Eichler v. Leshner, Slip Copy, 2008 WL 4459029 (M.D.Fla. Sep 29, 2008)

In the linked-to case the beneficiary of a trust tried to sue the trust’s investment manager for having “failed to properly invest trust assets.”  The defendant’s filed a motion to compel arbitration based on an arbitration clause contained in the account agreement signed by the trustee. The trust beneficiary/plaintiff in the current litigation was not a signatory to this agreement.

Compelling arbitration by non-signing trust beneficiaries:

I’ve written before about the “virtual representation” doctrine and how it can serve to bind beneficiaries to a court-approved settlement agreement [click here].  The virtual-representation doctrine has been codified – and expanded – under Florida’s new Trust Code.  Which is why I would have assumed that the binding effect of the arbitration agreement at issue in this case would have been upheld by reference to section 736.303(3) of Florida’s Trust Code, which provides as follows:

To the extent there is no conflict of interest between the representative and the person represented or among those being represented with respect to a particular question or dispute .  .  . (3) A trustee may represent and bind the beneficiaries of the trust.

But that’s no what happened, instead the court relied on an equitable estoppel argument to bind the trust beneficiary/plaintiff to the arbitration agreement signed by his trustee and the defendant. Here’s how the court summarized the general rules for deciding when parties who didn’t sign an arbitration agreement can nevertheless be bound by its terms:

Although arbitration is a contractual right that is generally predicated on an express decision to waive the right to trial in a judicial forum, the lack of a written arbitration agreement is not necessarily an impediment to arbitration. Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753 756-57 (11th Cir.1993). Certain limited exceptions, such as equitable estoppel, allow nonsignatories to a contract to compel arbitration. MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir.1999). A second exception exists when, under agency or related principles, the relationship between the signatory and nonsignatory defendants is sufficiently close that only by permitting the nonsignatory to invoke arbitration may evisceration of the underlying arbitration agreement between the signatories be avoided. Id. (citing Boyd v. Homes of Legend, Inc., 981 F.Supp. 1423, 1432 (M.D.Ala.1997). A third exception applies when the parties to a contract together agree, upon formation of their agreement, to confer certain benefits thereunder upon a third party, affording that third party certain rights of action under the contract. Id.

Why didn’t the litigants and/or the court even mention section 736.303(3) of Florida’s Trust Code? Perhaps the defendants were not confident the court would agree to extend the virtual-representation doctrine to the transactional context. The virtual-representation doctrine is a solution developed by courts for application specifically within the litigation context. Extending this doctrine to arbitration agreements (or any other contractual transaction) is a significant step. In his recently published article entitled, SERVE THE CHEERLEADER – SERVE THE WORLD: REPRESENTATION IN ESTATE AND TRUST PROCEEDINGS AND UNDER THE UNIFORM TRUST CODE AND OTHER MODERN TRUST CODES, Professor Martin D. Begleiter specifically addressed this point as follows:

We have noted that the purposes of the representation doctrines are necessity that cases proceed where unborns are necessary parties and convenience in avoiding the expense of a guardian ad litem. The concerns are to obtain jurisdiction over unborns and persons under disability or dispense with such persons as parties and bind such persons to the result of the judicial proceeding. To go beyond this to bind such persons in a transactional context is a large and significant step. It is one thing to bind someone to a court decision on an issue of law or fact. It is quite another to say that, where voluntary action of a person is required to effectuate an outcome, that such action of another person shall be treated as consent by the person under a disability or the unborn. While the importance to the living parties and the resolution of disputes may justify the representation doctrine in court cases, it is difficult if not impossible to apply such a rationale where affirmative action by a person, such as consent or execution of a release, is required for the desired result. Nevertheless, in a scattering of cases, courts have used virtual representation to attribute such consent to parties who never consented.

Lesson learned?

Until we have a body of common law interpreting and applying the Florida Trust Code, a belts-and-suspenders approach is probably a good idea when litigating any of the Trust Code’s more controversial provisions. I think the arbitration issue in this case could have been decided by simply citing to section 736.303(3) of Florida’s Trust Code. But then again, maybe this particular judge wouldn’t want to be the first to rely on this particular new statute to extend the virtual-representation doctrine beyond anything otherwise permitted under pre-code common law. Since no one can predict with 100% certainty how any judge will rule, citing to well-settled, general principals of law for binding non-signatories to arbitration agreements was probably a good idea. In other words, if there’s more than one winning argument, it usually doesn’t hurt to include all of them in your brief and let your judge pick the one he or she likes best.

Balboni v. LaRocque, — So.2d —-, 2008 WL 4414240 (Fla. 4th DCA Oct 01, 2008

The absence of supporting evidence is a recurring theme when it comes to appellate reversals in probate litigation [click here].  In this case the issue was whether the proponents of a lost will had overcome the presumption that the will was intentionally destroyed.  As I’ve written about before, the law in Florida is that a will that was in the possession of the testator before his death and that cannot be located after his death is presumed to have been destroyed by the testator with the intention of revoking it [click here].

In the linked-to opinion the 4th DCA summarized the evidence past courts have held is sufficient to overcome the presumption that a lost will was intentionally revoked as follows:

Evidence that can serve to rebut the presumption of intentional revocation of a lost will consists of evidence that the will was either accidentally lost or destroyed, or willfully and fraudulently destroyed by an adverse party. Id. In several cases, Florida courts have found the presumption of intentional revocation to be rebutted by a showing of: 1) evidence that a person with an adverse interest, and the opportunity, may have destroyed the will, see In re Estate of Washington, 56 So.2d at 547; Lonergan v. Estate of Budahazi, 669 So.2d 1062 (Fla. 5th DCA 1996); Upson v. Estate of Carville, 369 So.2d 113 (Fla. 1st DCA 1979); 2) evidence that the will was accidentally destroyed, see In re Estate of Carlton, 276 So.2d at 833 (presumption was rebutted where decedent repeatedly spoke of his will and his intention to leave his estate to the petitioner, although the decedent’s safe was found waterlogged and the papers inside turned to “mush”); 3) evidence that the original will had been seen among the decedent’s papers after her death, see Silvers v. Estate of Silvers, 274 So.2d 20 (Fla. 3d DCA 1973); and 4) evidence that the decedent was insane and thus did not have testamentary capacity to effectively revoke the will, see In re Estate of Niernsee, 2 So.2d 737 (Fla.1941).

No Evidence + Speculation & Conjecture = Reversal

The big problem for the lost-will proponents in the linked-to case was that they had all sorts of plausible sounding theories for why the lost will should be admitted to probate . . . but NO EVIDENCE to back them up. Here’s how the 4th DCA explained that not having evidence in support of your arguments can be a problem (yes, even in probate proceedings):

In the instant case, the evidence relied upon-the mirror-image wills of Bill and Charlotte, the decedent’s longstanding testamentary scheme, the discord between the decedent and granddaughter Kim, and the presence of nurses and visitors in the home-is simply not sufficient to overcome the presumption that the decedent intentionally revoked his will at some point in time prior to his death. Since it was undisputed that Charlotte predeceased her husband, the evidence that her will was found is not material. Likewise, evidence of a decedent’s fondness of someone or, in this case, a lack thereof, is not material to the question of revocation. See id. at 43. Further, the fact that people with no interest in the will had the opportunity to accidentally destroy it and “might possibly have done so obviously is no evidence whatever that they did.” Id. We therefore conclude that here, as in Baird, the petitioners have failed to rebut the presumption of revocation with competent substantial evidence and instead have “presented no more than the fabled twins of speculation and conjecture to establish that [the decedent] might not have revoked his will.” Id. at 43-44.

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Florida probate judges are given a great deal of latitude when making calls on how an estate should be administered.  But there’s one estate-administration issue over which their authority is severely limited: whether or not to appoint the personal representative nominated in a decedent’s will.  As I’ve previously reported here and here, for some reason this bit of Florida law is often overlooked.

Case Study

McCormick v. McCormick, — So.2d —-, 2008 WL 4377136 (Fla. 1st DCA Sep 29, 2008)

But what if a different PR is appointed before the decedent’s will is found? Does the originally appointed PR get to stay on even if he’s not the person nominated in the decedent’s later-discovered will?  You can see why a well-intentioned probate judge might be tempted to leave well enough alone.  If the originally-appointed PR is doing a tolerably good job, why upset the apple-cart by booting him out midway through the estate administration and appointing his allegedly discombobulated half-brother for no other reason than he’s the guy nominated as PR in the decedent’s will?

In the linked-to opinion the probate court decided to leave well enough alone and was reversed for doing so; underscoring, once again, the amount of deference Florida law gives to a person’s choice of personal representative.  Unless the nominated PR is disqualified as a matter of law: he’s in, end of story.  Here’s how the 1st DCA stated the point:

As provided by section 733.301(1)(a), Florida Statutes (1999), when granting letters of administration, the probate court shall, in testate estates, allow preference to the personal representative nominated by the will. “Nothing in section 733.301(1)(a) purports to vest discretion in the trial courts to disregard the preference there specified, as long as the personal representative nominated by the decedent is statutorily qualified to serve.” Warner v. Estate of McCloskey, 943 So.2d 1007, 1008 (Fla. 1st DCA 2006).

We acknowledge that during the hearing below, counsel for appellee advanced arguments that appellant should not be appointed to act as personal representative due to allegations of certain conduct by appellant after the death of McCormick, Sr. The probate court did not, however, base its order upon any ground other than the timeliness of appellant’s counter-petition for administration. This ground, as we have previously observed, is not valid. Pursuant to section 733.301(6), Florida Statutes (1999):

After letters have been granted in either a testate or an intestate estate, if any will is subsequently admitted to probate the letters shall be revoked and new letters granted as provided in subsection (1).

Accordingly, we find that the controlling statutes anticipate a situation such as occurred in the present case. Although letters of administration issued during administration of an apparently intestate estate, such letters must be revoked “when a later discovered will is admitted to probate.” Fouraker v. Carter, 507 So.2d 749, 750 (Fla. 5th DCA 1987). “Upon admission of the will, the personal representative nominated by the will is entitled to preference of appointment.” Id.

 

Jaylene, Inc. v. Moots, — So.2d —-, 2008 WL 4181140 (Fla. 2d DCA Sep 12, 2008)

It’s not uncommon for intermediate-level appellate courts to disagree with each each other, that’s why we have supreme courts.  But here’s something you don’t see every day: the 2d DCA disagreeing with itself by ruling two different ways on the same issue within a single 12-month period.

In January 2008 the 2d DCA reversed a trial judge’s order in In re Estate of McKibbin [click here] holding that a decedent’s estate was NOT bound by an arbitration agreement signed prior to her death by her attorney-in-fact because the power of attorney did not specifically grant the attorney-in-fact authority to enter into an arbitration agreement.  Fast forward to the current linked-to opinion: the 2d DCA reversed a trial judge’s order by basically ignoring its own prior opinion (trial courts in the 2d Circuit must love this).  This time around the 2d DCA held that a decedent’s estate IS bound by an arbitration agreement signed prior to her death by her attorney-in-fact, in the absence of specif arbitration authority, based on general language contained in the decedent’s power of attorney.  Here’s how the 2d DCA explained its current ruling:

.  .  .  In the POA, the principal gave the attorney-in-fact “full power and authority to act on my behalf.” This full power and authority extended to include the authority “to manage and conduct all of my affairs and to exercise all of my legal rights and powers.” The POA provided further that it was to “be construed broadly as a General Power of Attorney.” The POA unequivocally expresses the principal’s intent to make a comprehensive grant of authority to the attorney-in-fact. We conclude that the grant of authority in the POA was broad enough to authorize the attorney-in-fact to consent to arbitrate claims arising out of the Agreement. See Bryant, 937 So.2d at 269.

Ms. Moots correctly points out that the power of attorney under review in the Bryant case specifically authorized the attorney-in-fact to agree to arbitration. Id. at 268. Here, the power to consent to arbitrate the principal’s claims was not one of the powers specifically listed in the extensive list of powers explicitly granted. Nevertheless, the POA also provided that “[t]he listing of specific powers is not intended to limit or restrict the general powers granted in this Power of Attorney in any manner.” (Emphasis added.) In light of this provision, Ms. Moots’ argument that the absence of an express grant of authority to arbitrate in the POA compels a restrictive interpretation precluding the authority to consent to arbitration is unpersuasive.

 When the 2d DCA was reminded of it’s own prior opinion, the court brushed it aside as follows:

In support of affirmance, Ms. Moots relies on this court’s decision in McKibbin v. Alterra Health Care Corp. (In re Estate of McKibbin), 977 So.2d 612 (Fla. 2d DCA 2008). In McKibbin, the resident at an assisted living facility did not sign the residency agreement that included an arbitration agreement. Id. at 613. Instead, the resident’s son signed on his mother’s behalf under a durable power of attorney from the resident. Id. The McKibbin court noted the limitations of the power of attorney under review in that case as follows:

Nothing in that power of attorney, however, gave Ms. McKibbin’s son the legal authority to enter into an arbitration agreement on behalf of his mother. See Kotsch v. Kotsch, 608 So.2d 879, 880 (Fla. 2d DCA 1992) (holding that powers of attorney are strictly construed to grant only the powers specified). Furthermore, there was no other basis upon which to bind Ms. McKibbin to the arbitration agreement. Hence, the Estate was not bound to arbitrate….

Id. For this reason, the McKibbin court held that the circuit court erred in granting Alterra’s motion to compel arbitration. Id.

However, McKibbin does not compel a different result here. The McKibbin case is controlling only to the extent that it is possible to determine from the court’s opinion that the power of attorney at issue in that case was similar to the POA held by Ms. Moots. See Shaw v. Jain, 914 So.2d 458, 461 (Fla. 1st DCA 2005). But the opinion in McKibbin does not set forth the language of the power of attorney under review in that case. Id. Thus McKibbin is not controlling here where the POA unambiguously makes a broad, general grant of authority to the attorney-in-fact.

Understanding how to conceptually "frame" a case, both factually and legally, is half the battle in litigation.  So even if an appellate decision from another state isn’t binding precedent in Florida, the way in which the case is framed by the appellate court can be instructive for Florida lawyers.  Which is all a long-winded way of saying Florida probate lawyers should take note of an interesting LAW.COM article entitled Appeals Court: Relatives Who Assist in Suicide Can Inherit Estate, reporting on a Wisconsin case where the appellate court ruled that even if a decedent’s wife and daughter helped him commit suicide, which is illegal in Wisconsin, they weren’t barred from inheriting his estate by Wisconsin’s slayer statute.

Click here for a copy of the Wisconsin appellate decision.

The Facts:

The following excerpt from the linked-to article provides a solid summary of the key facts:

Edward Schunk, 63, shot himself in 2006 in a cabin on his property while he was terminally ill with non-Hodgkin’s lymphoma, a form of cancer. He left an estate valued at nearly $500,000.

The court ruled in favor of his wife, Linda, and youngest child, Megan Schunk, now 20, who were granted most of the estate under Schunk’s will.

Schunk’s six older children received little or nothing, according to court records. Five of them challenged the will, arguing that Linda and Megan Schunk took Schunk to the cabin, gave him a loaded shotgun and left even though they knew he was suicidal.

The two acknowledged they took him home from the hospital on a one-day pass but denied assisting his death. They said he had told them he wanted to go turkey hunting.

For the purposes of deciding the dispute, the court assumed the other children’s allegations were true but still ruled in favor of the wife and younger daughter.

Under Wisconsin law, assisting in a suicide is punishable by up to six years in prison. Thursday’s ruling did not address that law, and no one has been charged in Schunk’s death.

Slayer Statute Analysis:

The Wisconsin opinion turned on whether the bold text of the following sentence, which is found in both the Wisconsin and Florida slayer statute, includes assisting someone to commit suicide:

A surviving person who unlawfully and intentionally kills or participates in procuring the death of the decedent is not entitled to any benefits under the will or under the Florida Probate Code, and the estate of the decedent passes as if the killer had predeceased the decedent.

The Wisconsin appellate court held that "unlawful and intentional killing" within the meaning of its slayer statute did not include assisting another to commit suicide. 

Assisted Suicide Statute Analysis:

It’s interesting to note that the Wisconsin court ruled as it did even though Wisconsin, like Florida [F.S. 782.08], makes it a crime to help someone commit suicide. Here’s how the Wisconsin court distinguished its assisted-suicide statute from its slayer statute:

The objectors point out that WIS. STAT. § 940.12 makes it a felony to “with intent that another take his or her own life assist[] such person to commit suicide….” Thus, they assert, Linda and Megan acted unlawfully and the facts show they intended to help Edward commit suicide. However, “unlawful” and “intentional” modify “killing” by limiting its meaning. If, as we have concluded, assisting another to commit suicide is not “killing” another, it does not become so because the conduct is unlawful and intentional.

According to a WSJ article entitled Trusts Require Attention During Market Turmoil, there’s no need to worry if you open the paper one day and read your trust company’s going down in a ball of flames.

The good news is that trust assets managed by a corporate fiduciary such as Merrill Lynch & Co. don’t go on the company’s balance sheet. So, if the company is acquired, in the case of Merrill Lynch — or files for bankruptcy protection, as in the case of Lehman Brothers Holdings Inc. — trust assets the company manages aren’t in danger.

Bruce Stone, a trust expert and shareholder at Goldman Felcoski & Stone PA, a law firm in Coral Gables, Fla., said, "Nobody is going to take your trust assets and liquidate them to pay off a bankruptcy, because the bankrupt entity doesn’t own your trust assets."

Feeling better?

Blogging credit:

Credit goes to the Death & Taxes Blog for bringing the linked-to article to my attention in the blog post entitled Trusts, Corporate Fiduciaries, and the Bailout.

Probate litigation has a way of spawning jurisdictional disputes that make your toughest law-school exam seem like a walk in the park.  Click here, here and here for recent examples.  These jurisdictional battles rarely become mano-a-mano contests between competing judges, but that’s what seems to be happening in a case reported on in a San Francisco Chronicle article entitled Inheritance fight imperils de Young tribal art.

Since 2005 Palm Beach County, FL probate Judge John Phillips has been presiding over an inheritance battle between heirs of the Annenberg publishing fortune that is currently centered on an art collection valued for insurance purposes at over $90 million.  Known as the Jolika Collection, it’s housed in a specially built wing of the M.H. de Young Memorial Museum, which is owned and operated by the City of San Francisco, CA.

As you can imagine, San Francisco’s citizenry wasn’t about to let some small-town Florida probate judge to take control of this very valuable public asset without a fight.  So when San Francisco City Attorney Dennis Herrera got wind of the case, he asked Judge Phillips for permission to intervene in the Florida case.  Judge Phillips said no.  Undeterred, and presumably fully aware that possession is nine-tenths of the law, Mr. Herrera then turned to an apparently much friendlier venue – San Francisco state court Judge Peter Busch – and (surprise!) got a restraining order effectively giving him the win he was denied in Florida. The Florida parties and Judge Phillips can stomp their feet in righteous indignation all they want, but as long as the Jolika Collection‘s in San Francisco, nothing’s going anywhere until San Francisco Judge Busch says so.

Here’s an excerpt from the linked-to article:

Three brothers – John Friede, Robert Friede and Thomas Jaffe – have been feuding since 2005 over the estate of their mother, Evelyn A.J. Hall, a sister of the late publishing tycoon Walter Annenberg. Under a settlement reached on Oct. 18, 2007, John and Marcia Friede agreed to pay his brothers $30 million – $20 million of which was secured by the couple’s art collection, according to figures in the case.

The problem was that a week earlier, John Friede had finalized paperwork donating the entire 4,000 piece collection to the city-owned de Young, according to documents from the city attorney.

Last week, a probate judge in Florida ruled that John and Marcia Friede had breached the settlement agreement by its deal with the de Young and by granting a lien on the art in exchange for a $670,000 advance, court documents show.

Judge John Phillips ordered the couple to turn over "all collateral described in the security agreement, which is in their care, custody or control" to the two other brothers. The balance of the Jolika Collection is at the couple’s home outside New York City, according to court filings. Those pieces had been donated to the museum even if they had not been moved, according to the city.

Herrera’s office tried to intervene in the Florida case this week, but Phillips would not allow it, prompting Herrera to file a case in San Francisco Superior Court. There, Judge Peter Busch issued a temporary restraining order prohibiting the artwork from being removed from the museum or the house. A hearing on the issue is scheduled for Oct. 6.

The main question is: Who really owns the artwork?

"That’s a murky area," Deputy City Attorney Donald Margolis said. "We’re taking the position that entirety of the Jolika Collection has been transferred to the museum."

Lesson learned?

In the real world, bare-knuckles politics trumps the legal niceties of civil procedure any day of the week.  The City of San Francisco may not have had legal standing to intervene in the Florida probate case, but it’s now firmly ensconced at the negotiating table.  The parties can spend the next few years litigating this turn of events or simply accept the realities of life and cut the best deal possible with Mr. Herrera.  If the collection’s worth over $90 million, and the amount in dispute in Florida is $30 million, there’s probably a deal to be had that works for all concerned.

Blogging credit:

Credit goes to the Wills, Trusts & Estates Prof Blog for bringing the linked-to article to my attention in the blog post entitled Estate of Evelyn A.J. Hall.

Cutler v. Cutler, — So.2d —-, 2008 WL 4057751(Fla. 3d DCA Sep 03, 2008)

When I first wrote about this case the 3d DCA upheld a probate court order refusing to apportion any probate expenses to a devise of freely-devisable homestead property under the “inuring clause” of Article X, section 4(b) of the Florida Constitution, effectively frustrating the testator’s clearly expressed testamentary intent [click here].

In a decision that just goes to shows it’s never over ’till it’s over, in response to a motion for rehearing en banc the 3d DCA completely reversed itself and ruled that the freely-devisable homestead property in this case could in fact be sold to pay probate administrative expenses.  For those of us who follow Florida’s byzantine homestead laws, this is pretty shocking stuff.  Here’s how the 3d DCA explained its ruling this time around:

While we agree with the trial court’s conclusion that the property devised to Cynthia was Edith’s homestead, we cannot agree that the constitutional exemption from creditors’ claims inured to Cynthia’s benefit.

It is a cardinal rule of testamentary construction that “the primary objective in construing a will is the intent of the testator .” McKean v. Warburton, 919 So.2d 341, 344 (Fla.2005) (“a person can dispose of his or her property by will as he or she pleases so long as that person’s intent is not contrary to any principle of law or public policy” (citing Mosgrove v. Mach, 133 Fla. 459, 182 So. 786, 791 (1938))); Marshall v. Hewett, 156 Fla. 645, 24 So.2d 1, 2 (Fla.1945) (“In will construction the primary objective of the courts is to ascertain and give effect to the intentions of the testator. In the ascertainment of such intention the will in its entirety will be considered, and when once the intention has been discovered the wording of the will will be given such liberal construction and interpretation as will effectuate the intention of the testator so far as may be consistent with established rules of law.”) (citation omitted); Phillips v. Estate of Holzmann, 740 So.2d 1, 2 (Fla. 3d DCA 1998) (“The polestar in construing any will is to ascertain the intent of the testator.”).

In this case, the trust agreement expressly stated that the corpus of the trust, that is, the interests in Edith’s residence and the adjacent vacant lot, were to pass to, and be administered as part of, her estate upon her death. Edith’s will provides that the interest in her residence held by the trust should be passed to her daughter and that the interest in the adjacent vacant lot should pass to her son. She also directed that her debts be satisfied equally from both properties should the funds in her estate be insufficient to satisfy those debts.

*     *     *     *     *

.  .  .  It has long been recognized that the owner of homestead property may devise that property in a manner that terminates the protections accorded by article X, section 4. In Estate of Price v. West Florida Hospital., Inc., 513 So.2d 767, 767 (Fla. 1st DCA 1987), the court confirmed that where a testator directs the sale of homestead property and distribution of the proceeds, the proceeds lose their homestead character and become part of the estate subject to administrative costs and creditors’ claims. As the court explained, this is because the same result would have obtained had the testator sold the property and either gifted or used the proceeds while alive. Id. (“[I]f Mrs. Price had sold her house during her lifetime and distributed the proceeds to her two children, those proceeds would unquestionably lose their homestead character and would be subject to the claims of her creditors.”); see Knadle v. Estate of Knadle, 686 So.2d 631, 632 (Fla. 1st DCA 1997) (holding that because a will specifically directed that homestead property be sold and the proceeds placed in the residue for distribution along with other assets, it lost its homestead character); see also Thompson v. Laney, 766 So.2d 1087, 1088 (Fla. 3d DCA 2000) (confirming that where a will directs that homestead property be sold and the proceeds distributed, the proceeds lose their homestead protection).

Although Edith did not direct that her home be sold, she did direct, in a specific manner, that it be used to satisfy her debts. This was the equivalent of ordering it sold and the proceeds distributed to pay debts, actions which Price and its progeny confirm results in loss of homestead protections.FN1 While the benefits of homestead protections vest in a qualified beneficiary at the moment of a testator’s death,FN2 the property in this case passed into the beneficiary’s hands impressed with the obligation to pay the testatrix’s debts, an obligation that deprived the property of homestead protection under article X, section 4.

This is, of course, wholly consistent with article X, section 4 which expressly confers the power on the owner of homestead property to sell, mortgage, or give it away. See Art. X, § 4(a)(2)(c), Fla. Const. (“The owner of homestead real estate, joined by the spouse if married, may alienate the homestead by mortgage, sale or gift and, if married, may by deed transfer title to an estate by the entirety with the spouse.”). If a homestead owner (with no spouse and children) can sell, mortgage or give homestead property away while alive and use the proceeds from any such transaction as he or she sees fit, that same owner may give the property away upon death and order it to be used to satisfy debts even if such a devise means the property will no longer enjoy homestead protection.

In this case, rather than selling or mortgaging her homestead interests while alive and using the funds recognized to pay debts, Edith devised her homestead property to her daughter and expressly directed that this devise be used to satisfy a portion of her debts. This devise is wholly consistent with Tescher, Snyder, and Warburton and with article X, section 4 of the Florida Constitution and should be given effect.

Lesson learned?

In his dissent Judge Shepherd made the following observation:

By requiring the devise to Cynthia to abate to pay estate expenses, we incorrectly become the first court to hold that a general direction to pay estate expenses trumps constitutional homestead protections.

Whether you agree with the majority’s decision or Judge Shepherd’s dissent, why take the risk? If there’s any risk your client’s homestead property will be needed to pay probate administrative expenses, I think it still makes sense to include specific language in the will or trust authorizing sale of the homestead property for this purpose.  Here’s how Judge Shepherd described the specific-sale language needed to make sure your client’s estate doesn’t become the next homestead test case:

Nor do the “sale cases” cited by the majority offer any comfort to the majority. See supra p. 8. In both Estate of Price v. West Florida Hospital, Inc., 513 So.2d 767 (Fla. 1st DCA 1987), and Knadle v. Estate of Knadle, 686 So.2d 631 (Fla. 1st DCA 1997), the testators expressly directed their homestead properties be sold upon their respective deaths and the proceeds distributed either equally to their surviving adult children in Estate of Price or under the residuary clause of the will in Knadle. These and a whole host of other Florida cases hold that, in a contest between the application of Article X, section 4(b) and a will directive-as was the circumstance in the two cases cited by the majority-protected homestead becomes an estate asset if and only if “the will specifically orders that the [homestead] property be sold.” Estate of Hamel, 821 So.2d at 1279; see also McKean v. Warburton, 919 So.2d 341, 147 (Fla.2006) (quoting Knadle); Engleke v. Estate of Engleke, 921 So.2d 693, 696 (Fla. 4th DCA 2006) (stating that unless a trust specifically directs homestead to be sold, rights of heirs attach at death and homestead property is protected from creditors). Thompson, cited by the majority, confirms the degree of specificity required in a sale provision in a will to overcome a “protected homestead” challenge:

Florida law specifically provides that homestead property is not subject to the administration of the court unless the will specifically requires that the property be sold. See §§ 733.607–608 Fla. Stat. (1995); Knadle v. Estate of Knadle, 686 So.2d 631 (Fla. 1st DCA 1996) (where a testatrix directs in her will that her homestead be sold and the proceeds divided between her adult children, the proceeds lose their homestead character and become subject to the claims of creditors); Estate of Price v. West Florida Hosp., Inc., 513 So.2d 767 (Fla. 1st DCA 1987) (proceeds of sale of testatrix’ homestead, pursuant to will directing sale and distribution of proceeds to adult children, lost their homestead character and were subject to creditors’ claims). The will in the present case makes no such provision.

Thompson, 766 So.2d at 1088.

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Florida recently adopted it’s own version of a “directed trusts” statute [click here].  And if you take a look at the agenda for the upcoming Florida Bar Trust Law Committee meeting [click here], you’ll see we’re not done tinkering with that statute just yet.

Is this amount of focus on directed trusts by Florida’s Bar and Banking Industry really worth it?  Well, according to a Wall Street Journal article by Arden Dale entitled Estate Plans With Reins (Wall St. J., Sept. 13, 2008), there’s a lot of really smart folks out there who think the answer is a resounding YES!

Hint: If you’re a Florida trusts-and-estates lawyer or bank trust officer, you may want to take a quick look at this new statute.

The WSJ piece is short and it’s full of Florida references, so here’s all of it:

People near retirement age are turning to directed trusts as part of their estate-planning strategy.

Directed trusts are designed for those who want to put most of their estate into a trust but wish to hold the reins on one of the assets in it — say, a company. A bank or trust company manages the trust overall, but the client picks an outsider to handle a particular asset.

Florida recently changed its rules to make it more attractive for people to use directed trusts; some 30 states now have such statutes. The push for the change came from banks and trust companies with clients who own businesses and real-estate developments.

An entrepreneur nearing retirement, for example, might choose a directed trust to safeguard his company along with the rest of his estate, but also give family members the power to buy, sell and have voting rights on the company stock.
Putting a business into a larger trust is for those who “think the long-term economic interest of the family is to not sell the business, to let it go on generating money,” said Bruce Stone, a shareholder at Goldman Felcoski & Stone PA, a law firm in Coral Gables, Fla.

Banks often don’t want to administer a closely held company. On the other hand, a business owner is likely to have family or other associates who can take on the job as co-trustee.

In Florida, the proliferation of troubled real-estate developments is giving people another reason to choose directed trusts. Clients holding such assets tend not to want a trust company to manage them, said Mr. Stone.

Joan Crain, senior director of wealth-management strategies at BNY Mellon Wealth Management in Fort Lauderdale, Fla., said she has heard of wealthy people using directed trusts to keep specialized investments, such as hedge funds, in the hands of a longstanding money manager. Another common reason to use a directed trust is to put a relative or family lawyer in charge of doling out money from the trust to beneficiaries.

Directed trusts don’t have dollar-amount requirements, but some advisers said $1 million is the minimum to make the strategy worthwhile. BNY Mellon generally handles directed trusts of about $25 million and up in total assets, but also works with some smaller ones depending on the client’s long-term estate plan, said Ms. Crain.

Banks and trust companies like directed trusts because they don’t have to worry about managing assets in which they have no expertise.

A good trustee recognizes there are categories of assets he or she isn’t as good at managing, said Richard W. Nenno, managing director and trust counsel at Wilmington Trust Co. Mr. Nenno is chairman of the committee of the Delaware State Bar Association that works on updating Delaware trust law.

Anyone thinking about setting up a directed trust should tread carefully when choosing the outside manager, called a co-trustee or special trustee, protector or adviser, depending on the state where the trust is created.

The main trustee may not be responsible for that piece of the estate, and so the directed trustee “better be someone good and trustworthy who can be held accountable if something goes amiss,” Mr. Nenno said.

It also is important to realize that all directed trusts aren’t created equal. States hold trustees to different standards of liability, and one should get to know the rules that apply in any specific case. In several states, one could theoretically draft the trust so that no one is responsible should something go wrong, said Mr. Nenno.

However, he said, “an attorney drafting one of these is going to want to make someone responsible for the performance of the asset.”

Fees can be a sticking point with directed trusts; the bank or trust company typically charges a fee for the special asset, even though someone else is managing it. One reason is that the bank will end up performing some basic administrative work on the asset. The fee could be a flat fee or a percentage of the value of the asset in question.

Work to negotiate the lowest fee possible if you set up a directed trust. The result will depend on your relationship.

Blogging credit:

Credit goes to the Wills, Trusts & Estates Prof Blog for bringing the linked-to WSJ article to my attention in the blog post entitled “Directed Trusts” gain in popularity.

Click here for a PDF copy of the Agenda and related Reports/White Papers for the upcoming meeting of the Florida Bar’s Trust Law Committee at the Ritz-Carlton in Key Biscayne this coming Friday, September 19th, at 2 p.m.  These materials are an excellent way to keep up on the latest developments involving Florida’s Trust Code that could affect you, your firm or your clients. Any questions/comments regarding the meeting and the linked-to materials should be directed to the committee chair: Barry F. Spivey.