The world’s second richest man – who’s now worth $44 billion – will start giving away 85% of his wealth in July – most of it to the Bill & Melinda Gates Foundation.

FORTUNE Magazine reported here on what is advertised as the largest charitable gift EVER — out giving Carnegie and the Rockefeller clan by a long shot.  Here are a few excerpts from the Fortune story.

"Brace yourself," Buffett warned with a grin. He then described a momentous change in his thinking. Within months, he said, he would begin to give away his Berkshire Hathaway fortune, then and now worth well over $40 billion. 

This news was indeed stunning. Buffett, 75, has for decades said his wealth would go to philanthropy but has just as steadily indicated the handoff would be made at his death. Now he was revising the timetable.

"I know what I want to do," he said, "and it makes sense to get going." On that spring day his plan was uncertain in some of its details; today it is essentially complete. And it is typical Buffett: rational, original, breaking the mold of how extremely rich people donate money.

Also interesting: Letters from Buffett and Should You Leave It All to the Children?

Vinson v. Johnson, __ So.2d __, 2006 WL 1650609 (Fla. 1st DCA June 16, 2006)

Suppose a client with 9! children asks you what’s the best way to provide for the orderly disposition of his 34-acre farm. He wants to ensure that the farm either stays in the family intact, or is sold as a single property, not piecemeal. A simple way to effectuate this type of plan is to put the property in a trust, partnership or LLC and include purchase-and-sale provisions that achieve the desired outcome. The wrong answer is to say: “heck, that’s simple, just say in your will that all of the kids have to agree to a sale.”

That’s what the Vinson clan learned in this case. The portion of Vinson Sr.’s will at issue in the case was described as follows by the First DCA:

Hardy Vinson, Sr., executed a will leaving his 34-acre farm and home in Alachua County to his nine living children as tenants in common. The will provided in pertinent part:

The “Vinson Estate” shall not be subject to partition or forced sale by any heir, but shall only be sold upon agreement of all heirs. Taxes and ownership expenses shall be shared equally among the children. Any heir that pays more than his or her share shall be entitled to contribution from the nonpaying heirs upon sale of the property.

When 5 of Vinson Sr.’s 9 children sued for partition of the farm, the trial court ruled in their favor. On appeal the First DCA held that the clause in the will prohibiting partition or sale was an “unlawful restraint on alienation of real property” and upheld the trial court’s ruling. The First DCA explained its rationale as follows:

When real property is conveyed in fee simple, the grantee or devisee acquires a right to sell or dispose of the property as an incident to the right of ownership. The right of alienation is said to be an inherent and inseparable quality of the estate. See1. 61 Am.Jur.2d Perpetuities, Etc. § 102 (2002); 3 Thompson Real Property § 29.03(b), at 707 (2001). An absolute restraint on alienation is inconsistent with the right of ownership and is therefore invalid. See generally Iglehart v. Phillips, 383 So.2d 610 (Fla.1980) (surveying the case law pertaining to restraints on alienation).

The rule against restraints on alienation applies to restrictions on partition of real property, as well as restrictions on sale. The right to seek partition of property owned jointly in a tenancy in common is an incident to the right of individual ownership. See Richard R. Powell, The Law of Real Property, § 77 ¶ 846 (1991). While there appears to be no precedent in Florida for the precise issue presented in this case, other states have held that prohibitions against partition or forced sale of property devised in a will are unlawful restraints on alienation.

(Emphasis added.)

Wood v. U.S. Bank, N.A. , 160 Ohio App.3d 831, 828 N.E.2d 1072, 2005-Ohio-2341 (Ohio App. 1 Dist. May 13, 2005)

Suppose you are a bank officer and one of your large shareholders wants to appoint you as corporate trustee of his trust and, because this shareholder became wealthy owning your bank’s stock, he wants to make sure his trust can continue holding shares of stock of your bank after his death.

[Q.] What issues should the bank be thinking about to make sure that it can both comply with the testator’s wishes and avoid getting sued in the process?

[A.] The bank’s fiduciary duty of loyalty (in connection with acting as trustee of a trust holding its own stock) and the bank’s fiduciary duty to diversify the trust’s assets (in connection with retaining a large block of the bank’s stock).

This case is a good example of what can go wrong if the bank fails to think about these fiduciary duties (and liabilities). Here the grantor created a trust worth over $8 million, naming Firstar Bank of Cincinnati its corporate trustee. Nearly 80% of the trust assets were in the bank’s own stock. Not surprisingly after the grantor’s death when the bank’s stock plunged in value from a high of $35 per share to a low of $16 per share, the trust’s beneficiaries sued the bank. As summarized by the appellate court, at trial the bank pointed to the following exculpatory language as part of its defense:

"The language of John’s last trust was unambiguous. It granted Firstar the power to retain its own stock in the trust even though Firstar would ordinarily not have been permitted to hold its own stock. Specifically, Firstar had the power ‘[t]o retain any securities in the same form as when received, including shares of a corporate Trustee * * *, even though all of such securities are not of the class of investments a trustee may be permitted by law to make and to hold cash uninvested as they deem advisable or proper.’"

On appeal the Ohio appellate court ruled that although this exculpatory language might get the bank off the hook with respect to its duty of loyalty, it in no way relieved the bank of its duty to diversify. Here is how the appellate court explained its rationale:

"The retention clause merely served to circumvent the rule of undivided loyalty. The trust did not say anything about diversification. And the retention language smacked of the standard boilerplate that was intended merely to circumvent the rule of undivided loyalty-no more, no less. There were significant tax consequences that precluded John from diversifying by selling the Firstar stock during his lifetime, but that hurdle was removed upon his death. Had John wanted to eliminate Firstar’s duty to diversify, he could simply have said so. He could have mentioned that duty in the retention clause. Or he could have included another clause specifically lessening the duty to diversify. But he did not. We hold that the language of a trust does not alter a trustee’s duty to diversify unless the instrument creating the trust clearly indicates an intention to do so."

Lessons Learned:

Good drafting could have allowed the bank to both carry out the grantor’s wishes and avoid getting sued. The best way to make this point is to actually look at examples of proper trust provisions for this type of scenario. With respect to authorizing the bank to hold its own stock in trust, here is a sample clause (I’ve italicized the key terms):

Waiver of Duty of Loyalty:

The Trustee is authorized to invest in assets, securities, or interests in securities of any nature, including (without limit) commodities, options, futures, precious metals, currencies, and in domestic and foreign markets and in mutual or investment funds, including funds for which the Trustee or any affiliate performs services for additional fees, whether as custodian, transfer agent, investment advisor or otherwise, or in securities distributed, underwritten, or issued by the Trustee or by syndicates of which it is a member; to trade on credit or margin accounts (whether secured or unsecured); and to pledge assets of the Trust Estate for that purpose.

With respect to authorizing the bank to retain a highly concentrated stock position, in other words relieving the bank of its duty to diversify, here is a sample clause (I’ve italicized the key terms):

Waiver of Duty to Diversify:

I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in XYZ Corp., or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as "XYZ Corp."), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ Corp. because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust’s portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ Corp. that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called "uncompensated risk") incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ Corp., and nothing in this paragraph will be interpreted in any manner to limit the Trustee’s authority to do so.

Most of what passes for “debate” regarding estate tax repeal isn’t very funny. Well, there’s an exception to every rule. For great satire check out The Swift Report’s post entitled “‘Death Tax’ More Deadly than Gout, Polo Injuries Combined”. Here’s an excerpt from the post:

A visit from ‘death tax’ widows

Later this week Senators will hear from a handful of individuals whose families have been literally taxed to death in recent years. Among those scheduled to testify on Capitol Hill: members of the Mars candy family, the Gallo wine family, the Wegman supermarket family, the Dorrance family, which controls Campbell soup, and the Waltons, who control Wal-Mart.

Members of the hard-hit families will temporarily lift the black veil that the ‘death tax’ has lowered onto their lives, allowing Senators and ordinary citizens a glimpse into this other America. “These are not easy stories to tell,” says a source close to one of the families. “People are suffering. They’re having to scratch and claw just to get the things they need to survive: yachts, granite counter tops, single malt whiskey. We’re talking about very basic goods here.”

Sometimes you come across stories of attorney misconduct that are so outrageous they trigger deep, soul-searching philosophical questions, like . . . “was this person NUTS!?” Well, it turns out that the Allentown, Pa., attorney at the center of this latest scandal may actually be crazy (or crazy like a fox?). Here are a few excerpts from the linked-to story:

An Allentown, Pa., lawyer was indicted Thursday on charges of embezzling more than $1.5 million from the heirs of estates he was handling and real estate clients by transferring their funds to his own personal bank account — sometimes forging his clients’ signatures on checks.

Prosecutors claimed attorney Michael D. Kasprenski, 43, used some of the stolen money to buy a vacation home in Nova Scotia and to pay boarding costs for his horse.

* * * *

Kasprenski was arrested in February and was ordered to undergo a psychiatric evaluation by U.S. Magistrate Judge Arnold C. Rapoport. According to Kasprenski’s lawyer, John J. Waldron of Huber & Waldron in Allentown, Kasprenski was found incompetent to stand trial.

The following are excerpts from this New York Times article on today’s Senate vote defeating efforts to repeal the estate tax:

WASHINGTON, June 8 — The Senate rejected a major Republican effort on Thursday to eliminate the estate tax on inherited wealth. The vote was a big defeat both for President Bush and for Senate Republican leaders, who had framed their opposition to what they called the “death tax” as a popular and even populist crusade.

Sixty votes were required to end debate on the bill and prevent a filibuster, but the measure got only 57, with 41 Senators voting against and 2 not voting. Only a few lawmakers crossed party lines.

Though a handful of lawmakers continued to search for a compromise that could pass, negotiators appeared unable to reach a deal before the end of this week — if ever.

“We were foreseeing ourselves putting this over the line,” said Dick Patten, executive director of the American Family Business Institute, a group that has led much of the political campaign against the estate tax. Though insisting that he was still trying to line up another two votes, Mr. Patten had already begun to talk about making the issue a central one in the 2008 elections.

You can find more on the estate-tax repeal vote here.

Brigham v. Brigham, __ So.2d __ (Fla. 3d DCA May 31, 2006)

This case should be printed out and kept in the desk drawer of every probate litigator in Florida. Whether you find yourself defending a trustee being sued for breach of trust or prosecuting this type of claim on behalf of trust beneficiaries, you will need to be aware of this case and its profound implications.

The law in Florida is clear: a trustee defending himself in litigation involving any form of breach of trust cannot pay his legal defense fees with trust funds in the absence of a prior authorizing court order. That was Miami-Dade Judge Rothenberg’s ruling at the trial court level, and here’s how the Third DCA summed up this rule when it affirmed his order:

Appellees brought suit against Appellants in their trust roles and as individuals for trust mismanagement. Because Appellants defended against individual liability, their personal interests conflicted with their position as trustees. See Shriner v. Dyer, 462 So.2d 1122, 1124 (Fla. 4th DCA 1984). When a trustee’s individual interests conflict with his or her duties to a trust, court approval is necessary before a trustee can use trust funds to pay his or her own attorneys’ fees. 2005->Ch0737->Section%20403#0737.403″>§ 737.403, Fla. Stat. (2003).

By the way, this rule is retained under Florida’s new trust code as new F.S. § 736.802(10) (see here). Although every case is different, this opinion provides one possible road map for getting to a final ruling on this issue. Here is an extended excerpt from the opinion tracking the procedural steps and time-line in this case:

The settlor died in 2002. In June 2003, Appellees filed a multi-count complaint against Appellants alleging, among other things, undue influence, breach of fiduciary duty, self-dealing, conversion of trust assets, mismanagement of trust assets, intentional interference, fraud, and conspiracy. Appellants were sued in their individual capacities as well as their capacities as trustee and successor trustee. After receiving an accounting, Appellees discovered that Appellants were using trust funds to pay their legal fees in the underlying litigation. In November 2004, Appellees filed a Motion to Restrict Payment of Attorneys’ Fees, arguing that Appellants were prohibited from paying their individual attorneys’ fees with the trust funds and without prior Court approval. On January 18, 2005, the trial court, after a hearing, granted Appellees’ motion in part, finding that Appellants were prohibited from paying their individual attorneys’ fees with trust funds, and concluding that court approval was necessary to pay litigation expenses out of the trust, as a personal conflict may exist since Appellants were sued in their individual capacities as well as in their trustee roles. In March 2005, upon motion by Appellants, the trial court appointed a Special Master to assist the court in determining which of the attorneys’ fees and costs, already paid by the trust, were for the benefit of Appellants as trustee and successor trustee rather than as individuals. In June 2005, the Special Master issued his Report and Recommendation, noting that he “does not believe that any of the fees incurred to date can be separated into [Dana Brigham’s] individual defense as opposed to [Dana Brigham’s] defense as trustee,” and recommending that Appellants personally pay all attorneys’ fees necessary to defend themselves against the litigation, and return all monies taken out of the trust for payment of attorneys’ fees in the underlying litigation. After a hearing on Appellants’ Objection to the Report and Recommendation, the trial court adopted the Report and Recommendation and held that Appellants must pay the attorneys’ fees back to the trust and refrain from paying further attorneys’ fees and costs with trust assets without court approval.

This story is both sad and instructive. On the one hand, an attorney who for decades seemed to embody the best of the profession has been caught red handed stealing money that belonged to his clients, many of whom were either poor or elderly. On the other hand, this case shows why Florida probate judges will often require that all estate funds be deposited with a local bank in a “restricted depository account” governed by 2005->Ch0069->Section%20031#0069.031″>F.S. § 69.031. In other words, an attorney’s trust account is no longer deemed “safe enough” by the courts. For example, in Miami-Dade County there is a blanket policy requiring ALL estates to place liquid funds in restricted depository accounts – no exceptions granted.

The following are a few excerpts from the linked-to story:

“Mark Valentine, probate lawyer and counsel to Miami’s civil service board for more than twenty years, was disbarred in late April. In court documents, the Florida Bar Association compared Valentine’s dealings to a “Ponzi scheme” — a scam that uses new investors to pay off earlier investors. The State Attorney’s Office has opened a wide-ranging investigation, according to SAO spokesman Ed Griffith, and one former client’s heirs have sued. More lawsuits are likely.”

“[A]uditor Carlos Ruga began an ‘exhaustive and exhausting’ analysis of Valentine’s finances. Ruga discovered that for years Valentine had been taking the money left by his clients’ husbands, wives, mothers, and fathers — at least two million dollars from at least sixteen estates — and using it to repay funds he had withdrawn from others. Using his firm’s trust account as a conduit, Valentine sometimes took as much as $700,000 at a time from one estate to repay money taken from others, Ruga’s analysis revealed.

Valentine used the funds for, among other things, $55,000 in credit card bills, according to the audit. More than one million dollars remains missing, says Maureen Kennon, attorney for the estate of Louise Dargans-Fleming, one of Valentine’s former clients.

With Ruga’s audit as evidence, the bar association took the unusual measure of asking the state Supreme Court to suspend the lawyer on an emergency basis in October 2005. He was disbarred last month. In an affidavit, Ruga (who declined to comment in detail about the case) seemed flummoxed by the scope of Valentine’s misappropriations. He pointed out the audit had ignored at least 100 other estates and guardianships under Valentine’s supervision. ‘I could go on and on,’ Ruga testified, ‘but I have to stop at some time.'”

Florida is a hub for international business and investment. Given that Florida has just adopted a new Trust Code (see here), this is probably a good time to reconsider Florida as an ideal trust jurisdiction for non-U.S. persons. Warren Whitaker (Partner, Day, Berry & Howard LLP) has recently posted an excellent article addressing this question from a general U.S. perspective (i.e., he did not focus on Florida) entitled The U.S. May be a Good Trust Jurisdiction for Foreign Persons. The following is the SSRN abstract of his article:

Abstract: At one time non-U.S. persons would rarely consider creating a trust that was subject to the jurisdiction and governed by the substantive law of one of the fifty United States. The definition of what constituted a U.S. trust for income tax purposes was vague and amorphous, and US trusts are subject to U.S. income tax on their worldwide income, while non-U.S. trusts are taxed only on their U.S. source income. However, recent changes in U.S. tax law have made it possible to create a trust with a U.S. trustee that is subject to U.S. court supervision and governed by the laws of a U.S. state, and still achieve all the tax advantages of a foreign trust. In addition, certain states have enacted substantive trust laws that are attractive for anyone who wants to create a trust, including non-U.S. persons. Among the recent changes in the tax law that permit foreigners to use U.S. trusts are: 1. The revised definition of “United States Trust” enacted by Congress in 1996 creates a two-pronged bright line test, and only trusts that meet both tests are considered to be U.S. trusts. The tests make it possible to create a trust under US law that nonetheless qualifies as a foreign trust. 2. Several U.S. states now permit a Settlor to contribute assets to an irrevocable trust and remain a permissible beneficiary of the trust in the discretion of an independent trustee, and the trust assets will be protected from creditors whose claims arise after the trust is created, and thus also potentially excluded from U.S. estate tax at the Settlor’s death. 3. The rules regarding grantor trusts with non-U.S. grantors were also significantly amended in 1996. 4. Certain countries have lists of jurisdictions that are considered to be tax havens. The U.S. is not on any of these lists. 5. Income tax treaties between the United States and certain other countries provide benefits to non-U.S. persons residing in these treaty countries who create and fund U.S. domestic trusts. 6. The income taxes of the United States on passive income have been dramatically reduced in recent years in order to avoid taxation in their home country. The substantive advantages that make U.S. trusts attractive to foreigners include: 1. No Rule Against Perpetuities in some states. 2. Investment Advisor with sole responsibility for investment management. 3. Distribution Advisor 4. Protection From Forced Heirship 5. Private Trust Companies

Deirdre R. Wheatley-Liss, Esq., author of the You and Yours Blawg, wrote here about a report just published by Representative Henry A. Waxman, Ranking Member, Committee on Government Reform, and the Committee on Government Reform Minority Office. The study, entitled “New Report Reveals Estate Tax Repeal Would Give Over $200 Million Windfall to Oil Company Executives,” is a numerical look at who (naming names) might benefit the most from a total repeal of the estate tax. The following is the introduction to the report’s findings:

Tuesday, May 30, 2006 — Next week the Senate is scheduled to consider legislation (H.R. 8) to repeal the estate tax. Repealing the tax, which has been law since 1916, is estimated to cost $1 trillion from 2011-2021. Although the tax affects few Americans, repeal will give some families extraordinary windfalls. The CEO’s of major oil companies, for instance, would get enormous benefits if H.R. 8 were enacted. The family of one oil executive, Lee Raymond (the former ExxonMobil CEO), alone could receive a tax break worth over $160 million.

This report analyzes the impact that repeal would have on the families of the senior executives for the major oil companies. In 2005, the minority staff of the Government Reform Committee released a similar analysis showing that repealing the estate tax repeal would save the President, Vice President, and 11 cabinet members as much as $344 million.

Estimated Estate Tax Savings of Oil Company CEOs
2005 Analysis: Estimated Tax Savings of Bush Cabinet