Divorce and its unintended probate-litigation aftermaths are a recurring topic on this blog (see here, here & here).  The subtext to these prior posts should be fairly obvious: every divorcing client needs estate planning!  However, just in case the message wasn’t getting across Florida attorney Jeffrey Baskies was  kind enough to write a Florida Bar Journal article entitled Every Divorcing Client Needs Estate Planning that does a good job of underscoring the interconnections between divorce and estate planning.  Here’s the concluding paragraph to Mr. Baskies’ article:

[T]here are many compelling reasons every divorcing client needs estate planning. Clients involved in a divorce need to consider and address their changed circumstances and their changed estate planning objectives. Any lawyer representing a client in a divorce should advise the client to see a qualified estate planning attorney. Indeed, no divorcing client should ignore the complicated legal issues relating to estate planning that are made acute by the initiation of the divorce proceedings. For all of these reasons, estate planning should be a top concern for divorce lawyers and should be addressed immediately with their clients.

Morgan v. Cornell, — So.2d —-, 2006 WL 2987107, 31 Fla. L. Weekly D2632 (Fla. 2d DCA Oct 20, 2006)

Estate planning and probate litigation are two sides of the same coin.  The planner needs to understand the underlying substantive property rights being conveyed and how to draft documents that accurately describe what those property rights are and to whom they are being conveyed.  In the event of a dispute, the litigator needs to understand the same: what are the underlying substantive property rights being disputed and does the operative document effectuate a legally enforceable conveyance.

That’s why this case is equally instructive to the planner and the litigator.  The litigation revolved around whether the decedent had validly devised a life estate in two properties he owned as tenants-in-common with his girlfriend.  The properties at issue were a home in Naples, Florida and a second home in New Hampshire (i.e., the amount in controversy likely exceeded seven figures).  The decedent’s children argued — and won at the probate-court level – that the devise was invalid and thus girlfriend got nothing.  Girlfriend argued the opposite . . .  and won where it really counted, before the 2d DCA, which reversed the probate court’s order.

Here’s how the 2d DCA articulated the issue on appeal:

The specific devises at issue state:

If I own the home [in New Hampshire/Florida] at my death, I leave said home and real estate together with the contents therein to Julia H. Morgan for the term of her life, subject to the obligation to pay all real estate taxes, upkeep, insurance and ordinary costs of ownership, with a remainder interest in fee simple as Tenants in Common to her children ···, per stirpes.

**********

The personal representative of Mr. Cornell’s estate, his daughter Elizabeth L. Cornell, filed a petition seeking construction of these conditional devises, alleging that the condition-“If I own the home”-is unclear in extent, nature, and meaning. On one hand, the word “own” could be read to mean “to the extent I own the home,” so that the specific devises would be effective for whatever interest the testator possessed at his death. On the other hand, the word “own” could be interpreted more strictly, so that the condition would be fulfilled only if the testator were the sole owner of each home at the time of his death. If the second interpretation were operative, the condition would fail and the testator’s interest in the homes would become part of the residuary estate and pass to his three children.

The 2d DCA rejected the children’s interpretation — and the probate court’s order — by holding that the word "ownership" was a broad enough term to encompass a tenants-in-common interest.  This is the part of the 2d DCA’s opinion that is most instructive to future planners/drafters and litigators because it articulates in clear, unambiguous language what a "tenants-in-common" interest is and how it can be devised:

The parties in this case agree that Mr. Cornell and Ms. Morgan owned the real properties as tenants in common. When two persons own property as tenants in common,

A and B each owns in his own name, and of his own right, one-half of Blackacre···· It means that each owns separately one-half of the total ownership···· Each is entitled to share with the other the possession of the whole parcel of land. Each may transfer his undivided one-half interest as he wishes so long as the transfer does not impair the possessory rights of the other tenant in common. Each may transfer his undivided one-half interest by will···· The central characteristic of a tenancy in common is simply that each tenant is deemed to own by himself, with most of the attributes of independent ownership, a physically undivided part of the entire parcel.

Thomas F. Bergin & Paul G. Haskell, Preface to Estates in Land & Future Interests 58-59 (1966). The estate of a tenant in common is both inheritable and devisable. Tyler v. Johnson, 61 Fla. 730, 55 So. 870 (1911).

As a tenant in common, Mr. Cornell owned a physically undivided part of each entire parcel in New Hampshire and in Naples. Without question, Mr. Cornell did “own” the property at the time of his death; the ownership condition was fulfilled; and each devise validly passed a life estate in his undivided half interest to Ms. Morgan-just as he intended.

As reported here in Forbes a musician’s highest earnings years may come long after he or she has passed away.  Here’s an excerpt from the linked-to Forbes piece:

A nail in the casket is hardly the end for some stars. Instead, their work, as well as their iconic images, continues to appeal to fans who remember them, and to those born long after they died.

The 13 icons on our sixth annual Top-Earning Dead Celebrities list collectively earned $247 million in the last 12 months. Their estates continue to make money by inking deals involving both their work and the rights to use their name and likenesses on merchandise and marketing campaigns. To land on this year’s list, a star needed to make at least $7 million between October 2005 and October 2006.

Which is why the on-going legal battles involving the Hendrix estate shouldn’t be viewed as an isolated event.  If you’re luck enough to find some success as an artist, what happened to Hendrix’s estate could happen to you.  As reported in Hendrix Estate Wins Effort to Halt Sale of Star’s Songs after soaring to success and then overdosing and dying all by the age of 27, Hendrix also left behind a "world of controversy":

The dispute dates back to 1965. The then-unknown electric guitarist, whose music ushered in a new era in blues rock, signed a one-page recording agreement with PPX Enterprises, an entity controlled by Edward Chalpin and based in New York.

According to Judge Kaplan’s decision, Hendrix agreed to "produce and play and/or sing exclusively for Enterprises" for a three-year period. He gave Enterprise exclusive rights to the masters produced, in exchange for a royalty of 1 percent of the retail selling price of the records so produced.

Hendrix shot to international fame two years later. In June 1967, he performed at the Monterey International Pop Festival and wowed the audience with his rendition of "Wild Thing." His whirlwind success was short lived: He died of a drug overdose in 1970 at the age of 27.

"A WORLD OF CONTROVERSY"

Judge Kaplan noted that after Hendrix’s untimely death the musician "left a body of musical works and world of controversy." Hendrix’s estate and Chalpin and PPX Enterprises, an entity based in New York, have been engaged in a series of lengthy legal battles in Great Britain and the United States over the rights to Hendrix’s songs.

I have no doubt a minimal amount of estate planning would have avoided much of the controversy swirling around the Hendrix estate.  By the way, ASCAP has a good estate-planning primer for musicians at Estate & Trust Planning Issues For Music Copyright Owners. 

I of course recognize that the odds of a twenty-something rock super star sitting down to plan his or her estate are basically zero.  So perhaps the most these die-young super stars can teach us from a planning perspective is to highlight all the things that can go wrong.

The Wills, Trusts & Estates Prof Blog had this interesting post on the Robertson v. Princeton website, a classic example of litigation public relations.

Litigation PR is NOT crisis management:

In a piece entitled So Sue Me!: The Growing Popularity of Litigation Public Relations, author Katie Dageforde does an excellent job of both explaining what litigation PR is, and just as importantly, what it’s not. Here’s an excerpt (it’s long, but worth it):

Some people argue that litigation public relations is just another form of crisis management. However, the two areas of public relations could not be more different. They may have similar goals, but the conditions under which they work are not the same.

In his book “In the Court of Public Opinion,” John F. Haggerty, president of The PR Consulting Group in New York, explains why crisis management is not the same as litigation public relations.

“Companies and consultants skilled at crisis communications are usually ready to respond to any crisis, anywhere, at a moment’s notice,” he says. “While all of this may be necessary if the crisis is a lawsuit, litigation PR is much more than this—and strict reliance on classic crisis communications techniques can sometimes do more harm than good.”

One of the reasons Haggerty uses to differentiate litigation public relations from crisis management has to do with time span. A crisis manager’s job is usually implemented during the 24 to 48 hours right after the incident. However, because lawsuits can take several months or even years, a litigation PR specialist’s job is ongoing, and he or she needs to be able to maintain a steady amount of pressure over long periods of time. Because of this reason, normal PR “events,” such as press conferences or rallies, are not as effective as they would be in other areas of public relations.

Litigation public relations is also allowed to break another cardinal PR rule. In most crisis situations, the client is usually positioned as the spokesperson so that the company or individual appears more personable and sincere. However, since lawsuits often revolve around very complex issues that the general public may not understand, the client may not be the best choice for spokesperson.

“Litigation PR is one of the few areas where you can hand off the spokesperson’s role to one of the attorneys on the case without fear of repercussions,” says Haggerty. “These are, after all, legal issues we are dealing with.”

Non-profits and litigation PR:

It seems to me that trust/probate litigation involving charities is especially ripe for this tactic.  By the way, it should also be noted that in a sharp break from prior law, under Florida’s new trust code settlors of charitable trusts will now have standing to sue the charitable beneficiaries of their trusts under F.S. 736.0405(3).

Back to the main point of this blog post.  Here’s a sampling of what the Robertson family website has to say in their war-of-words against Princeton:

In a subsequent amended complaint, filed in New Jersey Superior Court on November 12, 2004, the plaintiffs expanded their charges, alleging that Princeton has:

  • Wrongfully spent more than $100 million of the Robertson Foundation’s money on programs, projects, salaries, bonuses, buildings, equipment and “overhead” costs that have little or nothing to do with the Robertson Foundation mission.
  • Engaged in an fraudulent cover-up scheme, involving several Princeton administrations, to hide the improper spending.
  • Similarly misused other donors’ gifts in what appears to be a systemic university-wide “pattern and practice of diverting [donations] from their intended purpose.”

In January 2006, the estimate of more than $100 million in improper spending was more than doubled, to more than $207 million (nearly $500 million in 2006 dollars).

Not to be out gunned on the PR front, this is a sampling of Princeton’s rebuttal:

Today’s briefs show that the University paid many costs that it could have charged to the Robertson Foundation under the Foundation’s Certificate of Incorporation. As a result, the Foundation was charged some $235 million less than it might have been—an amount greater than all of the “overcharges” alleged by plaintiffs combined.

Clearly the PR battle going on here is an integral aspect of the case . . . and both sides seem to believe success in the courtroom/settlement conference room will turn in large part on who wins the PR battle.   I also think that the first side to realize PR would play a large role in this case probably had the first-mover advantage (based on the clippings excerpted in the Robertson family website, I would guess they were probably the first to go on the PR offensive).

Note to self:  when it comes to litigation PR, be the first mover.

Baldwin v. Estate Of Winters, 2006 WL 3299834 (Fla. 4th DCA Nov 15, 2006)

So what is it, cash or tangible property?  The linked-to case demonstrates this seemingly basic/esoteric question can have a real-life impact on who gets what from an estate.  The contested writing was described as follows by the 4th DCA:

On May 22, 1999, two copies of a typewritten letter were prepared on the testator’s personal stationery. They directed the same personal representative “to give to Allan Baldwin a new car of his choice from [her] estate.” Each copy was signed by the testator, witnessed, and notarized.

If this document devised tangible property, then F.S. 732.515 governs, if it devises a monetary amount, then the general rules governing codicils under F.S. 732.502 governs.  The probate court ruled it was a devise of a monetary amount, NOT tangible property, thereby rejecting Mr. Baldwin’s argument for application of the less demanding rules applicable to devises of tangible property under F.S. 732.515.

Here’s how the 4th DCA summarized its ruling:

[W]e agree with the probate court’s initial ruling that the separate writing was not a proper devise of tangible property, pursuant to section 732.515. Because the devise was of a monetary amount, it could not be effectuated through a separate writing under the 1997 version of section 732.515.

Every once in a while we need to be reminded that estate planning documents aren’t simply technical instruments effectuating the tax efficient transfer of assets from one generation to another.  Which brings me to this wonderful description of a will in Strangers in Paradise: How Gertrude Stein and Alice B. Toklas got to Heaven, The New Yorker, Nov. 13, 2006, at 57:

Wills are uncanny and electric documents. They lie dormant for years and then spring to life when their author dies, as if death were rain. Their effect on those they enrich is never negligible, and sometimes unexpectedly charged. They thrust living and dead into a final fierce clasp of love or hatred. But they are not written in stone—for all their granite legal language—and they can be bent to subvert the wishes of the writer.

Source: Wills, Trusts & Estates Prof Blog

Now that both the House and Senate are in Democratic hands I think it’s safe to say that estate tax repeal is a dead issue, a view shared by USA Today among others (see also here).  What does have a fighting chance is estate tax reform that excludes most taxpayers while retaining most of the revenue currently generated by the tax, as reported in the USA Today piece:

While Democrats have opposed full repeal of the estate tax, many support increasing the exemption amount, says Clint Stretch, managing principal of tax policy at Deloitte Tax in Washington. Rep. Charles Rangel, the New York Democrat who’s expected to chair the House Ways and Means Committee, favored estate tax reform as far back as 2001, Stretch notes. "Clearly, he would be supportive of a significant increase in the exemption amount."

Here’s how a leading Democratic reform proposal was described in June 2006 in Estate tax reform not dead, despite vote:

Many Democrats may be amenable to raising the exemption level, but far fewer seem to be in favor reducing the tax rates, due to concern over how much revenue would be lost. The tax rate, not the exemption level, is what would cause the sharpest reductions in revenue, according to the liberal Center for Budget and Policy Priorities.

The latest proposed compromise comes from Sen. Tom Carper (D-Delaware). He offered an amendment to the repeal bill that would freeze the estate tax at 2009 levels: specifically, a $3.5 million exemption at a top rate of 45 percent.

The Urban-Brookings Tax Policy Center estimates that if the 2009 estate tax provisions were made permanent ($3.5 million exemption with a top rate of 45 percent) that would protect the smaller estates that otherwise would be subject to estate tax under pre-2001 law, and it would cost 60 percent less than permanent repeal.

If the estate tax were frozen at 2009 levels, only 0.3 percent of all estates would have any tax liability, according to CBPP.

My prediction:

Estate tax will be frozen at 2009 levels: $3.5 million exemption at a top rate of 45 percent.  By the way, this is reportedly the estate-tax reform approach favored by none other than Rep. Rangel himself:

Mr. Rangel has also supported estate-tax relief that would raise the exemption level to $3.5 million ($7 million for couples), thus exempting an estimated 99.7 percent of Americans from paying the so-called death tax.

See What Charlie Rangel hasn’t said

Fleck-Rubin v. Fleck, 933 So.2d 38, 31 Fla. L. Weekly D1369 (Fla. 2d DCA May 12, 2006)

The trial court in this case ruled that an estate tax marital deduction trust (obviously designed to qualify as a "general power of appointment marital deduction trust") failed to give the surviving spouse an unlimited withdrawal power over these trust assets . . . . in spite of the fact that in the absence of such withdrawal power the entire tax-savings design of the trust would fall apart?!

Estate-tax planning is a HUGE (and usually the primary) consideration driving how most trusts are drafted.  Failing to understand the estate tax issues underlying the entire design of a trust document is like trying to order off a Chinese menu with no English translations . . . you know it’s a menu, but have only the vaguest idea of what’s actually being said on a given page.  The same applies to the construction of most trust documents: if you don’t understand the tax planning concepts driving the trust’s design and drafting, then how can you possibly be expected to correctly construe the trust’s text?  Short answer: you can’t.

Although the 2d DCA achieves the right result, in a classic example of missing the forest for the trees it grounds its reversal of the trial court’s mistaken order on the meaning of the word "shall" without ever once discussing the single most important indication of the settlor’s intent:  estate tax planning.  For the record, here’s how the 2d DCA explained its ruling:

In this appeal, we are asked to determine whether the terms of the trust agreement permitted Sondra to remove all the funds and assets of Trust A without her cotrustee’s consent. The trial court considered two provisions in determining that Sondra did not have the authority to unilaterally remove the funds and assets of Trust A-paragraph 3(a)-(e) and paragraph 9(f). Paragraph 3(b) provides that “[t]he Trustees shall make distributions to my wife from the principal of Trust A, even to the complete exhaustion thereof····” (Emphasis added.) Paragraph 9(f) provides:

9. The following additional provisions and limitations, when applicable, shall govern the administration and disposition of the trust property:

····

(f) Notwithstanding any provision to the contrary elsewhere contained in this instrument, neither my wife nor any lineal descendant of mine shall, while serving as a Trustee hereunder, participate in the exercise by the Trustees of any discretionary power or authority conferred upon the Trustees by any provision of this instrument with respect to the distribution, or the withholding from distribution, of the principal of any trust estate held hereunder for the benefit of such one or with respect to the distribution, the withholding from distribution, or other application of the net income therefrom; and all such powers and authorities shall be exercised solely by the other Trustee.

(Emphasis added.)

The trial court determined that paragraph 9(f) required Sondra to obtain the authorization of the cotrustee, Aaron, for the transfer of the funds and assets from Trust A to herself since she was then the beneficiary and a cotrustee of that Trust. Paragraph 9(f), however, applied only to a trustee’s exercise of any discretionary authority. The unambiguous language of paragraph 3(b) allowed Sondra to demand distributions from Trust A “even to the complete exhaustion thereof.” Such distributions were not subject to the approval or discretion of Aaron, as cotrustee, since paragraph 3(b) provided that the trustees “shall make distributions” requested by Sondra. Because the trustees had no discretion under paragraph 3(b), paragraph 9(f) was inapplicable.

Lesson learned:

Trust litigation is demanding: not only do you have to know how to litigate a case, you also have to understand the complex estate-tax issues underlying almost all trust design and drafting.

Cone v. Anderson, 2006 WL 2986471, 31 Fla. L. Weekly D2621 (Fla. 1st DCA Oct 20, 2006)

The 1st DCA’s opinion provides no facts whatsoever to explain what was going on when the trial court entered an order enjoining the trustee-defendant from seeking compensation without prior court approval (which begs the question: why even publish an opinion that provides close to zero guidance to future litigants??).  However, reading between the lines I think what happened here was that the appellee obtained the injunctive order on an ex parte basis . . . which is a no-no in the absence of the compelling circumstances required by Civ. Pro. Rule 1.610 for ex parte injunctive relief:

Florida Rule of Civil Procedure 1.610 governs injunctions. If the language of an order is injunctive in nature, the order must comply with the requirements for the issuance of an injunction, even if the trial court merely intended to preserve the status quo in the order. See Spradley v. Old Harmony Baptist Church, 721 So.2d 735, 737 (Fla. 1st DCA 1998). In the present case, the trial court “enjoined” Cone from seeking any and all compensation until “further order of this Court or any other Court of competent jurisdiction.” Clearly, the language of the order is injunctive in nature. Appellee concedes that the trial court did not comply with rule 1.610. Accordingly, we REVERSE the order and QUASH the injunction.

Lesson learned:

Just because you’ve figured out the underlying substantive trust or probate law doesn’t mean you can’t get tripped up on the civil procedure.

A sale to an intentionally defective grantor trust is a very effective and flexible estate-tax planning device.  Moreover, if the sale is reported on one of the more than 99% of gift tax returns that are NOT audited by the IRS and the transferor dies more than three years after the gift tax return is filed, the IRS will generally be precluded from raising valuation or other issues related to the sale on an audit of the transferor’s estate tax return.  (In 2005, approximately 0.8% of gift tax returns filed with the IRS were audited. Approximately 8% of estate tax returns were audited. See Treasury Inspector General for Tax Administration, Trends in Compliance Activities Through Fiscal Year 2005, Figures 45 and 46.)

In the Wills, Trusts & Estates Prof Blog Prof. Beyer posted on a report in the October 2006 RPPT eReport by Amy E. Heller (Weil, Gotshal & Manges LLP) on the new Form 706.  Bottom line, all the arguments in favor of reporting grantor-trust sales on a gift tax return are even more compelling in light of new line 12(e) of part 4 of the new Form 706.  Although Ms. Heller’s report was published before the new 706 was adopted (see here for the new Form 706 as adopted), her comments remain relevant because new Line 12(e) of part 4 was in fact incorporated into the final form:

[L]ine 12(e) of part 4 of the draft form asks an executor whether a decedent at any time during his or her lifetime transferred or sold an interest in a partnership, a limited liability company or a closely-held corporation to a trust that was in existence at the decedent’s death and that was (1) created by the decedent during his or her lifetime or (2) created by someone other than the decedent under which the decedent possessed any power, beneficial interest or trusteeship. If the answer to this question is yes, the executor is required to provide the EIN of the entity in which the interest was transferred.

As a result of new line 12(e), certain gratuitous transfers to trusts that are reportable on a gift tax return will need to be reported for a second time on the transferor’s estate tax return. More significantly, certain sales to trusts for which no gift tax return was filed will need to be disclosed on the seller’s estate tax return. For example, an individual’s sale of a partnership interest to his or her grantor trust for fair market value will need to be reported on the individual’s estate tax return, regardless of whether the sale was required to be reported on a gift tax return. ***

[Because new line 12(e) was in fact incorporated into the new Form 706], practitioners who do not currently advise clients to report sales of interests in partnerships, LLCs or closely-held corporations to grantor trusts on gift tax returns may wish to consider doing so. Reporting these sales will help to close the statute of limitations on IRS challenges more quickly and may even reduce the risk of such challenges. If a sale is reported on one of the more than 99 percent of gift tax returns that are not audited and the transferor dies more than three years after the gift tax return is filed, the IRS will generally be precluded from raising valuation or other issues related to the sale on an audit of the transferor’s estate tax return. Furthermore, in the event that the IRS does successfully challenge a sale disclosed on a gift tax return, it may be possible to make adjustments to a client’s estate plan that would not be possible if the challenge arose after his or her death.