Listen to this post

File this under business development for all you trusts-and-estates planners out there.  A new study sponsored by U.S. Trust, Bank of America Private Wealth Management finds that the majority of owners of ultra-high-net-worth family businesses are leaving their professional and personal interests vulnerable through inadequate business succession, asset protection and estate planning. Click here for a link to the full press release.

Although the full study is not available on line (you have to buy it), the following bullet points caught my attention (again, think business development):

Succession Plans Collecting Dust

  • While over three quarters (76%) of owners have succession plans, only 38 percent implement them, inadequately addressing issues of succession
  • Most individuals with succession plans in place are not focusing on tax-mitigation issues (73%), even though nearly all participants (93%) report a desire to lower the tax burden associated with transferring the business

Asset Protection Strategies Missing

  • Almost nine out of 10 (89%) business owners were “very” or “extremely concerned” about protecting the family’s wealth
  • However, nearly three quarters (73%) of them do not have asset protection plans in place

Estate Plans Outdated

  • Over three quarters (78%) of owners have personal estate plans; however, 89 percent have not updated them after a life-changing event such as marriage, birth or death rendering the plan obsolete
  • More than half (54%) of participants lacking estate plans reported difficulty dealing with their own mortality, and one quarter (25%) cited a lack of time as reasons for not creating a plan

Blogging credit:

Credit goes to the WSJ Wealth Report Blog for bringing the U.S. Trust study to my attention in this blog post.

Slate recently reported here on Bill Murray’s brewing divorce. From a practitioner’s standpoint I was especially interested to find excerpts of original source documents – including Murray’s prenuptial agreement – reproduced in the Slate post. Here’s an excerpt:

Days before their 1997 wedding ceremony, comedian Bill Murray and his wife, Jennifer Butler Murray, entered into a 26-page antenuptial agreement (excerpted below and on the following four pages). “Jennifer … is aware that Bill is a person of very substantial means and income,” the document said (Page 2). The agreement stipulated that Murray would “continue to retain all right title and interest … to all separate property he may now own or hereafter acquire” (Page 3). As a wedding present, Bill agreed to buy his bride a modest house (“not exceeding one million dollars”) of her own (“title … taken in Jennifer’s sole name”—Page 5). In the “event of marital discord,” Jennifer would relinquish her rights to alimony (Page 4) and instead receive within 60 days of the marriage’s dissolution a lump-sum “marital award” of $7 million (Page 5).

I don’t do divorce litigation, but I do draft marital agreements as part of my practice. The Murray piece underscored for me how high the stakes can be when you work on a pre-nup. Fortunately, Florida recently adopted the Uniform Premarital Agreement Act (UPAA) at F.S. 61.079 (like that segway from celebrity divorce to Florida statutory reference?).  In a recent Florida Bar Journal article entitled The Uniform Premarital Agreement Act: Taking Casto to a New Level for Prenuptial Agreements, Florida divorce attorney Doreen Inkeles described the likely impact of this new legislation on the enforceability of pre-nuptial agreements as follows:

Ultimately, it would appear that prenuptial agreements will be harder to set aside under the act. If one cannot establish fraud, duress, or overreaching, which are hard enough to prove, the need to prove unconscionability catapults what had previously been an “unfair or unreasonable” standard into the stratosphere where the circumstances must be “shockingly unfair” and “excessively unreasonable.” And the elements of lack of financial disclosure/lack of knowledge must also accompany the unconscionability claim. The act reflects Florida’s policy which does not prohibit persons from making hard bargains or entering into unfair agreements, as long as they do it voluntarily, of their own free will, and with at least an approximate knowledge of what they are giving up.

.  .  .  .  .

Combined with the apparently more stringent standards set forth in the UPAA, parties will have second thoughts about testing the enforceability of their agreements now that the Florida Supreme Court has recognized the enforceability of prevailing party attorneys’ fee provisions contained in prenuptial agreements which would place liability on the impecunious spouse for the already dominant spouse’s attorneys’ fees should the agreement be upheld.

Blogging credit:

Credit goes to Chicago probate attorney Joel A. Schoenmeyer for bringing the Slate piece to my attention in this post on his Death & Taxes Blog.

The Florida Bar Real Property Probate and Trust Law Section has developed a new Fellowship program aimed at encouraging junior attorneys (i.e., under age 36) and newly-minted attorneys (i.e., admitted to the bar for fewer than 10 years) to become involved in the Section. Breaking into this niche ain’t easy, so anything the Section can do along these lines is a good thing.

Here’s a copy of the memo explaining the Fellowship program and a copy of the Fellowship application. The deadline for this year’s application is July 21, 2008. If you have any questions contact Tae Bronner, co-chair of the RPPTL Fellowship committee at tae@estatelaw.com or 813-907-6643. The Fellowship memo and application can also be found on the section website; www.rpptl.org.

Good luck!

CORRECTION:

I originally reported that the RPPTL Section’s Fellowship program was only open to attorneys under age 36. That was incorrect. As explained in the linked-to Section memo the Fellowship Program is in fact open to all lawyers who (a) are members of the RPPTL Section and (b) have been admitted to the bar for fewer than 10 years or (c) are younger than 36 years of age. I’ve revised this blog post accordingly.

Law professors Joanna Grossman and Mitchell Gans, both of Hofstra University, published an interesting two-part article dissecting the outcome of Heath Ledger’s untimely death from a probate point of view. Entitled Heath Ledger’s Estate: Why Daughter Matilda, Who Was Left Nothing in Her Father’s Will, Might Have a Claim to Everything, the article is worthwhile reading for all probate practitioners because it provides a useful outline for thinking about any estate involving a pretermitted child. The following excerpts are from part one of the series.

1.  Article: The Few, but Potentially Important, Rights of a Disinherited Child:

Under American law, children have no right to inherit from their parents, but they do have the right not to be disinherited by accident – at least, in most states. At a minimum, most jurisdictions protect children who are born after the execution of a parent’s will – so-called “afterborn” children – from unintentional disinheritance. Under omitted child statutes (also called “pretermitted” child statutes), the forgotten child is entitled to some share of the parent’s estate on the assumption that the parent simply forgot to amend the will after the child’s birth.

Let’s assume that New York law applies to the distribution of Ledger’s estate, because New York is the place he resided and then died. (The conflict-of-law issues will be considered in detail in Part II of this column.) Under Section 5-3.2 of the New York Estates, Powers and Trusts Law (EPTL), a child born after the execution of a parent’s last will is entitled to a portion of the estate as long as she is neither provided for nor mentioned in the will. Matilda was born in 2005, clearly after execution of his will in 2003, and there is no mention in Ledger’s will of future children. (In contrast, in Anna Nicole Smith’s will, she intentionally disinherited all existing and future children not mentioned, putting her daughter Dannielynn’s right to inherit in jeopardy – as discussed in a prior column for this site.).

Florida law:

The law in Florida regarding pretermitted children is similar to New York’s on this point and would result in the same outcomes discussed above. Here’s our statute:

732.302 Pretermitted children.–When a testator omits to provide by will for any of his or her children born or adopted after making the will and the child has not received a part of the testator’s property equivalent to a child’s part by way of advancement, the child shall receive a share of the estate equal in value to that which the child would have received if the testator had died intestate, unless:

(1) It appears from the will that the omission was intentional; or

(2) The testator had one or more children when the will was executed and devised substantially all the estate to the other parent of the pretermitted child and that other parent survived the testator and is entitled to take under the will.

The share of the estate that is assigned to the pretermitted child shall be obtained in accordance with s. 733.805.

2.  Article: When Do Children Born Out of Wedlock Inherit from Their Fathers?

Matilda’s rights as a disinherited child turn on whether she is considered the “child” of Ledger under New York law. The many magazine photos of the two strolling through the park may cement the social perception of the parent-child relationship, but the legal standard is more technical.

A child born to married parents is considered to be legally the child of both – and, as such, will have full inheritance rights from both parents. However, New York, like most other states, has different rules for determining legal parenthood of children born out of wedlock. A non-marital child is always considered the legal child of her mother and may thus always inherit from her. Yet such a child may only inherit from her father if steps were taken to establish the legal parent-child relationship, such as an acknowledgment of adjudication of paternity.

In New York, under EPTL § 4-1.2, a man is the legal father of a non-marital child if paternity has been adjudicated by a court; the parents have acknowledged paternity in writing; or paternity has been established by other “clear and convincing” evidence and the father has “openly and notoriously acknowledged” the child as his own.

Here, it seems pretty clear that Ledger’s paternity has been adequately established. He is listed as the father on her birth certificate, and he lived with Matilda and Michelle for the first year of Matilda’s life. (Plus, all the photos in US Weekly of Ledger pushing her stroller do support the claim of open and notorious acknowledgment.)

Moreover, a recent appellate case in New York rules that a child can get posthumous DNA paternity testing as long as she can show open acknowledgment of paternity. So, one way or the other, Matilda should be able to establish a parent-child relationship with Ledger.

Florida law:

In Florida the rules for establishing paternity of out-of-wedlock child are governed by F.S. 732.108, and would again result in the same outcome. Here’s the relevant portion of the statute

732.108 Adopted persons and persons born out of wedlock.–

.  .  .

(2) For the purpose of intestate succession in cases not covered by subsection (1), a person born out of wedlock is a descendant of his or her mother and is one of the natural kindred of all members of the mother’s family. The person is also a descendant of his or her father and is one of the natural kindred of all members of the father’s family, if:

(a) The natural parents participated in a marriage ceremony before or after the birth of the person born out of wedlock, even though the attempted marriage is void.

(b) The paternity of the father is established by an adjudication before or after the death of the father.

(c) The paternity of the father is acknowledged in writing by the father.

3.  Article: To What Share of a Parent’s Estate is an Afterborn Child Entitled? 

As an after-born child, what portion of Ledger’s estate might Matilda be entitled to? Now, this is where the story gets interesting. Under New York’s omitted child law, when a testator has no children living at the time the will is executed, the afterborn child is entitled to the same share she would have taken had the testator died without a will (in legal terms, “intestate”). In other words, the afterborn child is entitled to her “intestate” share of his estate, and the will is revoked to the extent of that share.

The laws of intestate succession determine who succeeds to a decedent’s estate and in what proportions when the individual died without a will. These laws tend to first give priority to a decedent’s spouse, but then seek to distribute the estate to the closest surviving relatives, with descendants always being preferred to ancestors. As a general matter, for example, parents of a decedent would never take under the rules of intestacy unless the decedent had not a single living descendant.

In this case, New York’s intestacy laws lead us to a somewhat striking result: Matilda, who was omitted from her father’s will entirely, would be entitled to everything. Why? Under EPTL §4-1.1, when a decedent is survived by no spouse, the decedent’s “issue” (a legal term that includes any direct descendant of the deceased such as children and grandchildren) take everything. Ledger was single when he died (he had never been married), so Matilda is next in line.

What about the Will, which was designed to benefit Ledger’s parents and sisters? If New York law governs disposition of his estate, his Will would be revoked in its entirety by the pretermitted child law. Ledger’s Will, in other words, could be declared valid, but, ultimately, completely revoked by the share due Matilda.

This result is counterintuitive, yet,clearly supported by both statutory and caselaw in New York. In a 2003 ruling of a probate court in New York, Lance Nelson’s entire estate was given to his infant daughter under the omitted child law, even though he had executed a valid will leaving everything to his parents. As the court explained in that case: “If Ashley Nelson is determined to be an afterborn child and was unprovided for by any settlement, the Will is revoked to the extent of her intestate share. If she is the only child of the decedent, that intestate share is the entire estate and the entire dispositive provisions of the Will are revoked.” If Ledger’s Will were probated in New York, and governed by New York law, this exact same analysis would apply, and Matilda would inherit his entire estate.

Florida law:

Here again the result under Florida law would be the same as under New York law: the pretermitted children of an unmarried decedent get 100% of his estate, even if the decedent executed a valid will leaving everything to his parents, a girl friend, a neighbor or a local charity. If there’s only one pretermitted child, he or she gets everything. Here’s the relevant portion of the governing Florida statute.

732.103 Share of other heirs.–The part of the intestate estate not passing to the surviving spouse under s. 732.102, or the entire intestate estate if there is no surviving spouse, descends as follows:

(1) To the descendants of the decedent.

4.  Article: What Effect Might a Second, Pre-Will Child Have on Matilda’s Claim?

After Ledger died, tabloids reported that Ledger might have fathered a child long before he fathered Matilda. There is an as-of-yet-unsubstantiated claim that he fathered a child while still in high school in Australia, with an older woman. If this claim is true, would the existence of that child (claimed to currently be an 11-year-old girl) have any effect on the distribution of Ledger’s estate?

That depends largely, at least under New York law, upon whether the criteria for legal parenthood would be met. There is no reason to think, with the current evidence, that Ledger had acknowledged paternity of the Australian child, had a DNA test during his life to determine paternity, or indeed even knew about her. As a result, under New York’s § 4-1.2, at least as presently interpreted, the child would be unable to prove paternity.

But what if the Australian girl were nonetheless determined to be Ledger’s child? Such a claim might be made either by the girl (through her mother or another representative), by pointing to the law of some other jurisdiction, or by Ledger’s parents and sisters, in order to wholly defeat Matilda’s rights.

The latter claim is somewhat counterintuitive: As a child born prior to the execution of the Will, the Australian girl is not protected by New York’s omitted-child law. So how can her existence, if the law treats her as Ledger’s legal child, deprive Matilda of her after-born share?

Here is the logic behind New York’s rule: If the testator omitted a child who was already in existence when he wrote his Will (for Ledger, this would be the Australian girl), how can we assume that he would have provided for the after-born child (for Ledger, Matilda)? To the contrary, we might assume that he intentionally had disinherited and would continue to disinherit, any and all children he might have. That assumption might be unfair in a particular case – Ledger may not have know about the Australian girl (if she exists) and that may be the only reason he did not include her in his Will. But the assumption applies in all cases, and cannot be rebutted.

Florida law:

Here for the first time Florida and New York law diverge in their results. New York’s pretermitted child statute is more restrictive than Florida’s pretermitted child statute [F.S. 732.302]. Under Florida’s statute, intentionally disinheritting a child in existence at the time the will is executed does NOT result in an automatic disinheritance of a later-born child. As such, under Florida law Matilda would still be entitled to 100% of the estate . . . even if another child, born before Ledger executed his will, establishes paternity.

It’s interesting to note that neither Florida nor New York have adopted the Uniform Probate Code’s pretermitted child statute (Section 2-302. Omitted Children.) The UPC commentary to this subsection is, as usual, an excellent starting point for figuring out the public policy rationales underlying the statute. Reading the UPC commentary and comparing how the Florida statute differs also makes clear the public policy decisions we’ve made here in Florida.

Blogging credit:

Credit goes to Texas probate litigator J. Michael Young for first reporting here in his Texas Probate Litigation Blog on the linked-to article.

Postscript:

Heath Ledger’s daughter inherited all of his estate, see here.

Listen to this post

Jurisdictional issues in probate proceedings are a source of recurring confusion for litigants and courts alike. If the court is proceeding based on its in rem jurisdiction, then under F.S. 731.301(2) all you need to do is serve anyone with a stake in the probate estate with “formal notice” under Probate Rule 5.040 and bingo, they’re bound by the resulting court order to the extent of their interest in the estate. If the court is asserting in personam jurisdiction over a particular person (vs. in rem jurisdiction over the assets of the estate), then formal notice is not sufficient, in those cases a “summons”/service of process under Civil Procedure Rule 1.070 on the person you want to subject to court authority is necessary. Applying these basic concepts in a real life probate proceeding isn’t always easy.

Case Study

Hall v. Tungett, — So.2d —-, 2008 WL 2065802 (Fla. 2d DCA May 16, 2008)

In this case the 2d DCA basically avoided stepping into the in rem vs. in personam jurisdictional thicket by concluding that the issue was forfeited at the trial court level because the side contesting jurisdiction failed to follow the procedural/evidentiary steps necessary to contest jurisdiction. The 2d DCA then goes on to provide an excellent procedural road map for probate counsel to follow if they ever find themselves in a dispute over jurisdiction.

Step 1: Did PR satisfy initial pleading requirement? YES

The PR, as plaintiff in this proceeding, bore the initial burden of pleading a sufficient basis to obtain jurisdiction over Ms. Hall. See Venetian Salami Co. v. Parthenais, 554 So.2d 499, 502 (Fla.1989). According to the 2d DCA the PR met its pleading burden as follows:

.  .  .The statute defines a “distributee” as “a person who has received estate property from a personal representative or other fiduciary other than as a creditor or purchaser.” § 731.201(10). A distributee who improperly receives assets or funds from an estate may be compelled to return the assets or funds received. § 733.812.

The PR’s motion alleged that the brokerage account was titled in the decedent’s name at the time of his death, was wrongfully distributed to Ms. Hall by Ms. Green as the predecessor personal representative, and was in Ms. Hall’s possession. The motion claimed that the account and other property belonged to the Estate and must be returned to it, or if the account and property were no longer in Ms. Hall’s possession then she had to return to the Estate the equivalent value, as well as any income earned on the assets or any gain received with respect to the assets.

These allegations were sufficient to meet the PR’s pleading requirement and to support service on Ms. Hall by the formal notice method permitted under section 731.301 and rule 5.040. Further, Ms. Hall did not contest the allegations by affidavit or other sworn proof. Thus, the court could properly find that it had jurisdiction over Ms. Hall to the extent of her interest in the Estate and to the extent that she received Estate property, other than as a creditor or purchaser, from Ms. Green.

Step 2: Did Ms. Hall contest the jurisdictional allegations by affidavit or other sworn proof? NO

Once the PR met its burden of pleading, the burden shifted to the person contesting jurisdiction to contest the essential jurisdictional allegations in the manner laid out in the following quoted text. Ms. Hall didn’t comply with this procedure, effectively forfeiting the issue (ouch!!).

In [Hilltopper Holding Corp. v. Estate of Cutchin, 955 So.2d 598, 601 (Fla. 2d DCA 2007)], we explained as follows:

If the plaintiff meets this pleading requirement, the burden shifts to the defendant to file a legally sufficient affidavit or other sworn proof that contests the essential jurisdictional facts of the plaintiff’s complaint. To be legally sufficient, the defendant’s affidavit must contain factual allegations which, if taken as true, show that the defendant’s conduct does not subject him to jurisdiction…. If the defendant does not fully dispute the jurisdictional facts, the motion must be denied….

If the defendant’s affidavit does fully dispute the jurisdictional allegations in the plaintiff’s complaint, the burden shifts back to the plaintiff to prove by affidavit or other sworn proof that a basis for long-arm jurisdiction exists. If the plaintiff fails to come forward with sworn proof to refute the allegations in the defendant’s affidavit and to prove jurisdiction, the defendant’s motion to dismiss must be granted.

955 So.2d at 601-02 (citations omitted).

Step 3:  Is the litigation about whether the brokerage accounts are probate assets? NO

On appeal Ms. Hall argued that she shouldn’t be subject to the probate court’s in rem jurisdiction because she had not conceded that the brokerage account at issue in this case was in fact a probate asset. The 2d DCA basically said that’s a fine argument at the trial court level, but gets you nowhere if you bring it up for the first time on appeal. Again, the 2d DCA skirted the substantive issue by basically ruling that Ms. Hall’s failure to follow the proper procedure at trial resulted in her forfeiting this point.

[T]he PR alleged that Mr. Green owned the brokerage account at the time of his death, that upon his death the account was an Estate asset, and that as the initial personal representative Ms. Green improperly distributed the account proceeds to herself and Ms. Hall. Unlike the litigation in [Estate of Vernon v. Resolution Trust Corp., 608 So.2d 510 (Fla. 4th DCA 1992)], the present litigation is not intended to determine whether the Estate, in the first instance, had any interest in the brokerage account; rather, the litigation is intended to recover an Estate asset that allegedly had been improperly distributed by Ms. Green. The allegations contained in the motion were not refuted by Ms. Hall in her response to the motion or by sworn evidence challenging the PR’s factual allegations. Thus, based on the information before it, the probate court properly determined that service by formal notice was sufficient and that it could exercise jurisdiction over Ms. Hall.

Do you really need evidence in contested probate proceedings? YES!!

Ms. Hall got a partial win out of this appeal when the 2d DCA reversed the trial court’s ruling on the contested brokerage account. The trial court apparently ruled based solely on argument of counsel, which is flattering to the attorneys, but scores a big zero on the evidence meter. Getting back to basics here, counsel’s argument is NOT evidence. I’ve written before about probate court’s deciding issues in the absence of evidence [click here]. Here’s how the 2d DCA tackled the no-evidence issue in this appeal:

Concerning that part of the probate court’s order that directed Ms. Hall to transfer property to the PR, Ms. Hall argued to the probate court that once the court resolved the issue of jurisdiction, an evidentiary hearing would be necessary to resolve disputed issues of fact relating to the property and the relief sought by the PR. After hearing the arguments of counsel as to jurisdiction and service by formal notice, the probate court took these issues under advisement. Then, the court entered its order determining that service had been proper and that it had jurisdiction over Ms. Hall. In the same order, and without receiving any evidence, the court determined that the Estate was entitled to return of the property and directed Ms. Hall to transfer the property to the PR.

As an interested person regarding the disputed property, Ms. Hall was entitled to be heard and to present evidence in support of her position. See Fleming v. Demps, 918 So.2d 982, 984 (Fla. 2d DCA 2005) (reiterating that due process requires that a party be given the opportunity to be heard and to present evidence “to determine who is the rightful owner of the funds and whether the funds should be administered as estate assets or otherwise distributed to the proper owner”). Moreover, the PR did not present any evidence establishing the Estate’s entitlement to return of the property. Because the court acted without an evidentiary basis in directing Ms. Hall to transfer the property to the PR, we reverse and remand for an evidentiary hearing.

Listen to this post

The linked-to opinion should be read by every trust beneficiary contemplating a lawsuit against his or her trustee. Not only is the beneficiary usually at a disadvantage in terms of litigation financing (the trustee can use trust assets to pay litigation costs, the beneficiary has to pay these costs out of pocket), courts will often give an enormous amount of deference to trustees, forgiving them small “technical” mistakes and erring on their side even when the trustee’s actions are questionable or down right vindictive.

Case Study

Parker v. Shullman, — So.2d —-, 2008 WL 2038046 (Fla. 4th DCA May 14, 2008)

This is the third!!! time the beneficiary in this case has sued her trustee, lost at trial, and lost again on appeal before the 4th DCA. Oh, and in the last two appeals the beneficiary tried to get the Florida Supreme Court to hear the case and was denied.

The first time around the 4th DCA agreed with the trial court’s ruling that although certain actions taken by the trustee were “questionable and vindictive,” they didn’t rise to the level warranting removal as trustee. Parker v. Shullman, 843 So.2d 960, 961 (Fla. 4th DCA), rev. denied, 857 So.2d 197 (Fla.2003). The second time around the beneficiary sued her trustee based on objections to the compensation he was paying himself as CEO of the closely held business he was also administering as trustee of the trust. The trial court’s dismissal with prejudice of that lawsuit was upheld on appeal because “the trustee’s simultaneous participation in the company and management of the trusts was authorized by the text of the trusts.” Parker v. Shullman, 906 So.2d 1236, 1237 (Fla. 4th DCA), rev. denied, 915 So.2d 1196 (Fla.2005).

Strike three: beneficiary 0 for 3 in litigation v. trustee

The beneficiary fared no better this time around – her third trial – than she’s done in the past. This time the issues at trial were the sorts of things that often bother beneficiaries. Again, this case is a good example of why patience may be wiser (and certainly cheaper) than suing.

First complaint: trustee is taking too long to fund my trust

This is the sort of complaint trusts and estates lawyers hear all the time. Even if the trustee is dragging his feet, if there’s even a whiff of legitimacy to his delay, the court will likely side with the trustee. That’s what the court did in this case, and here’s why the 4th DCA affirmed that ruling:

Section [736.05053] provides that the interests of all beneficiaries of a revocable trust are subject to the trustee’s duty to pay the expenses of the administration and obligations of the grantor’s estate. This court was presented with a similar situation in First Union National Bank v. Jones, 768 So.2d 1213, 1215 (Fla. 4th DCA 2000), in which a trustee argued the trial court had erred in ordering disbursement of the entire corpus of a trust prior to the trust having the opportunity to seek its attorney’s fees. This court reversed and remanded:

Although a trust instrument directs termination of the trust and the distribution of the principal to the beneficiaries upon the settlor’s death, the trustee cannot make complete distribution until provision has been made for all the expenses, claims and taxes the trust may be obligated to pay, and certainly not before these amounts have been fully ascertained. Moreover, when the trust is the beneficiary of the grantor’s probate estate and is charged with the duty to pay the expenses, claims, and taxes imposed on the probate estate, the trustee cannot make complete distribution of the trust until the probate proceeding has been substantially concluded, which was not the case here.

First Union, 768 So.2d at 1215; see also Sheaffer v. Trask, 813 So.2d 1051, 1052 (Fla. 4th DCA 2002)(citing First Union in reversing trial court’s grant of petition to distribute trust assets before authorizing trustee to pay trust debts and expenses); Merrill Lynch Trust Co. v. Alzheimer’s Lifeliners Ass’n, 832 So.2d 948 (Fla. 2d DCA 2002)(holding trial court abused its discretion in finding trustee in civil contempt for failing to distribute trust where it would not have been prudent to do so without an accounting).

Second complaint: it’s the trustee’s fault the estate’s stock portfolio lost money

Under Florida’s Prudent Investor Rule, F.S. 518.11, whether a trustee has done his job right in managing the trust’s stock portfolio is determined by looking at his investment “process,” not his investment results. In other words, if the trustee takes all the steps a reasonable investor would take to properly manage his investment portfolio, it doesn’t matter if the stocks crater in value, he’s done his job. As the 4th DCA put it, “section 518.11 provides that the fiduciary’s decisions are to be judged under the facts and circumstances at the time of the decision or action, and that the test is one of conduct rather than resulting performance.” Based on the following evidence, the beneficiary lost on this point as well (note the emphasis on process, not performance):

The testimony and evidence at trial supports the trial court’s finding that Shullman’s conduct with respect to the trust’s complete portfolio of assets satisfied the Prudent Investor Rule and that appellant’s objections were heavily based on hindsight rather than in the context of the existing facts and circumstances at the time. The trial court found that Shullman relied upon the advice of Comerica in managing the securities. Shullman testified at length about the steps he took following Barbara’s death to interview and eventually retain an investment adviser and schedule meetings with them to advise them of the trust requirements, and that he followed their advice. The trial court’s decision is therefore supported by competent substantial evidence in the record that Shullman hired Comerica to manage the securities and reasonably relied on them in his capacity as trustee.

Third complaint: the trustee improperly paid his legal fees without getting the court’s prior approval

This loss must have really hurt. On this point, the beneficiary was clearly in the right – and yet she lost here too. Under F.S. 736.0802(10), a trustee who’s being sued for breach of trust may be personally liable for damages, thus it’s a conflict of interest to use trust funds to pay for the trustee’s personal legal defense. The statute deals with this conflict of interest by requiring that trustees in this situation obtain court approval prior to using trust funds to pay for their legal defense. The 4th DCA upheld this interpretation of the statute just last year in J.P. Morgan Trust Co., N.A. v. Siegel, — So.2d —-, 2007 WL 2710957 (Fla. 4th DCA Sep 19, 2007).

On this issue the 4th DCA agreed with the beneficiary and reversed the trial court’s ruling absolving the trustee from the obligation of obtaining court approval prior to paying for his personal legal defense with trust assets. But having given with one hand, the 4th DCA took with the other by simply giving the trustee a free “do over”:

[I]n accordance with Siegel, we hold that the action objecting to the compensation Shullman paid himself as CEO of Sportswear put Shullman in a position of conflict under the previous version of section 737.403(2), Florida Statutes, in effect at the time. We therefore reverse on this issue without prejudice to Shullman’s ability to seek court approval for the fees incurred defending that action.

In 2006 I predicted the federal estate tax would ultimately NOT be repealed, but that it would be frozen at 2009 levels: $3.5 million exemption ($7 million for couples), at a top rate of 45 percent [click here].

Post 2006 developments have only confirmed my initial estate tax predictions. The latest evidence: The Wall Street Journal’s Wealth Report Blog reported here on a new Financial Times/Harris Poll finding growing worldwide support for raising taxes on the wealthy. Here’s the Wealth Report Blog’s take on the poll:

The study of 8,748 adults in eight countries found that more than half of respondents in all countries believed the wealthy should be taxed more. Here are the soak-the rich rankings (i.e., the percentage of respondents from each country who said “The government should tax the wealthy more”):

Japan — 77%
Spain — 65%
Germany — 64%
U.S. — 62%
China — 60%
Italy — 59%
U.K — 56%
France — 51%

Granted, there are some obvious problems with the poll — it defines neither “wealthy” nor “tax more.” And it’s a relatively small sample size per country.

Yet the responses become more interesting when they’re compared with another poll question: Is the gap between rich and poor too wide?

In this ranking — call it the envy ranking — Japan is at the bottom, with only 64% of respondents saying the gap is too wide, while another 20% believe it’s just right. France has the second-highest envy ranking, with 85% believing the gap is too wide — yet it has the lowest “soak-the-rich” ranking. Germany is ranked first in the envy ranking at 87%, while the U.S. ranks second to last, with 78% saying the gap is too wide.

You would think that the countries with the highest envy ranking would also be the most likely to want to hike taxes on the rich. So why is the relationship nearly the opposite?

One answer might be existing tax codes. France already taxes its earners heavily, so there might be less pressure to tax people even more, even though the envy ranking is high. The U.S. probably has the highest wealth gap of any of the other countries, yet taxing the rich isn’t as popular here, since more voters aspire to become wealthy themselves.

Another answer may be relative wealth gaps. Germans says their wealth gap is too wide –but Germany is among the more meritocratic economies in the world when it comes to distribution of wealth. Germans’ definitions of “too wide” are probably different from those of Japanese and American respondents.

Click here for a PDF copy of the Agenda and related Reports/White Papers for the Probate and Trust Litigation Committee Meeting in Bonita Springs on May 22, 2008. I found the following legislative items especially interesting:

  • Corporate trustees should be happy with the new legislation being proposed in House Bill 435 [Agenda ITEM 2]. This bill would make the following changes to Florida’s Trust Code:
  1. F.S. 763.0703(7) would be amended to provide for the type of “directed trusts” banks and trust companies have been lobbying for. Click here for the back story on this issue.
  2. F.S. 736.0802(10) would be amended to make it much more difficult to cut off a trustee’s access to trust funds to pay attorney’s fees when being sued for breach of trust. Click here for an example of the type anti-trustee ruling this legislation is attempting to block.
  3. F.S. 736.1008 would be amended to set new outside time limits on when a beneficiary could sue a trustee for breach of trust.
  • It looks like the proposed new rule giving heirs standing to challenge a deathbed marriage on the grounds of fraud, duress or undue influence I previously wrote about [click here] is coming up for a vote [Agenda ITEM 4]. This is good public policy, I hope it becomes law soon.

Questions/comments regarding the meeting and the linked-to materials should be directed to the committee chair: William (“Bill”) T. Hennessey.

In re Guardianship of Shell, — So.2d —-, 2008 WL 1757211 (Fla. 2d DCA Apr 18, 2008)

When it comes to guardianship cases the court is not simply adjudicating a dispute, it is the party with ultimate/primary authority to determine, in its discretion, what is in the "best interests" of the ward. I think this perspective is crucial to understanding the level of scrutiny courts give to guardianship fee petitions. It is this special role of the court in guardianship matters that was also the basis of the 2d DCA’s grandparent-visitation-rights opinion in 2005 [click here].

Competent Substantial Evidence: Litigation of Guardian’s and attorney’s fees and expenses.

The statute governing contested guardian fee petitions is F.S. 744.108. In this case the court-appointed guardian was Lutheran Services Florida, Inc. In a contested hearing on its fees the only evidence was the testimony of Lutheran Services’ representative, Sharon Van Wart. She, of course, testified that the fee was appropriate. The trial court disagreed and Lutheran Services appealed. The issue on appeal was whether your own witness’s testimony can constitute "competent, substantial evidence" to rule against you. The answer: of course! For me, the big lesson from this case is that fee disputes are always bad news.

Here are the key excerpts from the linked-to opinion:

    In this appeal, Lutheran Services relies on Sitter for the proposition that a probate court’s decision to reduce a guardian’s fee must be based on competent, substantial evidence. 779 So.2d at 348. We do not disagree with this general statement. However, we note that no presumption of reasonableness attaches to a guardian’s petition for fees, and no statute or case law requires the probate court to simply accept the guardian’s fee petition at face value and rubberstamp it. Nor is the probate court required to accept a guardian’s personal assertion of the time he or she spent performing a common task as dispositive of the issue of reasonableness. Indeed, such would be an abdication of the probate court’s responsibilities to the ward. Instead, the probate court may question the guardian concerning the tasks performed and the time spent performing those tasks, and the guardian’s responses to those questions constitute competent evidence upon which the probate court may rely when determining whether the fee requested is reasonable. Moreover, when the probate court accepts such testimony from the guardian, it may assess the credibility of that testimony in light of the court’s experience and common sense, and this court must defer to the probate court’s credibility assessment.

    .   .   .   .   .

    Here, the probate court elicited, or attempted to elicit, evidence from Van Wart to support the disputed fee entries. Had Van Wart provided a reasonable explanation for why the claimed time was necessary to accomplish the disputed tasks in this case, we might have had some basis to find that the probate court abused its discretion in rejecting that testimony and reducing the fee. However, when Van Wart failed to provide any testimony, reasonable or not, to support the time claimed for the specific tasks at issue, the probate court was within its authority to reduce the fees accordingly. Therefore, we hold that the probate court did not abuse its discretion in reducing the fees claimed by Lutheran Services in this case and in denying the objections raised by Lutheran Services to the reduced fee.

SOAPBOX SOUND OFF:

Are courts really helping wards by forcing top-tier providers, like Lutheran Services, out of the guardianship business?

In the linked-to opinion the court alludes to its special role in contested guardianship proceedings – especially when the guardian is litigating its own fees – in the following footnote:

[FN1.]    At the start of the hearing, the probate court expressed its concerns that no one at the hearing was representing the ward, whose interests on the fee reduction issue might well conflict with the guardian’s interests since the guardian’s fees were being paid from the ward’s assets. We share the probate court’s concern that no one is truly representing the ward’s interests when objections to fee reductions are filed and brought to hearing by the guardian. We also note that section 744.391, Florida Statutes (2005), requires the probate court to appoint a guardian ad litem to represent the interests of the ward “if the interest of the guardian is adverse to that of his or her ward.” However, we recognize that appointing a guardian ad litem for the ward each time the guardian petitions for an award of fees is impractical. Therefore, we must rely on the probate court to exercise its authority responsibly to protect the interests of the ward in these situations.

Based on their role in guardianship cases and the perceived conflict of interest noted above, courts feel authorized – perhaps even compelled – to micromanage guardians to an extent other fiduciaries commonly before probate courts – personal representatives/ trustees – are never subjected to. However, enforcing a "managed care" pricing structure on fees in guardianship proceedings could ultimately hurt, rather than help, wards because well-meaning, well-managed, professional organizations such as Lutheran Services will inevitably get priced out of the market. Here’s a revealing quote from the linked-to opinion:

Lutheran Services’ counsel responded that Lutheran Services was feeling “micromanaged” and that this type of micromanagement would force it out of business.

Managed-care pricing only works if service providers are guaranteed a sufficient volume of patients/wards to produce the economies of scale that make managed care economically viable. Insurance companies make this model work because they have the power to steer patients to their network of doctors in sufficient numbers to make it economically feasible for those doctors to stay in business billing at very low per-patient rates. Probate courts have the authority to steer wards to particular service providers/guardians in only very limited circumstances. Probate courts simply cannot create the economies of scale that are needed to sustain guardians providing top-quality service at the very low fees some courts demand. Bottom line, managed-care pricing without managed care economies of scale will inevitably lead to lower quality care for wards. I don’t think this outcome is in the "best interest" of wards.

Having diagnosed the problem, I don’t think a courtroom is the cure for the public policy problem I’ve described above. Courts are good at adjudicating discreet disputes, they’re institutionally incapable of collecting and analyzing the data needed to craft broadly applicable public policy solutions of the type needed to deliver top quality care to minors and incapacitated adult wards subject to guardianship proceedings. An organization like Lutheran Services is ideally positioned to play a role in crafting good public policy, and perhaps the organization would have been better off going that route vs. the litigation route? The 2d DCA made this point at the conclusion of its opinion:

Lutheran Services is a renowned nonprofit organization with impeccable credentials for providing guardianship services. Certainly it would be in Lutheran Services’ best interest to work with the court system to improve this system rather than seeking to end it.

Michael A. Hiltzik of the Los Angeles Times published an excellent article reporting on the probate and trust litigation swirling around Ray Charles’ $75+ million estate: Ray Charles’ children battle over his legacy. This estate is so discombobulated you could probably pick it apart from an estate planning perspective in a dozen different ways. Three points that jumped out at me:

  1. Talking to your heirs about your estate plan can sometimes be a VERY bad idea.
  2. Picking the wrong fiduciary to be in charge of your estate can turn low level, simmering resentments that would otherwise simply blow over into World War III.
  3. If an estate plan involves the creation of a private charitable foundation, governance issues are doubly important.

1. Talking to your heirs about your estate plan can sometimes be a VERY bad idea.

When estate planners write about parents discussing their estate plans with their children, it’s almost always assumed to be a good idea [click here for example]. Well, sometimes it’s a lousy idea, as the Ray Charles estate is learning. If estate litigation is even a remote possibility, family discussions about mom and dad’s estate plan can make a difficult situation worse.

Shortly before Christmas 2002, Ray Charles called a meeting of his 12 children at a hotel near Los Angeles International Airport. Ten of them, ranging in age from 16 to 50 — with 10 mothers among them — listened as their father told them he was mortally ill and outlined what they could expect from his fortune.

Most of Charles’ assets would be left to his charitable foundation. But $500,000 had been placed in trusts for each of the children to be paid out over the next five years, according to people at the meeting and a trust document.

Yet Charles’ description left so much to the imagination that some of the children came away with the impression that he meant to leave them $1 million each. Charles also hinted that there would be more for them "down the line," which some interpreted to mean they would inherit the right to license his name and likeness for profit.

The confusion and contention that resulted from that family gathering, the only time so many of the children met with their father as a group, helps explain what has happened since. Charles exercised iron control over his music and recordings, but his legacy is in disarray, knotted up in legal disputes between the estate’s management and his family members, according to interviews, court documents and correspondence from the California attorney general’s office.

2. Picking the wrong fiduciary to be in charge of your estate can turn low level, simmering resentments that would otherwise simply blow over into World War III.

As I’ve written before [click here], picking the right person or bank/trust company to be in charge of your probate estate or trust may be the single most important estate planning decision you make . . . especially if your estate is large or especially complex. Ray Charles picked his long-time business manager, Joe Adams, to be the one fiduciary in charge of every aspect of his estate. After reading the following excerpts from the LA Times piece ask yourself if Adams is the right man for the job:

That executive, Joe Adams, is the target of the family’s complaints. Adams signed on as Charles’ manager in 1961. Toward the end of the artist’s life, Adams was perceived by Charles’ children and others close to him as controlling access to the star.

After Charles’ death, Adams ended up with virtually unchallenged power over the estate. He was head of Ray Charles Enterprises, director of the foundation and trustee of the children’s trusts. In some cases, co-officers appointed by Charles departed their roles while Adams remained.
.     .     .     .     .

Adams has kept the children and other family members from participating in ceremonies honoring their father, they say, even his funeral.

Adams interrupted a private family service at the Angelus Funeral Home in Los Angeles, attempted to eject some of the participants and ordered the casket removed from the chapel, according to several people who were there.

"The biggest issue with me is disrespect for the family and kids," the Rev. Robert Robinson, one of Charles’ sons, said in an interview. "If you respect a man and his work, then you respect his kids. His blood is flowing through our veins."
.     .     .     .     .

In 1997, Charles decided he needed a fresh approach to his career and attempted to replace Adams with Jean-Pierre Grosz, a 50-year-old French artists manager who had become a close friend. Charles, however, apologetically sent Grosz home to Paris after Adams refused to relinquish his office in Charles’ Washington Boulevard studio, according to the French manager.

3. If an estate plan involves the creation of a private charitable foundation, governance issues are doubly important.

Governance issues are especially important when it comes to private foundations because after the founder is dead, generally speaking no one other than the state attorney has standing to step in and make sure the foundation is being properly run. And just because it’s a charity don’t assume the sins of humanity are somehow banished from its hallowed halls, as reported by NY Times reporter Stephanie Strom in Report Sketches Crime Costing Billions: Theft From Charities. The following excerpt from the linked-to LA Times piece makes clear the Ray Charles private foundation may be many things, but a beacon of good governance it’s not:

In February 2006, Adams’ stewardship of the foundation was questioned by Deputy Atty. Gen. Wendi A. Horwitz. After learning that Adams was serving simultaneously as chairman, president and treasurer of the foundation — in violation of state law — she gave Adams 30 days to comply. He appointed a new treasurer and a few months later added a majority of independent outsiders to the board.

The attorney general’s office never took public action against the foundation. In December, Adams resigned as president of the foundation and of Ray Charles Enterprises. He was succeeded by Ivan Hoffman, a lawyer who had worked with the estate. However, a receptionist at Ray Charles Enterprises said last week that Hoffman was not currently its president. Hoffman and a company spokesman declined to comment.

Adams still exercises power at the organizations, the lawsuit filed by Den Bok alleges. It is unclear whether he still holds any formal titles. A spokesman for Atty. Gen. Jerry Brown, who succeeded Lockyer in 2006, had no comment.