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In Florida it is almost inevitable that attorneys — and especially trusts and estates attorneys — will end up counseling clients who have existing relationships with off-shore trust companies or are considering some sort of arrangement involving an off-shore trust.  Like any industry, there are good and bad actors doing business out there.  Perhaps unfairly, my inclination is to approach the entire industry with more than my usual degree of skepticism (which says a lot!).

Recent events underscore why Florida attorneys would be wise to counsel caution when evaluating tax savings ideas proposed to clients by off-shore trust operators.  In April of 2006 the heads of a Bahamian corporation operating under the name “Sterling Trust” were jailed in North Carolina after a sting operation mounted by undercover agents of the IRS in connection with an alleged tax fraud conspiracy.  The trust angle was described in Executives With Bahamas Ties Jailed as follows:

The indictment, signed by Assistant U.S. Attorney Matthew Martens, says Graves, the Woltzes and Currin “would and did concoct foreign ‘dual trust’ arrangements so that wealthy United States citizens could evade federal income tax.”

According to the indictment, the IRS undercover agents solicited advice from Graves on evading U.S. taxes on the fictitious sale of “gaming rights” for $10 million. Graves allegedly recommended a scheme known as a “dual trust structure” by which Sterling Trust would set up two trusts that would facilitate the evasion of the taxes.

Attorneys can get personally stung by this type of fraud when they step over the line from simply acting as counselors to affirmatively facilitating their cleints’ involvement in this type of scheme.  As reported in Former U.S. Attorney to Plead Guilty in Tax Fraud Scheme, a distinguished former U.S. Attorney is facing up to 43 years! in prison because of his involvement . . . in addition to the personal catastrophe this must be for his family.  Here are a few excerpts from the linked-to article:

A former U.S. Attorney, state judge and state Republican chairman has agreed to plead guilty to charges related to a tax fraud conspiracy, federal prosecutors in Raleigh, N.C., said Wednesday.

Samuel T. Currin will plead guilty to conspiring to launder $1.45 million through his law firm’s client trust account and to lying on his taxes by failing to report an offshore debit card account, prosecutors said. Three others also have been charged.

He could be sentenced to as many as 43 years in prison.

Tax attorney Ricky Graves; Howell Way Woltz, president of Sterling Trust in the Bahamas; and his wife, Vernice Woltz, a director of Sterling Trust, are also charged.

Lesson learned: Caveat Emptor!

Florida’s new trust code continues the common law rule in this state that charitable trusts are policed primarily by the Florida Attorney General (F.S. §736.0110(3)). The same rule applies to Florida not-for-profit corporations (F.S. §617.2003). However, in a significant break from the common law rule, the new trust code also gives settlors standing to personally enforce the charitable trusts they create (F.S. §736.0405(3)).

The ongoing saga over the J. Paul Getty Trust in California (see here for prior post) is a dramatic example of how charitable trusts can go awry and how a state’s attorney general’s office can play a role in policing these organizations. In the latest twist, the New York Times reported in California Attorney General Appoints Overseer of Reforms at J. Paul Getty Trust that the California attorney general has appointed an independent monitor to oversee mandated reforms. The following is an excerpt from the linked-to story:

LOS ANGELES, Oct. 2 — Ending a 14-month investigation, the California attorney general appointed an independent monitor on Monday to oversee reforms at the J. Paul Getty Trust, one of the world’s richest cultural organizations. The inquiry determined that the trust’s former president, with the approval of the Getty board, misspent trust money on his wife’s travel, used employees for personal errands and made improper payments to a graduate student.

Although the attorney general, Bill Lockyer, found that the former president and the board violated their legal duties, he declined to take civil or criminal action against them. The report stated that the misuse of funds did not result from fraud and that the value of a settlement between the former president, Barry Munitz, and the trust exceeded the value of the losses from any improper payments.

The Getty, which has adopted several reforms since Mr. Munitz resigned under pressure in February, expressed satisfaction with the results of the inquiry.

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Parties with an interest in a Florida estate that are unfamiliar with the inner workings of Florida’s probate code proceed very much at their own risk.  In this case, New Jersey counsel for out-of-state creditors sought to enforce a settlement agreement the decedent had executed prior to his death.  The key sequence of events is as follows:

  • Creditor filed a statement of claim against the estate tracking the format of the form approved by the Florida Bar.
  • Personal representative of the estate filed an objection to the claim, which stated that the personal representative was objecting to only part of the claim.
  • As stated by the 2d DCA, the “objection was served on McLean Boulevard and it contained language informing McLean Boulevard that it was limited to a period of thirty days from the service of the objection within which to bring an action on the claim as provided in section 733.705, Florida Statutes (2000). McLean Boulevard never filed an independent or declaratory action on the claim.” .  .  .  OOPS!!

Case Study

In re Estate of Cadgene, 2006 WL 2739334 (Fla. 2d DCA Sept 27, 2006)

Because the creditor failed to file an independent action on his claim within the permitted 30-day statutory time period, as a matter of Florida law he forfeited 100% of his claim . . . even if the PR’s objection was by its own terms only a partial objection.  The probate court granted the PR’s motion to strike the entire claim, and the creditor appealed arguing that the PR objected to only part of his claim, and thus he should not be deemed to have forfeited the un-objected-to portion of his claim.  The 2d DCA rejected the creditor’s arguments, stating as follows:

The only requirements for filing an objection to a statement of claim pursuant to the 2000 version of section 733.705(2) were (1) that the personal representative or other interested person must have informed the claimant that it had thirty days from the date of service of the objection within which to file an independent action on the claim and (2) that the objection must have been served upon the claimant. Here, the personal representative met both of the requirements of section 733.705(2). With the exception of a personal representative’s statement of claim,[FN2] Florida does not utilize the concept of a “partial objection” to a statement of claim. This concept is recognized under the Uniform Probate Code that has been adopted in eighteen states but not in Florida.[FN3]

FN2. See § 733.705(3), Fla. Stat. (2000) (now § 733.705(4), Fla. Stat. (2006)).

FN3. The jurisdictions which have adopted the Uniform Probate Code are Alaska, Arizona, Colorado, Hawaii, Idaho, Maine, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, Utah, and Wisconsin. In re Estate of Kotowski, 704 N.W.2d 522, 526 n. 1 (Minn.2005). 

Lesson Learned

Florida’s probate code is purposely designed to stream-line the administration process whenever possible.  As such, the mechanism for dealing with contested creditor claims is extremely unforgiving to those who fail to comply with a deadline or otherwise fail to understand the unique procedural aspects of Florida probate proceedings.

I previously reported on Part 1 of Professor Powell’s two-part series of Florida Bar Journal articles explaining Florida’s new trust code.  This month’s Florida Bar Journal contains Part 2 of Prof. Powell’s series entitled aptly enough The New Florida Trust Code, Part 2.  The new trust code provisions covered in this latest article are the following:

  • Duties of a trustee
  • Trustee Powers
  • Liability of Trustees for Breach of Trust
  • Exculpatory Clauses
  • Remedies and Damages for Breach of Trust
  • Costs and Fees
  • Liability of Trustees to Third Parties
  • Limitations on Actions Against Trustees
  • Protection of Persons Other Than Beneficiaries Dealing with the Trustee
  • Rules of Construction
  • Charitable Trusts

Prof. Powell concludes his article with the following observations:

Even before the enactment of new Ch. 736, Florida already had an extensive body of statutory trust law, virtually all of which is found in F.S. Ch. 737. Nevertheless, enactment of the Code should prove beneficial because the Code is more structured, comprehensive, understandable, modern, accessible, and uniform than existing Ch. 737. Indeed, a major benefit of the Code is that it provides answers to a host of questions for which Florida’s law was previously not definitively settled. The added certainty the Code offers should promote efficiency and fairness to beneficiaries and trustees alike. At the same time, it should minimize the need for costly litigation.

I think Prof. Powell’s last point is especially important.  Knowledge is power, especially so in the trust litigation arena where the substantive law can be very complicated and the dollars at stake in most cases simply makes it economically unfeasible to learn all the trust-law nuances once you’re involved in the case.  In order to be truly effective, you need to know this stuff ahead of time.

If your practice involves contested probate or trust matters, you would do well to keep abreast of the legislative proposals being considered by the Probate and Trust Litigation Committee.  For example, key legislative items currently under consideration are the following:

The meeting agenda contains several white papers and proposed statutes being considered by the Committee.  The following is the Committee chair’s email circulating the linked-to agenda document.  All inquiries should be directed to Jack Falk at the email address provided below.

 >>> "Falk, Jack A." <jfalk@dwl-law.com> 09/26/06 09:24AM >>>
Dear Committee Members,

The Probate and Trust Litigation Committee will be meeting from 10:00 a.m. to Noon on Friday, September 29, 2006, at Gaylord Palms hotel in Kissimmee, Florida, in conjunction with the Real Property, Probate and Trust Law Section’s Executive Council meeting. Attached please find
the Agenda and Minutes for the meeting.

I anticipate that we will spend a substantial part of the meeting working through the proposed legislation on payment of attorneys’ fees from trust assets by a trustee accused of breach of
trust.

Attached is the Agenda for the meeting.

I look forward to seeing you in Kissimmee! Jack

Warren Buffett’s record shattering gift has raised the level of awareness people have with respect to gifting as part of a person’s estate plan.  Apparently in response to this waive of interest Forbes just published an article entitled Reduce Estate Tax By Making Gifts, which did a pretty good job of summarizing how gifting can fit into a person’s estate plan.  The following are excerpts from the linked-to article:

While the estate tax is still in effect–or if Congress resurrects it after it goes away as scheduled in 2010–you may want to take steps to reduce possible estate tax liability at your death. One way to avoid estate taxes is to give away property during your life. This provides you with more than just tax savings; you also get to see the recipients enjoy your gifts. 

Currently, you can make an unlimited number of $12,000 gifts of cash or other property each year, completely tax-free. To ensure these tax savings, you need remember only that no individual recipient can receive more than $12,000 in a calendar year. If you left the same gifts at your death and they were subject to estate taxes, the recipients would see their gifts shrink by at least 39%.

How the Annual Exclusion Works

The $12,000 annual tax exemption rule (called the "annual exclusion") is pretty straightforward. For instance, if you give $25,000 to someone, $12,000 of it is exempt from the gift tax. The remaining $13,000 is not. A few more examples:

–You give $8,000 to a cousin in one year. There are no federal gift-tax consequences.

–You give $16,000 to your grandson in one year. $4,000 is subject to the gift tax.

–You give $8,000 each to your two children in one year: None of that $16,000 is subject to the gift tax.

The exclusion amount is indexed for inflation; it rises, in $1,000 increments, as the cost of living does.

Couples: Double Your Exclusion

Married couples can combine their annual exclusions, meaning that they can give away $24,000 worth of property tax-free, per year, per recipient. In fact, even if only one spouse makes a gift, it’s considered to have been made by both spouses if they both consent. (Internal Revenue Code § 2513.) If you and your spouse give to another couple, you can transfer up to $48,000 tax-free each year.

Gifts To Your Spouse

All gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen. If your spouse isn’t a citizen, the limit on tax-free gifts is currently $120,000 per year. (IRC § 2523[a].) However, there’s seldom a reason to make large gifts to your spouse. If you each own about the same amount of property, you could worsen your tax situation by saddling your spouse with an estate that’s so large it will be taxed at his or her death.

My personal theory is that most probate litigation is NOT the result of intentional malfeasance, but rather the product of well-intentioned fiduciaries who are simply in over their heads (see here).  If the estate is complex or the beneficiaries are likely to be demanding (often legitimately so), then a professional trustee is almost always a bargain . . . especially compared to the cost of contested proceedings.

A recent article entitled Trust in your bank? reports on a study just published by the Spectrem Group, Chicago, that makes two principal points:

  • All probate or trust estates valued at over $5 million should be managed by a professional trustee.
  • More and more families are opting for non-bank professional trustees.

I wrote here about a previously published study by Tiburon Strategic Advisors that also reported on the trend away from banks to other providers for professional trustee services.

Here are a few excerpts from the linked-to story:

A recent report, published by the Spectrem Group, Chicago, shows that, ironically, just as the baby boomers need trust services more trust money is leaving banks. Personal trust assets held by U.S. banks fell 10% to $986.2 billion in 2005 from a peak of $1.1 trillion in 1999, it says.

Banks are losing ground due to the continued growth of nonbank trust services and the selection of family members as trustees, the report says. Plus, banks have been slow to change their services and the way they provide services.

The Spectrem Group report says that every ultra-high-net-worth household — those with at least $5 million — should have a trust. Yet only 52% of the 930,000 households nationwide that fall in that category do.

Estate of Gunderson v. School Dist. of Hillsborough County, 2006 WL 2612678 (Fla. 1st DCA Sept. 13, 2006)

Apparently the Hillsborough County School District wanted to get out of a $52,808 workers’-comp’ settlement agreement in the worst way possible.  The decedent in this case signed the settlement agreement — then died before signing the general release agreed to as part of the deal.  When the decedent’s widow sought to enforce the settlement agreement, the School District told her to take a hike.  Widow lost this argument before the probate court!  (Just goes to show, nothing is ever certain in litigation . . . even if the legal issues are a slum dunk in your favor.)

Widow then appealed the probate court’s order – and won on appeal.  The 1st DCA reversed the probate court’s order and rejected the School Board’s two arguments for non-enforcement.  The School Board had argued that the settlement agreement was unenforceable (1) because execution of the general release – by the decedent – was a condition to the formation of a contract between the parties, and (2) the settlement agreement was a personal services contract that could only be performed by the decedent – because only he could sign the general release.  The 1st DCA unequivocally rejected both of these arguments.  The following excerpts from the linked-to opinion reflect the 1st DCA’s rationale on both counts:

In defense of its failure to perform the settlement agreement, the E/C asserts that the deceased’s execution of the general release and voluntary resignation were either conditions precedent or conditions subsequent to the formation of a valid contract and, thus, the failure to execute the documents renders the settlement agreement non-binding. This argument is without merit. Provisions of a contract will only be considered conditions precedent or subsequent where the express wording of the disputed provision conditions formation of a contract and or performance of the contract on the completion of the conditions. [Citations omitted.]  No such wording exists in the disputed contractual provisions.

*     *     *     *     *

The general rule is that contracts for personal services contain an implied condition that such contracts dissolve at the time of the contractor’s death. See CNA Int’l Reinsurance Co., Ltd. v. Phoenix, 678 So.2d 378, 380 (Fla. 1st DCA 1996). Restatement (Second) of Contracts § 262 defines a contract for “personal services” as a contract where the existence of a particular person is necessary for the performance of a duty. In addition, section 733.612(2), Florida Statutes (2004), authorizes a personal representative to “perform or compromise, or when proper, refuse to perform, the decedent’s contracts····” Similarly, section 733.612(24), Florida Statutes (2004), authorizes a personal representative to “satisfy and settle claims.”  .  .  .  The duty of performance on the claimant’s part was a duty which could statutorily be performed by his representative in the event of his death through the effectuation of the necessary documents. These were not duties which the claimant’s death rendered impossible to perform.  .  .  .  More importantly, the death of a claimant following the execution of a settlement agreement will not affect the agreement’s enforcement if the personal representative can show that a binding contract was reached. See Jacobson v. Ross Stores, 882 So.2d 431 (Fla. 1st DCA 2004).

[Emphasis added.]

Weinberg v. Weinberg, 2006 WL 2265216, 31 Fla. L. Weekly D2094 (Fla.App. 4 Dist. Aug 09, 2006)

Is it just me, or does it seem like venue has all of a sudden become a hot topic in trust litigation?  I wrote previously about recent trust-litigation venue rulings here and here.  Well, you can add this case to the list as well.  Here the 4th DCA has weighed in on the subject in the context of a dispute involving a lawsuit by the adult-children-of-first-marriage against second wife, who revoked a trust in Palm Beach County then moved south to Miami-Dade County.  The kids sued her in Palm Beach County.  Second wife argued that since she was presently residing in Miami-Dade County, the lawsuit against her in Palm Beach County should be dismissed on venue grounds.  The trial court denied her motion, and she appealed.  On appeal the 4th DCA upheld the trial court’s decision citing to the following set of facts as grounds for its ruling:

In this case, Palm Beach County was the situs of the trust and its assets, the trust was administered in Palm Beach County before Betty purported to revoke it, and the distributions would have been made by the trustee in Palm Beach County upon Sidney’s death. When Betty attempted to revoke the trust in its entirety and take title to all of the trust property, the last event necessary to make her liable for breach of trust took place. That is where the injury to the sons first took place. We therefore hold that the cause of action for breach of trust accrued in Palm Beach County, where Betty purported to revoke the trust.

Our resolution of this issue makes it unnecessary to decide whether venue was proper on any other basis.

Lesson Learned:

I found it interesting that the 4th DCA never mentions Florida’s trust-litigation venue statute (F.S. 737.202).  Regardless, this case underscores the level of scrutiny courts will apply to the unique facts of a case when determining venue disputes.  It seems to me that the party that most persuasively argues the facts establishing a clear link between its favored venue and the facts directly underlying the cause of action being litigated is most likely to win.

I recently wrote here about some of the tools available to Florida probate attorneys involved in cases where the decedent is alleged to have been the victim of financial elder abuse/exploitation.  The Wall Street Journal recently published an article entitled Intimate Betrayal: When the Elderly Are Robbed by Their Family Members, that underscores the comments I made regarding how prevalent this problem is.  Here is an excerpt from the linked-to story:

Note to retirees: Beware the family.

Financial swindles are one of the fastest-growing forms of elder abuse. By some estimates, as many as five million senior citizens are victimized each year, says Sara Aravanis, director of the nonprofit National Center on Elder Abuse, which provides information to federal and state policy makers. Because of the problem’s spread, "many states have laws authorizing financial institutions to report suspicions of elderly abuse," says Bruce Jay Baker, general counsel for the Illinois Bankers Association. Earlier this summer, the Securities and Exchange Commission hosted a Seniors Summit to highlight the issue, with SEC Chairman Christopher Cox noting that protecting seniors’ pocketbooks "is one of the most important issues of our time."

Yet it’s not dodgy financial experts or crooked caregivers who are the biggest threat. It’s family. Children, siblings, grandchildren, nieces and nephews, and even spouses are the people most likely to rob the elderly, according to elder-law advocates and attorneys. The data that exist — albeit in a spotty manner — suggest that financial crimes rank as the third-most prevalent abuse of the elderly.