The LA Times recently reported here on the bitter and lengthy on-going litigation involving a $400 million testamentary trust between the decedent’s third ex-wife (who also happens to be the guardian of the 13 year old boy who is the principal beneficiary of the trust) and the trustees. Battles over how an estate is administered, be it a probate estate being administered by a personal representative or a trust estate being administered by one or more trustees, are far and away the leading causes of probate litigation. These disputes are foreseeable, and can be mitigated (although not eliminated) with proper planning.

Source: Wills, Trusts and Estate Prof Blog

Rasmussen v. Rasmussen, 2005 WL 2138710 (Fla. 2d DCA September 7, 2005) (Trial Court Reversed)

Although this is a divorce case, the issue of when and “if” a gift actually transfers property rights comes up quite often in the probate-litigation context. So this case should be of interest to trusts and estates planners as well as litigators.

Former major league ball player Dennis L. Rasmussen signed the following note, dated June 10, 1999, which bore the signature and stamp of a notary public (but without a jurat or acknowledgment):

I, Dennis Rasmussen, in sound mind and body, wish to have my wife, Jan S. Rasmussen, receive all property, including personall [sic], in the event of death or separation. I hereby give up any right of any joint or individually held monetary [sic] and property due to any of the above circumstances.
This agreement will remain in effect until an [sic] mutually agreed upon revision replaces the above. (Emphasis added.)

Not unreasonably, Mrs. Rasmussen tried to hold him to this “gift” after filing for divorce. Mr. Rasmussen apparently had a change of heart and argued he didn’t really mean to give her anything. Hillsborough County Judge Manuel A. Lopez didn’t buy this argument, and ruled against him. Unfortunately for the soon-to-be “ex” Mrs. Rasmussen, on appeal the Second District Court of Appeal reversed the trial judge, basing its ruling on the following excellent summary of the current state of the law in Florida with respect to when a gift effectively passes title to property:

We have previously outlined the principles used for determining whether there has been a valid gift:
It is well settled that to effectively pass title by gift there must be a surrender of dominion over the res, coupled with the intent then and there to pass title. In other words, there must be an immediate vesting of some interest in the donee, complete and irrevocable. If the donor withholds divestiture it is not a legal gift. A delivery which does not confer the present right to reduce the res into possession of the donee is insufficient. . . .

Under these principles, the note of June 6, 1999, did not make a valid gift of the husband’s property to the wife. According to the terms of the note, the wife’s rights would come into existence only “in the event of death or separation.” The note thus provided for a conditional, future transfer of the property; it did not give the wife a present right to the property. Since the note was ineffective as a gift of the husband’s property to the wife, the trial court erred in treating the assets in question as marital assets subject to equitable distribution.

As reported in this New York Law Journal article, Manhattan law firm Graubard Miller has been hit with a suit claiming some of its partners tried to extract almost $50 million in “gifts” and unearned fees from a longtime client, the 80-year-old widow of one of New York City’s largest real estate developers, Sylvan Lawrence, who died in 1981. Mr. Lawrence’s estate has been embroiled in litigation ever since. Mark Zauderer of DLA Piper Rudnick Gray Cary, who represents Graubard Miller, said Ms. Lawrence’s suit against the firm is aimed at avoiding paying a “well-earned fee.” Ms. Lawrence, who is represented by Leslie D. Corwin of Greenberg Traurig, is seeking rescission of her retainer agreement and the return of all fees previously paid to the firm and all gifts paid to the partners. The complaint also requests punitive damages and attorney fees.

Scott v. Reyes, 2005 WL 2172231 (Fla. 2d DCA September 9, 2005) (Trial Court Affirmed)

A little-known “exception” to 2005->Ch0733->Section%20702#0733.702″>F.S. § 733.702, the statute of limitations applicable to creditor claims against an estate, is the so-called “trust exception” or “equitable title to specifically identifiable property exception.” In this case the Second District Court of Appeal provided the following summary of just what the “trust exception” is and when it applies:

Considering the changes to prior law effected by the adoption of the Code and the new statutory language concerning the filing of claims, we summarized the current state of the law relative to the trust exception as follows:

[T]he “trust exception” or “equitable title to specifically identifiable property” exception to the requirements of the nonclaim statute, as those exceptions pertain to recovery of property from an estate, have effectively been limited to those situations where the decedent clearly held the property on behalf of the actual owner either by way of an express trust or some other clearly defined means. In other words, if a decedent asserted beneficial ownership of the property before his death, a claim to the property would be barred unless filed according to section 2005->Ch0733->Section%20702#0733.702″>733.702. The reason being that the dispute as to ownership, creating the cause of action, arose before the decedent’s death because the decedent, prior to his death, adversely claimed the property as his own. If, however, the decedent was merely in possession of the property but made no such assertion of ownership prior to his or her death, the assertion of ownership being made by the personal representative or heirs for the first time after the decedent’s death would not require the filing of a claim.

In addition to an express trust, the Second District Court of Appeal provided the following additional “candidates” for when the “trust exception” might apply: “a trust imposed by statute . . ., a bailment, and a lease of personal property.”

In 2006 the exemption amount for federal estate taxes is $2.0 million, in 2009 it goes up to $3.5 million. If the Republicans have their way, estate taxes will either disappear all together or essentially become inconsequential. The Democratic response is to freeze the estate tax exemption at the 2009 level.

Even in the absence of estate tax repeal, estates that are inconsequential for estate-tax planning purpose are already more than large enough for most families to litigate over. Moreover, demographic trends may soon lead to dramatic jumps in estate litigation.A March 2006 newspaper article entitled Law firms see rise in inheritance feuds, had the following to say about the expected increase in estate disputes as the World War II generation passes away leaving trillions to their children, the baby-boomer generation:

Legal disputes over inherited property are making headlines [locally and] . . . nationwide in the case of Anna Nicole Smith, a former Playmate of the Year. But the millions at stake in these high-profile lawsuits pale in comparison to the trillions of dollars of wealth that will be bequested, inherited and fought over in the next 50 years. As in-court arguments over inherited wealth become more common, law firms are strengthening their trust-and-estate litigation services to meet the demand.

*    *    *    *    *
The perfect storm

The reasons for the flurry of trust-and estate-related legal battles are many.
According to an article in the Dispute Resolution Journal, an estimated $41 trillion of wealth will be transferred in the United States from the “Greatest Generation” to their kids, the baby boomers, between 1998 and 2052. The massive transfer in wealth alone is enough to spur more family feuds . . .

*    *    *    *    *

Some lawyers say baby boomers seem much more willing to air their family problems in court than their parents were. Well-publicized trials also contribute to the rise in demand for estate litigation.

McKean v. Warburton, 2005 WL 2155180 (Fla. September 8, 2005) (4th DCA Reversed) REVISED OPINION: McKean v. Warburton, 2005 WL 3601898 (Fla. September 8, 2005) The Florida Supreme Court reversed this Fourth DCA decision permitting the distribution of freely devisable homestead property to satisfy a preresiduary bequest. For the reasons discussed here, I think the Florida Supreme Court got this one wrong, turning what should be a benefit, i.e., Florida’s homestead protection laws, into one very big trap for the unwary. In light of skyrocketing real estate values in Florida, for most Florida homeowners, their single most valuable asset is their home. If a homeowner is survived by a spouse or minor children, his or her residence is protected homestead property under Florida’s Constitution (Art. X, § 4(c)) and Probate Code (2005->Ch0731->Section%20201#0731.201″>F.S. § 731.201(29)), and thus not subject to devise pursuant to 2005->Ch0732->Section%204015#0732.4015″>F.S. § 732.4015. However, if the homeowner’s residence is NOT protected homestead property, one might be forgiven for assuming that the residence was “freely” devisable. Not so fast says the Florida Supreme Court. If a homeowner that expects NOT to be survived by a spouse or minor children wants to make sure that his or her single most valuable asset at death can be used to satisfy pre-residuary bequests, the Florida Supreme Court’s holding in this case will require that the homeowner specifically provide in his or her Will that the homestead property be sold and added to the general probate estate. Specifically, the Florida Supreme Court summed up its holding in this case as follows:

We therefore . . . hold that where a decedent is not survived by a spouse or minor children, the decedent’s homestead property passes to the residuary devisees, not the general devisees, unless there is a specific testamentary disposition ordering the property to be sold and the proceeds made a part of the general estate.

The following appellate briefs were filed with the Florida Supreme Court for this case:

Miami Attorney Jack A. Falk, Jr., Chair of the Probate and Trust Litigation Committee of the Florida Bar, distributed this agenda as well as this memorandum in connection with the following pending and proposed legislative initiatives discussed at the August 18, 2005 litigation committee meeting:

Karasek v. William J. Lamping Trust, 2005 WL 2086183 (Fla. 4th DCA August 31, 2005) (Trial Court Reversed) Precise drafting is the single most effective barrier against costly probate litigation. What makes estate planning documents especially challenging for attorneys is that the careful drafter needs to consider the very real possibility that the Will or Trust he or she drafts today could become a disputed matter decades in the future (or even hundreds of years in the future under Florida’s new rule against perpetuities statute, see 2005->Ch0689->Section%20225#0689.225″>F.S. § 689.225). That’s what happened in this case. A Will that was executed in 1967 became the subject of litigation in 2003 . . . 36 years after the date it was signed! The 1967 Will contained a “default” clause common to any well drafted Will. Essentially, the document directed that in the event the testator’s children predeceased his surviving spouse, upon the death of his surviving spouse the trust corpus was to be distributed to the “heirs” of his deceased children. What was unclear was whether the 1967 definition of heirs was applicable or the 2003 definition of heirs was applicable. The Fourth District Court of Appeals ruled that under Florida law the presumption is that the testator intended the term “heirs at law” to be construed under the statutes in existence at the time the Will was executed, i.e., 1967. The entire dispute could have been avoided if the default clause had stated what law was applicable, as the following example does:

If any property is subject to this article under another provision of this Trust Agreement, the Trustee shall distribute that property to my heirs at law determined under Florida law then in effect as if I had died intestate and unmarried on that date as a resident of Florida.

Longmire v. Estate of Ruffin, 2005 WL 2016944 (Fla. 4th DCA August 24, 2005) (Trial Court Reversed) This Fourth District Court of Appeals opinion should make clear once and for all that if a personal representative should reasonably expect that the estate will be sued by a particular party, F.S. § 2005->Ch0733->Section%202121#0733.2121″>733.2121(3)(a) requires that the personal representative treat that potential plaintiff like a creditor entitled to actual notice that the probate proceedings are pending. Although this case involved a personal injury cause of action, there is no reason to believe the applicable rule would be different with respect to any other type of cause of action. Lesson learned: if a personal representative wants to take full advantage of the liability shield created by 2005->Ch0733->Section%20702#0733.702″>F.S. § 733.702(1), potential plaintiffs must receive actual notice that the probate proceedings are pending.

Mediated settlement agreements are the norm in Florida when in comes to probate litigation. An excellent resource for thoughtful articles on why probate mediation has “taken off” over the last decade can be found here on the Mediate.com website. But just when you thought mediation was the answer to all of your problems, this interesting post on the Wills, Trusts & Estates Prof Blog (which is reproduced below) discusses yet another option for the creative probate attorney: civil disengagement.

In a recent newsletter, Gerald Le Van, a strong proponent of family wealth mediation, introduces the concept of “civil disengagement” as an alternative to financially and emotionally costly litigation when family members cannot reach an amiable solution.

Mr. Le Van explains that civil disengagement:

  • acknowledges current irreconcilable differences,
  • but avoids family litigation;
  • manages each divided camp separately,
  • but leaves the door open to family reunification in later generations.

See Gerald Le Van, Divided Families: Civil Disengagement Instead of War (Aug. 2005).