showing that the provisions of the invalid will are not materially different from the prior will. If they are materially different, the doctrine is not applicable and the presumption is rebutted. See id.

The doctrine of DRR is more understandable when it is referred to by another name, such as ineffective revocation, the doctrine of retroactive revival, or revocation under mistake. See e.g., RESTATEMENT (THIRD) OF PROPERTY 4.3 cmt. a (1999) (ineffective revocation). See also Frank L. Schiavo, Dependent Relative Revocation Has Gone Astray: It Should Return to Its Roots, 13 WIDENER L.Rev. 73, 96 (2006) (doctrine of retroactive revival); Joseph Warren, Dependent Relative Revocation, 33 HARV. L. REV. 337,337 (1920). Historically the doctrine has dealt with cases of mistake: where there has been a revocation by physical act under a mistaken belief of fact or law or invalidity because of a defect in execution. Because of “mistake,” all of the early cases go to a total, rather than partial, revocation of the subsequent will and reinstatement of the prior will. Onions v. Tyrer, 23 Eng. Rep. 1085 (Ch.); Hairston v. Hairston, 30 Miss. 276 (1855); Stewart v. Johnson, 194 So. 869,870 (Fla. 1940); In re Estate of Johnson, 359 So. 2d. 425 (Fla. 1978); In re Estate of Pratt, 88 So. 2d 499 (Fla. 1956); In re Estate of Lubbe, 142 So. 2d 130 (Fla. 2d DCA 1962); First Union Nan Bank v. Estate of Mizell, 807 2d 78 (Fla. 5th DCA 2001).

For additional commentary on this case, you’ll want to read The South Indian Monkey Trap, by Foley & Lardner partner John T. Brooks. The drafting attorney at the center of this case was eventually disbarred. See The Florida Bar v. Carey, 46 So.3d 48 (Fla. 2010).

If you’re an estate planner, it’s not unusual to get asked if the fees being proposed by trust company "X" are reasonable. We usually have a sense of what the going rate is in our market, but it’s mostly a "guesstimate." So I was glad to see an excellent piece of market research published on The Trust Advisor Blog. In a blog post entitled Who’s Charging What for Trust Services? trust advisor Jerry Cooper provides a comprehensive chart of the fee estimates he obtained from numerous well-established trust companies and an easy-to-understand explanation of how the various fees stack up. Good stuff to keep handy for the next time you’re asked about corporate trustee fees.

In the 1980’s Florida philanthropist Edwin H. Bower made large charitable donations to the Foundation for the Developmentally Disabled, Inc. (the “Foundation”) through his charitable foundation, The Bower Foundation. Mr. Bower intended that his donations be used to acquire land and construct a facility to benefit pre-school-aged children with disabilities who participated in a program referred to as Step by Step. However, he never created a written trust or gift agreement when he made those donations. Mr. Bower died in 2003.

Foundation For Developmentally Disabled, Inc. v. Step By Step Early Childhood Educ. And Therapy Center, Inc., — So.3d —-, 2010 WL 1135901 (Fla. 2d DCA Mar 26, 2010)

A dispute arose over whether Step by Step was entitled to rent-free use of the facility specifically constructed for it with Mr. Bower’s donations. In the absence of a gift or trust agreement supporting Step by Step’s claim to rent-free use of its facility, The Bower Foundation argued the existence of an implied trust under all three of the following theories:

  1. Implied charitable trust
  2. Resulting trust
  3. Constructive trust

The 2d DCA shot down all three arguments. If a disgruntled donor asks you to consider suing a charity in the absence of a a written trust or gift agreement, you’ll want to consider these arguments and understand why they failed in this case. Here’s how the 2d DCA explained Florida law on all three:

[1] No implied charitable trust:

The Fifth District addresses a similar situation in Persan v. Life Concepts, Inc., 738 So.2d 1008, 1009 (Fla. 5th DCA 1999),[FN3] where a group of about twenty donors gave land to the Central Florida Sheltered Workshop, Inc. (“CFSW”), so that living facilities could be constructed for disadvantaged adults. CFSW also solicited the community for $200,000 to pay for the construction of the homes. Id. After the homes were operated for approximately fifteen years, a decision was made to sell the property. Id. As in the present case, there was evidence presented at trial that the donors gave the land with the intent that the land be used for the specific purpose of providing living facilities for disadvantaged adults, but a written trust was never created. Id. at 1010. In Persan, the court noted that there was no evidence of an intent to create any type of trust and that the evidence established only an intent to donate land and money for the homes to be constructed. Id. In holding that a charitable trust was not created, the court stated as follows:

Making a gift to a charity for a specific project or purpose does not create a charitable trust. For this court to suggest that it does would create havoc for charitable institutions. A charity has to be able to know when a donation is a gift and when it is merely an offer to fund a trust for which the charity is taking on fiduciary responsibilities. The creation of such a trust must be express.

Id.

[FN3.] In its amicus brief, the [Florida Attorney General] contends that Persan v. Life Concepts, Inc., 738 So.2d 1008, 1009 (Fla. 5th DCA 1999), was wrongly decided. However, it acknowledges that in the ten years following the decision in Persan, the legislature has made no changes to Florida law regarding constructive and resulting trusts.

[2] No resulting trust:

The Fifth District further concluded that a resulting trust was not established. “The evidentiary burden to prove a resulting trust is ‘clear, strong and unequivocal,’ beyond a reasonable doubt.” Id. To establish a resulting trust, the parties must “actually intend to create the trust relationship but fail to execute documents or establish adequate evidence of the intent.” Wadlington v. Edwards, 92 So.2d 629, 631 (Fla.1957). A typical example of a resulting trust is where one party “furnishes the money to buy a parcel of land in the name of another with both parties intending at the time that the legal title is held by the named grantee for the benefit of the unnamed beneficiary.” Id.

A resulting trust arises when the legal estate in property is disposed of, conveyed or transferred, but the intent appears or is inferred from the terms of the disposition, or from accompanying facts and circumstances, that the beneficial interest is not to go to or be enjoyed with the legal title. In such a case a trust is implied or results in favor of the person whom equity deems to be the real owner.

Howell v. Fiore, 210 So.2d 253, 255 (Fla. 2d DCA 1968).

In the case at bar, there was no evidence that the parties intended to create a trust relationship. In fact, the evidence was to the contrary-that Mr. Bower did not intend that his gifts to the Foundation be held in trust. Consequently, the trial court erred in finding that Step By Step established that there was a resulting trust as to the property.

[3] No constructive trust:

Unlike a resulting trust, a constructive trust does not have the element of intent or an agreement, either oral or written, to create a trust relationship. Wadlington, 92 So.2d at 631. “The trust is ‘constructed’ by equity to prevent an unjust enrichment of one person at the expense of another as the result of fraud, undue influence, abuse of confidence or mistake in the transaction that originates the problem.” Id. Here, there was no evidence of fraud, undue influence, abuse of confidence or mistake in the transaction. As a result, the trial court also erred in finding that there was a constructive trust between the parties.

Lesson learned?

The big take-away from this case for potential plaintiffs is that absent a written trust or gift agreement, don’t waste time and money on a lawsuit; donors should expect they’ll have little to no say over how charities administer their donations once the gift is made – unless they document that retained right in a written trust or gift agreement. Here’s how the 2d DCA made this general point:

We note the inherent problems that would be created if an individual who donates to a charitable organization with merely a stated intent that the donation be used for a specific purpose were able to control, or their heirs were able to control, that corporation in perpetuity. Although The Bower Foundation donated a significant amount of money to the Foundation, it was a small percentage of the money the Foundation used to construct and expand the facility. The board of directors of a nonprofit corporation has the responsibility to determine what is in the best interest of the corporation going forward, and therefore, absent a written trust agreement, it should not be bound by the intent of donors who gave many years ago when such is no longer in the best interest of the corporation.

What can charities do to avoid disputes?

The last thing a charity wants is to waste precious resources on litigation or alienate future donors as a result of a dispute over how a past donation is being administered. So what could the charities in this case have done differently? Good question. And the authors of The Unraveling of Donor Intent: Lawsuits and Lessons provide some solid answers. If you work with charities the article is well worth reading in its entirety. As to the specific question of what the charities could have done differently in this case, the authors recommend the following:

It is almost inevitable that charities will experience a need to make changes to long-term gifts. The need for change may result for a variety of reasons. The gift’s purpose may no longer effectively support the charity’s mission; the cost to administer the gift may outweigh the charitable benefits of the gift or the lack of funds may cause harm to the gift property; or the charity’s needs have dramatically shifted so that the gift revenue is no longer needed (or no longer needed at the level provided). When problems arise, charities should understand the options for resolution. In order of facility, those include: 1) change of gift terms negotiated with living donors; 2) provision for change pursuant to the gift agreement; 3) relief under the de minimus provisions of the Uniform Prudent Management of Institutional Funds Act; or 4) court approved changes.

[1.] Negotiating change of purpose with living donors. While donors who make gifts relinquish all control over contributed property, the provisions of UMIFA and UPMIFA allow charities to negotiate a change of purpose in long-term gift agreements with living donors. This means charities with living-donor gift may have the opportunity to examine existing documents renegotiate gift terms to provide flexibility over time, a moderation of purpose, or an alternative purpose if they act in a timely manner. This approach not only honors donor intent, but positions the charity as accountable and a good steward for the gift’s life. It is also the option with the lowest expense ratio.

[2.] Making changes pursuant to terms of the gift agreement. If possible, gift agreements should contain flexibility to make non-judicial changes with an emphasis on the triggers for change and clear direction on how that decision is made. For planners, this adds an extraordinary drafting challenge since it is difficult to take the gift through a period of 10, 25, 50 or even 100 years without knowing the environmental, cultural, and economic changes that will occur over that time. The alternatives may include secondary uses for the gift at the same institution, a gift over transferring proceeds to a succeeding charitable institution, or other creative alternatives.

The document should designate individuals responsible for making changes to the gift purpose. This group may be the same group set out in the paragraph above (who determine it is time to make a change) or it may be a different group. The document should also designate the type of changes that are appropriate without court approval, and what to do if there is conflict among the appointed group. Placing discretion in a group qualified to make those decisions based on the facts and circumstances at the time is a principal used in multi-generational trusts and makes those trusts effective long after the grantor is there to make decisions.

[3.] Seeking relief under the Uniform Prudent Management of Institutional Funds Act (UPMIFA). In 1972, the Uniform Management of Institutional Funds Act (UMIFA) was adopted at the 1972 Annual Meeting of the National Conference of Commissioners on Uniform State Laws. UMIFA (and its successor UPMIFA), adopted in whole or in part by all states except Alaska and Pennsylvania, governs long-term funds held by charitable institutions. Section Seven of the model statute permitted a “release of limitations that imperil efficient administration of a fund or prevent sound investment management if the governing board can secure the approval of the donor or the appropriate court” and had four parts:

  • Restrictions can be released with the written consent of the donor.
  • If the donor’s written consent cannot be obtained, a court of appropriate jurisdiction can release the restriction if the restriction “is obsolete inappropriate, or impracticable.”
  • A release cannot change the use of the funds to non-charitable purposes.
  • The section does not limit the court’s application of the cy pres doctrine.

In July 2006, The Commissioners on Uniform State Laws approved a revised version of UMIFA entitled the Uniform Prudent Management of Institutional Funds Act (UPMIFA) that made changes in areas from investment management standards, to provisions allowing the release of gift restrictions under certain circumstances. UPMIFA is rapidly replacing UMIFA across the country; more than 43 states have adopted a version of UPMIFA at last count [but NOT Florida].

UPMIFA expanded the power to release or modify donor gift restrictions in Section 6, allowing change under four circumstances:

  • Donor release: “With the donor’s consent in a record”, the charity can release a restriction in whole or in part, so long as the gift is still used for the organization’s charitable purposes.
  • Doctrine of deviation: If a modification to a gift agreement/document will enhance the furtherance of the donor’s purposes, or a restriction is “impracticable or wasteful and impairs the management or investment of the fund”, the charity can ask a court to modify the restriction. The Attorney General must be notified and allowed to be heard, and the modification must reflect the donor’s “probable intention.”
  • Doctrine of cy pres: If the purpose or restriction becomes “unlawful, impracticable, impossible to achieve, or wasteful”, the court may use the cy pres doctrine to modify the fund purposes. The Attorney General must be notified and allowed to be heard.
  • Small funds: For funds with a value less than $25,00036 that have been in place more than 20 years, court action is not required if the charity determines a restriction is “unlawful, impracticable, impossible to achieve, or wasteful” so long as the charity waits 60 days after notice to the state Attorney General of the intention to make the change, and the change is designed to be a good faith reflection of the expressed charitable purposes.

[4.] Seeking court approved changes. Although court action is generally perceived to the action of last resort, it may be the charity’s only solution when resolution is not available through one of the options above. Generally the state Attorney General will be a party to the action to represent the public’s charitable interests. These hearings may not only be costly, but unpredictable. (See the result in the Fisk/Georgia O’Keeffe Museum dispute described earlier.) Ultimately, the decision to seek court approval is a decision to make with legal counsel considering the burden or problems with the gift terms, the donor and donor family’s response, the public’s reaction to the request, and the potential downside if the court makes a ruling counter to the charity’s goals.

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Amy B. Beller of Beller Smith, P.L., in Boca Raton, Florida, was on the winning side of Pajares v. Donahue, — So.3d —-, 2010 WL 934101 (Fla. 4th DCA Mar 17, 2010), an interesting case I wrote about here involving the enforceability of will devising homestead property (always a tricky issue).

I invited Amy to share some of the lessons she drew from this case with the rest of us and she was kind enough to accept.

[Q]  What strategic decisions did you make in this case that were particularly outcome determinative at trial? On appeal?

[A]  I struggled with the decision of whether or not to agree that extrinsic evidence was not required and, in fact, my submissions at the trial court level were equivocal on this point. Because fees were an issue for my clients, I did not take any discovery and so I did not know whether extrinsic evidence would be helpful or harmful. In the end, I decided that if the trial court had to decide the case without the benefit of extrinsic evidence, the court would more than likely decide in my favor, and my clients, after being apprised of the risk, agreed with this strategy.

[Q]  Would you have done anything differently in terms of framing your case for your probate judge?

[A]  No — I believe the determining factor was that the Will contained cash bequests which could not be paid unless they were to be paid from the sale of the homestead, to be paid “from the sale” of the homestead property. This clearly provided me with a strong argument that the testatrix intended the homestead to be sold.

[Q]  From your perspective as probate litigator, do you think there’s anything that could have been done in terms of estate planning to avoid this litigation or at least mitigate its financial impact on the family?

[A]  Most definitely! This was apparently a self-made Will created from an internet form. Need I say more? (Note to estate litigators: be ye thankful for the internet Will form, for it brings forth the fruit of tomorrow’s litigation.)

[Q]  Any final words of wisdom for probate lawyers of the world based on what you learned in this case?

[A]  I stand on the shoulders of our real homestead experts (Kelley, Felcoski & Scuderi, Stone, Baskies, to name a few) and don’t feel qualified to offer any wisdom to my colleagues at the Bar. But obviously homestead is still a developing area of the law, with plenty of room for zealous litigation. A good appellate decision is the product of good lawyering on both sides. Therefore, I want to acknowledge the excellent efforts of opposing counsel, Jay Kauffman, Esq., of Herb & Kauffman.

Pajares v. Donahue, — So.3d —-, 2010 WL 934101 (Fla. 4th DCA Mar 17, 2010)

A will provision devising Florida homestead property is valid ONLY if BOTH elements of the following two-part test are satisfied:

  1. The homestead was subject to devise. In other words, the restrictions on the devise of homestead contained in Sect. 4(c), Article X, of the Florida Constitution and F.S. 732.401, F.S. 732.4015 do NOT apply. (When in doubt as to this point, refer to Kelley’s Homestead Paradigm.)
  2. The will contains a specific power directing that the homestead property be sold and the sales proceeds distributed to the estate’s beneficiaries.

The will at the heart of the linked-to opinion wasn’t exactly a picture of clarity (thus the litigation). What’s interesting about this case is the lengths to which first a probate court and then the 4th DCA went to carry out the decedent’s intent, as clearly set forth in her will, even though the will lacked the sort of explicit homestead-sales clause discussed by the Florida Supreme Court in McKean v. Warburton and quoted by the 4th DCA below.

First, here’s the less-than-clear text at issue in this case. The homestead property is a home in Delray Beach whose address is 202 N.W. 18 Street, Delray Beach, Florida 33444. To make sense of this opinion you’ll need to focus on all references to that property:

Article One of the will stated that Kuhnreich’s husband was deceased and she had no children.

Article Three, entitled “Specific Bequests of Real and/or Personal Property,” concerned two parcels of real property. First, a West Palm Beach condominium unit was devised outright to two named devisees. Second, “[f]rom the sale of: 202 N.W. 18 Street[,] Delray Beach, Florida 33444,” the will bequeathed specific dollar amounts to five persons: Robert Kuhnreich, $5,000; “Lane Abbot, AKA Orlando Abad,” $10,000; “David Mears, AKA David Abad,” $10,000; “Connie Abad, AKA Conchita Abad,” $30,000; and Maria De Cuena, $5,000. Article Three ended with this sentence: “In the event that I do not possess or own any property listed above on the date of my death, the bequest of that property shall lapse.”

Article Four was entitled “Homestead or Primary Residence.” It stated:

I will, devise and bequeath all my interest in my homestead or primary residence, if I own a homestead or primary residence on the date of my death that passes through this Will, to see above primary residence. If I name more than one person, they are to receive the property [X] equally, after all estate taxes, debts are satisfied.

And here’s how the 4th DCA got to the "right" conclusion (if by "right" we mean: carrying out the decedent’s testamentary intent vs. strictly enforcing Florida’s restrictions on the devise of homestead property):

Where the decedent has no surviving spouse or minor children, homestead property may “pass as a general asset of the estate by a specific devise.” McKean, 919 So.2d at 345. “[W]hen the testator specifies in the will that the homestead is to be sold and the proceeds are to be divided[,] … the homestead loses its ‘protected’ status.” Id. at 346-47 (citation omitted). “Thus, where the will directs that the homestead be sold and the proceeds added to the estate, those proceeds are applied to satisfy the specific, general, and residual devises, in that order.” Id. at 347 (citations omitted).

Reading Articles Three and Four together, we find that Kuhnreich specified that the Delray Beach property was to be sold and the proceeds divided according to the provisions of the will. With the italicized and underlined language, “see above primary residence,” Article Four specifically references the treatment of the residence in Article Three. Article Three indicates that the specific bequests will be paid from “the sale” of the Delray Beach home. In fact, the will provides for the Article Three bequests only through a sale of the real property: the will provides that if the decedent did not own one of the two properties on the date of her death, then “the bequest of that property shall lapse.” Article Four does not expressly say that the Delray Beach Property is to pass to Pajares and Donahue free of claims of the decedent’s creditors, a hallmark of homestead property. See In re Estate of Hamel, 821 So.2d 1276, 1278 (Fla. 2d DCA 2002). Rather the devise is subject to “debts.” The will does not therefore demonstrate an intent to preserve the advantages of homestead for the property.

For these reasons, we affirm the order of the circuit court, which harmonized Articles Three and Four of the will.

Lesson learned?

If a client walks into your office with case involving freely-devisable homestead and a will that at first blush appears to lack the type of explicit homestead-sales clause discussed in McKean v. Warburton, don’t be too quick to throw in the towel. Scour the will for language that could be read to imply the decedent intended or expected the homestead property would have to be sold. If you’re dealing with freely-devisable homestead property, a decedent’s testamentary intent shouldn’t be frustrated simply because his or her will wasn’t perfectly drafted. That’s the argument, anyway. It worked in this case, it might work in yours.

Bonus:

Amy B. Beller of Beller Smith, P.L., in Boca Raton, Florida, was on the winning side of this case both at the trial-court level and on appeal. In this interview I invited Amy to share some of the lessons she drew from this case with the rest of us and she was kind enough to accept.  You can also download her appellate brief: APPELLEES’ ANSWER BRIEF

In this latest opinion from the 9th Circuit, the spotlight turns once again on the record-shattering trust-and-estates litigation the late Anna Nicole Smith a/k/a Vickie Lynn Marshall (she died in 2007) and and her former step-son, E. Pierce Marshall (he died in 2006), waged over the vast estate of her former husband, J. Howard Marshall. As I’ve previously written about on this blog, this case resulted in a U.S. Supreme Court decision, Marshall v. Marshall, viewed by many (including me) as opening the federal court room doors to trust-and-estates litigation to an extent we’ve never seen before.

Here’s how Law.com reported in this piece on the 9th Circuit’s ruling.

A federal appeals court ruled Friday that Anna Nicole Smith’s estate will get none of the more than $300 million the late Playboy model claimed a Texas billionaire to whom she was briefly married meant to leave her after he died.

The ruling came in a 15-year legal battle that started in a sleepy Houston probate court and stretched all the way to the U.S Supreme Court.

It initially pitted Smith against the son of J. Howard Marshall over the $1.6 billion estate the oil tycoon left after his 1995 death at age 90. J. Howard Marshall had wed Smith the year before when she was 26.

Marshall’s son E. Pierce Marshall died in 2006 and Smith perished after a drug overdose in 2008. Their heirs and lawyers kept up the legal fight that included one ruling awarding Smith $474 million.

Kent Richland, who represents the Smith estate, said he would appeal the latest ruling but hasn’t decided whether to ask the appeals court for another hearing or take the case back to the U.S. Supreme Court regarding different issues.

Eric Brunstad, a lawyer for Marshall family members, said they hoped the legal fight was over.

“Our only wish would be that Pierce were here to see his vindication,” the family said in a prepared statement.

The three-judge appeals court panel ruled unanimously that a 2001 jury verdict in Houston in favor of the Marshall family should be honored over two federal court rulings in Smith’s favor.

The appeals court said the federal bankruptcy court award of about $447 million and a subsequent federal trial court ruling that lowered the amount to $89 million should be ignored.

The appeals court said the Houston jury heard from all the parties, including Smith, during a five-month trial in which she accused E. Pierce Marshall of illegally coercing his father to keep the reality TV star out of his will.

This is a bit off topic, but I recently came across a Goldman Sachs research report entitled Take Stock of America that deserves wider attention than your standard market analysis piece. The report is all about why the smart money’s riding on the U.S. Over the next 20 years China will (hopefully) continue to grow and prosper, but that growth won’t come at our expense.

Warren Buffett’s been beating this drum for years, first in a 2008 NYT’s op ed piece, then in his very public 2009 deal to buy a U.S. railroad. “It’s an all-in wager on the economic future of the United States,” said Buffett. “I love these bets.”

What I love about the Goldman Sachs report is its focus on the hard facts underlying Buffett’s sunny optimism. This isn’t empty-headed jingoism. Consider the following excerpts from Take Stock of America.

[1] Economic Strength
At $14.3 trillion as of December 2009, the US accounts for 24.9% of world GDP. Its economy is 2.8 times larger than the next largest economy, Japan; 3 times larger than the third-largest economy, China; and 4.4 times larger than the fourth-largest economy, Germany. To put these numbers in perspective, the United States has a higher GDP than the next three largest economies combined. The only entity to come close to the US is Euroland, a union of 16 countries with a common currency and monetary policy. A reminder that Euroland includes countries that have their own significant economic challenges will quickly dispel any notion that it will challenge US’s economic preeminence anytime soon.

[2] Military Strength
While the gap between total GDP and GDP per capita of the US and that of other countries is quite significant, the gap in military power is even greater. As Josef Joffe has pointed out, “the United States plays in a league of its own.” Based on 2008 data from the Stockholm International Peace Research Institute, the US spends $616 billion or about 4.2% of its GDP annually on its military, accounting for close to half of the world’s total military spending. Even the sum total of the next 14 countries (including Australia as the 14th) does not add up to the US’s annual outlay.

[3] Prosperity
Let’s now turn to the softer factors that contribute to US’s preeminent status. Since its inception over 200 years ago, the US has had an extremely resilient and dynamic economy and a stable political system. It is an open society and an open economy with immigration as a core principle of its existence. Its technological achievements, in aggregate, outpace those of any other country. The question is how can one measure the factors that account for such resilience, dynamism and stability and use them to make comparisons between the US and other countries. The Legatum Prosperity Index attempts to capture some of these factors. This index is comprised of 79 different variables, which are distilled into nine different sub-indexes; each country’s score is an equal weight of the sub-indexes. The nine sub-indexes are economic fundamentals, entrepreneurship and innovation, democratic institutions, education, health, safety and security, governance, personal freedom, and social capital.

Among major countries, the US ranks number one. Overall, it is ranked ninth out of 104 countries after Finland, Switzerland, Sweden, Denmark, Norway, Australia, Canada and the Netherlands. The only country with a GDP of greater than $1 trillion in the top nine is Canada at $1.3 trillion. Japan, the world’s second largest economy, is ranked 16th. Brazil is ranked 41st, India 45th, Russia 69th and China 75th.

[4] Taxes
[T]here is scope for a rising tax base. Federal tax revenues stand at the lowest level relative to GDP since 1950. A reversion to more typical postwar levels would equate to several percentage points of deficit reduction. Moreover, the total tax base of the US relative to GDP stands well below the level in any other developed country and the OECD average. Thus, there is capacity for the US to increase taxes without jeopardizing its comparative position in the global economy.

Lastly, it’s worth remembering that both personal and corporate tax rates are low by historical standards. While there is raging debate about the impact of such increases on prospective growth, three points bear mentioning. First, higher tax rates have not historically been an impediment to economic growth, as many of the faster-growing periods in American history occurred with tax rates much higher than today’s levels. Second, levels matter. If the federal marginal tax rate on the highest income bracket were to revert to its pre-Bush level of 39.5%, it would still stand below the 50% threshold that some experts consider highly detrimental to growth. Third, timing matters. The mistake of both the US as it was exiting the Great Depression and Japan early in their “Lost Decade” was raising tax rates during the nascent phases of economic recovery. Given the approaching mid-term elections, any broad tax hikes are unlikely to come until 2011, a point at which the economy should be on strong enough footing to absorb them. In short, while undoubtedly not welcome news for individual tax payers, the near certainty of tax hikes should benefit deficit levels going forward.

By the way, in my opinion these stat’s are the byproduct of American exceptionalism, not its root cause. What has set us apart over our relatively short history is the ability to adapt to changing circumstances. This point was captured beautifully in a Alexis de Tocqueville quote the authors of Take Stock of America began their report with:

The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.

 

Thomas v. Thomas, — So.3d —-, 2010 WL 391833 (Fla. 5th DCA Feb 05, 2010)

There are certain key milestones in a probate proceeding where Florida’s probate rules build in ultra-short limitations periods designed to bring disputes to a head quickly or forever bar them. One of those milestones is when the personal representative files his final accounting. Probate Rule 5.401 says that anyone wanting to object to a final accounting has only 30 days to file an objection, and 90 days from the filing of the objection in which to serve a notice of hearing. Miss those deadlines and you’re out of luck, no matter how legitimate your objections may be. Here are the relevant portions of Rule 5.401:

Rule 5.401. Objections to . . . Final Accounting

(a) Objections. An interested person may object to the . . . final accounting within 30 days after the service of the later of the . . . final accounting on that interested person.

*     *     *

(d) Hearing on Objections. Any interested person may set a hearing on the objections. Notice of the hearing shall be given to all interested persons. If a notice of hearing on the objections is not served within 90 days of filing of the objections, the objections shall be deemed abandoned and the personal representative may make distribution as set forth in the plan of distribution.

In the linked-to opinion the parties objecting to the final accounting argued that because the accounting wasn’t complete, it didn’t count as a “final” accounting, so Rule Rule 5.401’s ultra-short limitations periods didn’t apply. Clever, but no cigar. The probate judge didn’t buy this argument, and neither did the 5th DCA. Here’s how the 5th DCA explained its ruling:

On December 3, 2008, the court entered a final judgment granting .  .  .  the motion to strike the objection to the final accounting. The Appellee argues that the court based its ruling on the fact that the objection to the final accounting was not timely filed. That is, the accounting was filed June 16, 2006, and the objection was not filed until October 12, 2006, well beyond the 30 days in which to object as provided by rule 5.401(a).

Appellants contend that the final accounting filed in this case was not complete and, therefore, it was not a final accounting. The Appellants cite no authority for their position and this Court disagrees.

It is clear that a final accounting was filed June 19, 2006, and if infirmities in the final accounting existed, the Appellants had 30 days in which to file an objection, and 90 days from the filing of the objection in which to have a hearing. They did neither. The court found that the objection was waived.

But Wait, There’s More!

I received a comment to this blog post from über probate litigator Brian Felcoski. He makes an important point that goes to the 5th DCA’s construction of the rule’s 90-day requirement.

Hi Juan. I saw your post concerning the Thomas decision. The language in the decision suggesting one needs to have a hearing within 90 days from filing the objection to accounting does not appear to be consistent with Florida Probate Rule 5.401. The language of the rule speaks to service of the notice of hearing and not the actual hearing itself. The committee notes reflect that (d) was amended “to clarify that 90-day period pertains to service of hearing notice, not the actual hearing date.” You might want to make an editor’s note on your probate litigation blog to make your readers aware of this issue. I am copying Tae Bronner, Chair of the Section’s probate law and procedure committee, and asking that her committee review the issue and determine if action is warranted to clarify the rule further. Best regards. Brian Felcoski

Listen to this post

The linked-to opinion is yet another example of yet another plaintiffs lawyer seeing his trial-court win go up in smoke because he blew a probate creditor filing deadline. The last time I wrote about this problem was a med-mal case. This time around it was a personal injury case arising out of an automobile/ motorcycle accident.

Plaintiffs suing estates often fail to realize that they’re really litigating their claims in two separate courts in front of two separate judges:

  1. The trial court adjudicating their lawsuit (this is where the decedent’s liability is established); and
  2. The probate court administering the decedent’s probate estate (this is where you go to collect on your judgment).

What’s scary about this dual-court approach is that it creates a huge trap for the unwary: you can spend years and a fortune in fees litigating claims against an estate in a trial court and never be the wiser to the fact that you’ve blown past one of the ultra-short limitations periods applicable in a probate court under F.S. 733.702 or F.S. 733.710; which means no matter how spectacular your win might be at trial, you’ll never be able to collect on your judgment in the probate court.

Case Study

Grainger v. Wald, — So.3d —-, 2010 WL 479862 (Fla. 1st DCA Feb 12, 2010)

In the linked-to opinion above the plaintiff eventually prevailed in his lawsuit, but the judgment wasn’t rendered until after the decedent’s death. In order to collect on his judgment, plaintiff needed to file a creditor claim against the probate estate of the now deceased defendant. This is where things went south for the plaintiff (and a good probate lawyer working for the estate snatched victory from the jaws of defeat!!).

At some time during the course of the litigation plaintiff’s personal injury attorney was served with a “creditors notice” in connection with the probate proceeding. The personal injury lawyer apparently ignored this notice, which ultimately resulted in his trial court win being forfeited (ouch!!). Here are the key facts/dates as recounted by the 1st DCA:

Wald was involved in an automobile/motorcycle accident with the decedent and brought a personal injury lawsuit to recover damages. Wald eventually prevailed in his lawsuit, but the judgment was not rendered until after the decedent’s death. Some time after obtaining the judgment, Wald filed a claim against the probate estate.

The personal representative argued she had served notice on Wald’s attorney as required by Florida Probate Rule 5.041(b) (2009) on May 23, 2007, thus triggering the time constraints of section 733.702(1). Therefore, under the statute, Wald had until June 22, 2007, to file any claim he might have. Since Wald’s claim was not filed until July 2, 2007, the personal representative argued it was untimely and forever barred .

So far so good for the estate. But then the probate judge did something the 1st DCA characterized as “bizarre”: he declared the estate’s creditor notice wasn’t valid because plaintiff’s personal injury attorney had been served instead of plaintiff’s probate attorney. What?! Yeah, that’s what the 1st DCA said too.

There are two reasons why the probate court erred in finding the time constraints of section 733.702(1) inapplicable.

First, the Florida Probate Rules do not make any distinction based on the scope of an attorney’s representation of a client. A personal representative would have no way of knowing such information. These descriptive labels, such as “probate” attorney or “personal injury” attorney do not appear in the Rule 5.041(b), which governs the service of pleadings and papers in probate actions. Instead, the Rule simply requires that if a creditor is represented by an attorney, service must be on the attorney and not on the creditor. The language of Rule 5.041(b) states that “when service is required or permitted to be made on an interested person represented by an attorney, service shall be made on the attorney unless service on the interested person is ordered by the court.” (emphasis added). …

Second, regardless of whether the attorney served was labeled the “probate” or the “personal injury” attorney, the record reflects that Wald had actual notice and that he received notice in time to file the claim. Wald received all process that was due. The record contains Wald’s original statement of claim against the estate. Although the claim was not filed until July 2, 2007, Wald signed the claim on June 16, 2007-at least six days before the time for filing claims was to expire. “[D]ue process requires the personal representative to give notice by any means that is certain to ensure actual notice of the running of the non-claim period.” Estate of Ortolano, 766 So.2d 330, 332 (Fla. 4th DCA 2000) (emphasis added). Considering the date of Wald’s signature, he had actual notice and sufficient time to file a claim within the 30-day statute of limitations. Therefore, any failure was not in the service of the notice, but in the untimely filing of the claim. Since there was no excuse for Wald’s failure to file the claim in a timely manner, it should have been declared time barred under section 733.702(1).