Florida Probate & Trust Litigation Blog

4th & 2d DCA on "in camera" review of privileged documents in probate litigation

Juan Antunez — Fri, 10 May 2013 19:02:46 -0500

If you're an estate planner, it's only a matter of time until someone asks you to turn over a deceased client's estate planning file. Don't automatically say "yes," you'd be surprised (horrified!) by the ethical traps lurking in this seemingly simple request (if you want to make sure you don't get sued for getting this wrong, read Florida Bar Advisory Opinion 10-3, which I've previously written about here).

And if you're a probate lawyer, sooner or later you're going to find yourself representing a personal representative, trustee or guardian on the receiving end of discovery requests demanding privileged communications (in which case you'll want to cite F.S. 90.5021, the evidentiary privilege rule specifically designed for fiduciaries, which I've previously written about here).

So what's the link between the ethical duty to keep client information confidential and the evidentiary rule shielding this information from disclosure? Think in camera (Latin for: "in a chamber") inspection. If there's a dispute, a court's going to have to decide which documents get turned over and which don't. In order to preserve the confidentiality of information claimed to be privileged during the process of determining the propriety of those claims, there's no other logical alternative than for the court to independently review the material in camera.

Can a court say NO to the in-camera review process? NO

Patrowicz v. Wolff, --- So.3d ----, 2013 WL 1352488 (Fla. 2d DCA April 05, 2013)

In this case the same lawyer was apparently estate planner for the decedent and counsel for the personal representative of his estate (which is common). So when the plaintiff subpoenaed his records, it was in his capacity as a non-party estate planner, not probate counsel. Why does this matter? Because it means the law governing if or when these records get turned over are the ethics rules dissected in Florida Bar Advisory Opinion 10-3, not evidentiary rule F.S. 90.5021. This distinction matters.

In any event, when the subpoena was challenged, no matter what law governs the ultimate outcome the path for getting there is the same: court must conduct an in camera review. So can a probate judge simply skip this step? NO, so sayeth the 2d DCA:

Sarah R. Patrowicz, as Personal Representative of the Estate of Joseph H. Winner, petitions this court for a writ of certiorari quashing a discovery order compelling the production of documents allegedly subject to the attorney-client privilege. Because the trial court departed from the essential requirements of the law by ordering the production of allegedly privileged documents without first conducting an in camera inspection to determine whether the privilege applies, we grant the petition and quash the order.

. . .

“A trial court's order erroneously compelling discovery of information protected from discovery by the attorney-client privilege is reviewable by certiorari.” Bennett v. Berges, 84 So.3d 373, 374–75 (Fla. 4th DCA 2012). A party claiming that documents sought by an opposing party are protected by the attorney-client privilege is entitled to have those documents reviewed in camera by the trial court prior to their disclosure. Id. at 375. This is equally true where the subpoena on its face requests communications between attorney and client. See Nationwide Mut. Fire Ins. Co. v. Hess, 814 So.2d 1240, 1243 (Fla. 5th DCA 2002). The failure to address whether a claimed privilege applies prior to ordering the disclosure of documents is a departure from the essential requirements of the law. See Snyder v. Value Rent–A–Car, 736 So.2d 780, 782 (Fla. 4th DCA 1999).

. . .

[T]he reason we must quash the order is that the trial court ordered production of the documents without first reviewing them and determining whether the attorney-client privilege applied. Not only did Linde specify that his objection was based on the attorney-client privilege, but the subpoena on its face explicitly requested communications between an attorney and his client. Consequently, the trial court was required to conduct an in camera inspection of the documents prior to ordering their disclosure. We therefore quash the order compelling the production of the documents and remand the case for further proceedings.

OK, so if a court can't say no to the in-camera review process, can you? NO

Bennett v. Berges, --- So.3d ----, 2012 WL 832730 (Fla. 4th DCA March 14, 2012)

In probate litigation the same person is your judge and jury; these are all bench trials. So if you're worried something you told your lawyer is going to prejudice you in the eyes of your judge/fact-finder, having this same judge conduct the in camera review of your files isn't going to help much, the damage is done. Assuming this scenario, then maybe you're going to really want to block the in-camera review process. That may be so, but don't count on an appellate court coming to your rescue. If your judge says turn over the documents, that's it, you're done. So sayeth the 4th DCA:

Here, the trial court properly ordered an in camera review of the relevant documents claimed to be privileged. The order does not compel Petitioners to produce the documents to Respondents. After an in camera inspection, the trial court may determine that the documents are privileged and uphold Petitioners' objection to the discovery request. Accordingly, because the order requires a party to submit allegedly protected materials only for an in camera inspection, and the trial court may never require disclosure of the documents to the opposing party, we hold that the petition is premature. See Cape Canaveral, 917 So.2d at 340 (holding certiorari review was premature because no irreparable harm had been demonstrated where the order under review merely required documents to be produced for an in camera inspection and no discovery had yet been ordered); Gaton v. Health Coal., Inc., 774 So.2d 59 (Fla. 3d DCA 2000) (certiorari review of an order requiring submission of documents allegedly protected by the trade secret privilege to the courts for an in camera inspection was premature because no production had been ordered to the opposing party). But see Cebrian By & Through Cebrian v. Klein, 614 So.2d 1209 (Fla. 4th DCA 1993) (granting a writ of certiorari and quashing an order requiring in camera inspection of certain HRS investigation reports because the shield law found in section 415.52(2), Florida Statutes (1990), created a privilege for such reports; thus, an in camera inspection was not necessary to determine whether the material was or was not protected).

Whether the trial court has misapprehended the scope of the privilege is a question we need not decide because to date, no discovery has been ordered. Accordingly, the petition is denied.

5th DCA: Does inter vivos gift of stock automatically fail if stock certificate remained registered in donor's name at death?

Juan Antunez — Thu, 25 Apr 2013 19:53:11 -0500

Welch v. Dececco, --- So.3d ----, 2012 WL 5969623 (Fla. 5th DCA November 30, 2012)

When and "if" a gift actually occurs can be a tricky, fact-intensive issue to decide. A few years ago I wrote here about a contested gift by former major league ball player Dennis L. Rasmussen to his ex-wife. This time around the case involves an alleged gift of Exxon-Mobil stock by a man to his nephew. After uncle's death nephew claimed the stock. One problem, the stock certificate remained registered in uncle's name at the time of his death. As far as the probate judge was concerned, this one fact decided the case: nephew loses. Not so fast says the 5th DCA.

Inter vivos gift of stock does NOT automatically fail if stock remained registered in donor's name at death:

Gifts are a function of "donative intent," and just because the stock remained registered in uncle's name at the time of his death doesn't automatically mean he didn't intend to gift it to nephew. Case reversed, here's why:

In this probate matter, Frank Welch appeals the trial court's order determining that ExxonMobil stocks had not been transferred to him by his uncle, Frank Kolbl, via inter vivos gift and, thus, belonged to Kolbl's estate. Because it is unclear from the order whether the court considered all the relevant evidence in arriving at this ruling, we reverse and remand for the trial court to clarify the basis of its ruling.

The elements of an inter vivos gift are present donative intent, delivery, and acceptance. See Mulato v. Mulato, 705 So.2d 57, 61 (Fla. 4th DCA 1997). Here, the trial court concluded that Welch failed to prove present donative intent, and that the evidence showed, at best, a failed testamentary intent. The court cited the fact that the stocks were still registered in Kolbl's name at his death. Although stock registration is properly considered in analyzing donative intent, it is not necessarily dispositive where, as here, other evidence is presented for and against such intent. See id. at 59–60, 62; Freedman v. Freedman, 345 So.2d 834, 836–37 (Fla. 3d DCA 1977); Sullivan v. American Tel. & Tel. Co., 230 So.2d 18, 18–21 (Fla. 4th DCA 1969); Kuebler v. Kuebler, 131 So.2d 211, 212–16, 218–19 (Fla. 2d DCA 1961); Eulette v. Merrill Lynch, Pierce, Fenner and Beane, 101 So.2d 603, 604–05 (Fla. 3d DCA 1958). It is unclear from the trial court's order whether the court focused exclusively on the stock registration, or properly considered it as one fact along with all the other evidence relevant to donative intent.

Accordingly, we reverse and remand this matter for the trial court to clarify whether it considered all the relevant evidence, and if not, to reconsider its ruling on the basis of the evidence presented.

When is a gift of stock complete for tax purposes?

It's impossible to predict with 100% certainty if your particular probate judge is going to consider the particular facts of your specific case and conclude the three elements of a completed gift have been proven: "present donative intent, delivery, and acceptance." One way to give your judge some guidance (and your client some sense of how weak or strong his case is) is to look to the detailed regulations and common law developed in the tax context for determining when a gift of stock is complete. If under the facts of your case the gift would have been complete for tax purposes, that's a powerful argument for the same conclusion as a matter of state law, and vice versa. Charities make it their business to put this kind of information on the web for potential donors of stock, so it's easily accessible if you know what you're looking for. See here, here, here and here for examples.

AAA's new Wills and Trusts Arbitration Rules and Mediation Procedures

Juan Antunez — Mon, 22 Apr 2013 12:36:15 -0500

As end users of Florida's court system, trusts and estates lawyers know all too well the negative consequences of an underfunded judiciary. What may not be as clearly apparent is that our clients do have the power to largely "opt out" of the public court system. How? Think alternative dispute resolution or ADR. In Florida there are no jury trials in contested probate or trust proceedings, so these cases lend themselves to privately funded and managed ADR mechanisms, including mandatory arbitration.

F.S. 731.401: Statutory Authorization of Mandatory Arbitration Clauses in Wills & Trusts:

The trouble with arbitration clauses in wills and trusts is that historically it was unclear if a client could impose mandatory arbitration on the beneficiaries of his or her estate/trust. In Florida this uncertainty was eliminated in 2007 with the adoption of F.S. 731.401, expressly authorizing mandatory arbitration clauses in wills and trusts (which I wrote about here). In that blog post I also discussed a few sample arbitration clauses for wills and trusts, including the sample clause published by the American Arbitration Association or AAA (click here) and the sample clauses provided in an ACTEC article entitled Resolving Disputes with Ease and Grace.

Making Arbitration Clauses Work in Real Life: Think Rules and Procedure:

What's difficult about drafting effective arbitration clauses is incorporating a set of rules and procedures the parties and their arbitrators can rely on to resolve disputes privately, promptly and economically. One option is to draft these rules yourself and include them in your wills and trusts. I don't like that approach. First, a complete set of arbitration rules can run for dozens of pages, making it impractical to include them in a will or trust agreement. More importantly, I'm an expert in trusts and estates law, not arbitration law. The better alternative is to incorporate by reference a pre-existing set of arbitration rules tailored for wills and trusts that also include all of the generally applicable "best practices" an arbitration specialist would draft for. Ideally, you'd also want to incorporate a set of arbitration rules that gets revised from time to time to keep up with evolving arbitration norms and legal requirements.

To my knowledge the only publicly-available arbitration rules meeting all of these requirements are the rules published by AAA. Which is why I keep up with their rules and was interested to learn that effective June 1, 2012 they'd been amended and re-published. Here's an excerpt from the introduction to the PDF version of AAA's new Wills and Trusts Arbitration Rules and Mediation Procedures:

Every year billions of dollars are administered by executors and trustees. Wills, transferring property to beneficiaries, are the most frequently used instruments, but family trusts, charitable trusts, and commercial trusts are growing in use and scope. Occasionally, disputes arise over whether those funds are being properly administered and whether the governing will or trust is being interpreted correctly by the fiduciary. . . . Many of these disputes can be resolved by the use of mediation or arbitration, processes that provide parties with an alternative means to resolve their disputes. . . . Arbitration is an effective way to resolve these disputes privately, promptly, and economically, utilizing as the arbitrator a lawyer or lawyers with substantial experience in the area of wills, trusts and estates.

. . . The AAA Wills and Trusts Arbitration Rules and Mediation Procedures provide that the arbitrator, at his or her discretion, may provide for the protection of unrepresented parties, including the use of a guardian ad litem to represent any minor, incapacitated, or unborn beneficiary . A written reasoned award is required under the AAA Wills and Trusts Rules. Testators or settlors can require that future disputes be arbitrated by inserting the following clause into their wills and trusts in most jurisdictions.

Opting out of the public court system:

From my perspective there are two chief selling points for mandatory arbitration clauses in trusts and wills. First, if your arbitration clause is properly drafted, your case gets decided by a specialized trusts and estates lawyer (or lawyers) with real-life experience handling complex estate matters (usually 10+ years) vs. a randomly assigned state-court judge, who almost never has any private-practice experience dealing with complex estate matters (most judges are former prosecutors). Second, by privatizing the process the parties can, to the extent permitted by F.S. 731.401 (and there are limitations), opt out of the dysfunctions inherent to an overworked and underfunded state court system. This second point is what tips the scales for me.

In 1994 Yale Law professor John H. Langbein reviewed Undue Influence: The Epic Battle for the Johnson & Johnson Fortune, by David Margolick. In his book Margolick reported on a will contest litigated in New York City's probate court system involving heirs to the Johnson & Johnson pharmaceutical fortune of J. Seward Johnson, Sr., who died at age eighty-seven in 1983. The case was litigated by the best T&E legal talent from some of the largest, most well-regarded Wall Street firms. And yet, if you believe Margolick's reporting, a dysfunctional court system personified by the judge overseeing the case, Surrogate Marie Lambert, resulted in an ugly spectacle demeaning all involved. As famed NYC attorney William D. Zabel wrote here, "the parties decided to settle. The Will was, to put it charitably, totally rewritten by the contestants. The result: any resemblance to Seward Johnson’s actual last Will seemed purely coincidental."

In Prof. Langbein's review of Margolick's book, published as Will Contests, 103 Yale L.J. 2039 (1994), he lambasts the estate planners involved in the Johnson & Johnson case for not anticipating the dysfunctions inherent to many of our probate court systems.

There have long been difficulties in staffing the American probate bench, and some of the people who serve there-such as Surrogate Marie Lambert, whose partisanship disfigured the trial of the Seward Johnson estate-are menacing. Margolick supplies a chilling collection of instances of Lambert's incessant one-sidedness and impropriety. (E.g., 313, 407, 424, 479, 486, 494, 523-24, 546-47, 564, 568, 576, 585) He leaves open the question of whether she was looking to be bribed (459, 550) or whether her prejudgment was merely gratuitous.

I would not wish to imply that Marie Lambert typifies the American probate bench, or that competent and devoted judges are not to be found in American probate courts. Occasionally, splendid figures such as James Wade in Denver or Floyd Probst in Atlanta grace the probate bench. My point is simply that the integrity and ability of the American probate bench has so often been found wanting that confidence in the predictability and correctness of adjudication in these courts has been impaired. Americans can only look with envy to the esteemed and meritocratic chancery bench that conducts probate adjudication in English and Commonwealth jurisdictions.

The risk of error or worse in American probate adjudication is not adequately offset by the prospect of appellate review. Because the presumption of correctness that attaches to the trial court's findings of fact is so difficult to overcome on appeal, Marie Lambert had little to fear. She was virtually a potentate. . . . Indeed, Margolick asserts that in New York, Marie Lambert was thought to be especially immune from oversight on account of the perverse financial incentives of the appellate judges. In previous scrapes, “the judges of the Appellate Division, her ostensible superiors, went easy on her; once they left the bench, they wanted appointments” (314) to guardianships or other lucrative posts that, especially in New York, are treated as patronage plums within the gift of the surrogate.

Incorporating mandatory arbitration clauses in our wills and trusts is one way of anticipating the dysfunctions inherent to many of our probate court systems and planning accordingly. Arbitration may not be perfect, but at least you get some say in who your judge is and what his or her minimum qualifications are. And in the arbitration process (which is privately funded) you also have a fighting chance of getting your arbitrator to actually read your briefs and invest the time and energy needed to thoughtfully evaluate the complex tax, state law and family dynamics underlying these cases (a luxury that's all but impossible in a state court system that forces judges to juggle hundreds of cases at a time with little or no support). The alternative to a privately financed and managed arbitration proceeding is a public court system that usually works, but not always. And when it does fall short, it's not just bad, it's ugly.

3d DCA says NO to adoption of 42 year old girlfriend; ends ploy to raid 1/3 share of $300 million trust fund

Juan Antunez — Mon, 08 Apr 2013 18:37:14 -0500

Goodman v. Goodman, --- So.3d ----, 2013 WL 1222944 (Fla. 3d DCA March 27, 2013)

In a sharply worded opinion the 3d DCA struck down an order by Miami trial-court Judge Antonio Marin allowing embattled Palm Beach polo tycoon John B. Goodman to adopt his 42-year old girlfriend. The apparent intent behind the adoption was a ploy to qualify the girlfriend for a 1/3 share of a $300 million trust otherwise benefiting Mr. Goodman's two minor children from a prior marriage. According to the 3d DCA, judge Marin prohibited the minor children's mother/guardian from intervening in the adoption proceeding "because it would allow for endless intervention by the children to contest the judgment." What?!

Thankfully the 3d DCA saw things differently. Not only did the 3d DCA rule mom should have been permitted to intervene, rather than sending the case back to judge Marin, they summarily voided the adoption as a fraud (I'll explain the fraud ruling in a moment).

Here's an excerpt from a SunSentinal piece reporting on the 3d DCA's ruling and the case's "back-story" entitled Goodman can't adopt 43-year-old girlfriend, court rules:

Embattled polo mogul John Goodman can't adopt his 43-year-old girlfriend after all, an appeals court ruled Wednesday.

The adoption would have enabled girlfriend Heather Hutchins to claim a third of a $300 million trust fund established for Goodman's two children, both younger than 18.

The 49-year-old multimillionaire's bid to assume parental custody of Hutchins was voided because he didn't notify his ex-wife Carroll Goodman, the mother of the children, until after the adoption appeals process had passed in January 2012, according to a Third District Court of Appeal ruling.

. . .

It's the latest episode in the ongoing legal saga surrounding Goodman, who was sentenced to 16 years in connection with the Feb. 12, 2010 death of Scott Patrick Wilson, 23. Goodman's Bentley ran a stop sign and collided with Wilson's Hyundai, killing Wilson.

Convicted of DUI/manslaughter in March 2012, Goodman remains on house arrest at his Wellington mansion on a $7 million appellate bond.

Earlier this year, he reached a $46 million settlement in a wrongful death lawsuit brought by Wilson's parents Lili and William — whose attorneys have said Goodman's adoption attempt was a brazen bid to shield his assets from the grieving parents.

The Wilsons, divorced since 2007, have been fighting in court over their late son's ashes. In February, a county court judge denied William Wilson's request to split up the ashes.

On Wednesday, the appellate court said Goodman's adoption of Hutchins "constituted a fraud on the court" because he intentionally concealed the adoption from his wife, who was entitled to be made aware of the action because it "directly, immediately, and financially impacted the children."

"Goodman's concealment of the adoption proceeding deprived the children of an opportunity to address the trial court and present their objections," the decision stated.

The adoption of Hutchins was approved in Miami in 2011, but the appeals court decided that because Carroll Goodman wasn't notified, she had no opportunity to protect her childrens' financial interests from being encroached upon by Hutchins.

Goodman, who founded the International Polo Club Palm Beach in Wellington, is heir to a multimillion-dollar Texas manufacturing fortune.

So why should trusts and estates lawyers care about adult adoptions?

Many states, including Florida (F.S. 63.042), allow adult adoptions. These laws were primarily intended for situations like a stepparent adopting a stepchild later in life. According to a rule of construction found in our probate code, adoptees are automatically presumed to be descendants of their adoptive parents for class gift purposes. F.S. 732.608. So if a will or trust benefits someone's "descendants" as a class (i.e., without specifically naming them), that class of beneficiaries is presumed to include adoptees. This rule of construction opens the door to manipulation of multigenerational trusts via adult adoptions.

For example, unable to legally marry in most states, some same-sex couples have used the adult-adoption process to establish inheritance rights for their partners. I previously wrote here about the last such case to make headlines; it involved a claim by an adult adoptee to a share of the trust created by Thomas John Watson, Jr., of IBM fame.

Now back to the 3d DCA's fraud ruling:

The adult-adoption order at the center of the 3d DCA's opinion wasn't voided on substantive grounds (e.g., it was contrary to the settlor's intent, or contrary to public policy, or otherwise per se illegal), it was voided for procedural reasons: Mr. Goodman's intentional lack of notice to interested parties (i.e., the minor children's mother/guardian). According to the 3d DCA, this intentional deception amounted to fraud upon the court.

Presumably Mr. Goodman knew his ex-wife wasn't going to stand idly by as he diluted their children's share of the family trust in favor of his girlfriend. Rather than face this objection head-on and honestly, Mr. Goodman kept the adoption proceeding secret until after the adoption order was entered and no longer subject to appeal. What's scary about this case (and instructive for litigators) is that this ploy actually worked at the trial-court level?! Even after the trial-court judge was made aware of Mr. Goodman's deception, he refused to do anything about it. Fortunately the 3d DCA was less willing to put up with this kind of gamesmanship.

[T]he guardian and Carroll were entitled to notice. It is undisputed that neither the guardian nor Carroll received timely notice of the adoption proceeding. Goodman notified them of the adoption proceeding in January 2012, after the period to appeal the Final Judgment of Adult Adoption had expired.[FN1] The adoption converted [Goodman's girlfriend] into an immediate beneficiary of the trusts and entitled her to one-third of the corpus of the trusts. It hardly could be said that this conversion did not threaten the financial interests of the minor children, whose interests decreased from one-half to one-third. Thus, we hold that . . . the guardian and Carroll were entitled to notice of the adoption proceeding, pursuant to section 63.182(2)(a).

FN1. This lack of notice can only be viewed as none other than an act of concealment, an act which Goodman purposefully instituted to suppress circumstances he knew fully well ought to have been made known to the guardian and Carroll. As we shall discuss further, Goodman committed fraud on the court in doing so.

. . .

The guardian and Carroll correctly pointed out that this lack of notice violated the minor children's due process rights. We reiterate that Hutchins' adoption directly, immediately, and financially impacted the children. Goodman's concealment of the adoption proceeding deprived the children of an opportunity to address the trial court and present their objections. . . .

Furthermore, we determine that the judgment entered in the adoption proceeding is void. This Court previously has stated that “[a] violation of the due process guarantee of notice and an opportunity to be heard renders the judgment void.” . . . This Court also has ruled that the failure to give due process notice and the failure to grant a necessary party's motion to intervene are defects that can render a judgment void. . . .

We therefore set aside the Final Judgment of Adult Adoption because Goodman's deliberate failure to provide notice of the adoption to the guardian and Carroll constituted a fraud on the court. In Florida, a decree of adoption may be set aside based on fraud in the proceedings. . . . Goodman committed extrinsic fraud on the court when he failed to give notice of the adoption to the appellants until after the appeals period had expired. See Richard v. McKesson, 774 So.2d 838, 839 (Fla. 4th DCA 2000) (holding that contingent beneficiary to a trust had standing to challenge the adoption had she known about and was not precluded from collaterally attacking the adoption).

The only other Florida appellate decision involving an adult adoption in the trust context I could find was the 4th DCA opinion cited above by the 3d DCA: Richard v. McKesson, 774 So.2d 838 (Fla. 4th DCA 2000). In that case the adult adoption was also intended to give the adoptee inheritance rights under a pre-existing trust. As in this case, the adult adoption proceeding was kept secret from the pre-existing beneficiary of the trust. As in this case, that adoption order was subject to attack on fraud-upon-the-court grounds.

What about settlor intent?

But what if Mr. Goodman had given his ex-wife notice of the adoption proceeding? Would the result have been the same? Maybe, but not for the same reasons. It seems to me that regardless of whether or not the adoption is valid, the issue of settlor intent remains. At the time of the trust's creation, was it intended to benefit future adult adoptees? If the answer to that question is NO, then regardless of whether or not the adoption is valid, the adult adoptee gets nothing under the trust. That's what happened in a DNA case I wrote about here: no matter what the DNA science proved, settlor intent remained the outcome-determinitive question for trust-administration purposes. Same thing for adult adoptions: no matter how legally valid the adoption might be, settlor intent remains the outcome-determinitive question for trust-administration purposes.

Most courts that have addressed the issue in terms of settlor intent have ruled against the adult adoptee. See, e.g., Cross v. Cross, 177 Ill.App.3d 588, 126 Ill.Dec. 801, 532 N.E.2d 486 (1988) (Adoption of adult solely for purpose of making him heir of an ancestor under terms of testamentary instrument known and in existence at time of adoption is act of subterfuge, does great violence to intent and purpose of adoption laws, and should not be permitted.) But sometimes adult adoptees do win these cases. See, e.g., In re Trust Created by Nixon, 277 Neb. 546, 763 N.W.2d 404 (Neb. Apr 10, 2009) (Adult adopted by trust settlor's daughter was daughter's child, and thus adoptee became the sole beneficiary of trust upon daughter's death, under trust document which provided that, upon daughter's death, the trust was to be divided among her living children, where trust settlor's will did not specify that the term “children” was to exclude adopted children.)

How would a Florida appellate court rule in this scenario? Who knows. There are no Florida appellate opinions on point.

Lesson learned?

First, the law in Florida is now clear on at least one point in cases involving trusts and adult adoptees: you can't get these orders in secret, you must provide notice and an opportunity to be heard to all other pre-existing beneficiaries of the trust pursuant to section 63.182(2)(a).

Second, this type of case cries out for a drafting solution at the estate planning phase. Including a simple adoption clause in a client's will or trust should spare all involved the stress and financial strain inherent to any form of inheritance litigation. Here's the clause we use in my office, I'm sure there are lots of good alternate clauses floating around out there. Just pick one and use it.

Sample Adoption Clause:

Effect of Adoption. A legally adopted child (and any descendants of that child) will be regarded as a descendant of the adopting parent only if the petition for adoption was filed with the court before the child’s eighteenth birthday. If the legal relationship between a parent and child is terminated by a court while the parent is alive, that child and that child’s descendants will not be regarded as descendants of that parent. If a parent dies and the legal relationship with that deceased parent’s child had not been terminated before that parent’s death, the deceased parent’s child and that child’s descendants will continue to be regarded as descendants of the deceased parent even if the child is later adopted by another person.

Before the Party's Over: Arguments For and Against Pre-Death Will Contests

Juan Antunez — Wed, 27 Mar 2013 16:22:12 -0500

Certainty. It's the Holy Grail of estate planning and non-existent in any will contest. Here's how one judge put it over a century ago:

"[P]ost mortem squabblings and contests on mental condition . . . have made a will the least secure of all human dealings, and made it doubtful whether in some regions insanity is not accepted as the normal condition of testators."

Lloyd v. Wayne Circuit Judge, 23 N.W. 28 (Mich. 1885).

Worst Evidence Rule = NO Certainty:

All litigation is uncertain, but why are will contests especially so? Think "worst evidence rule," a term coined by famed Yale Law professor John H. Langbein, in Will Contests, 103 Yale L.J. 2039 (1994). In most states (including Florida, see F.S. 732.518) you're barred as a matter of law from litigating the validity of a will until after the single most important witness -- the testator -- is dead. Which means we're forced to litigate these cases based in large part on the worst evidence available: the self-interested hearsay testimony of those claiming a right to the testator's estate.

So what's to be done? One possible solution is obtaining a final order validating a will in a guardianship proceeding while the testator is still alive; it worked in a California case I wrote about here. A better idea is adopting legislation expressly authorizing pre-death will contests.

Pre-Death Will Contest = Certainty:

State legislators have experimented with pre-death will contests for generations. According to Prof. Beyer in Will Contests - Prediction and Prevention, the first such statute was passed in 1883 in Michigan, and the National Conference of Commissioners on Uniform State Laws seriously considered the idea in the early 1980's. As explained by Prof. Beyer, if your goal is greater certainty, a pre-death will contest or "ante-mortem probate" is your best solution.

Ante-mortem probate has the potential of greatly improving the legal system's effective transmittal of an individual's wealth by providing the testator with greater certainty that the testator's desires for the distribution of property will be fulfilled and designation of fiduciaries followed according to the testator's written declaration. Because the validity of the will would be determined prior to the testator's death, at a time when all relevant evidence is before the court, will contests would be greatly reduced. In addition, ante-mortem probate would lead to more efficient use of scarce and valuable resources as less court time is expended dealing with spurious will contests and fewer estate funds are dissipated defending those contests.

Admittedly, ante-mortem probate is not a panacea. The ante-mortem process . . . may be extremely disruptive to the testator and the testator's family. The testator may not wish to disclose the contents of the will or to face the potential embarrassment that may occur if testamentary capacity is litigated. Additionally, the process involves additional costs and may raise due process and conflict of laws problems. The benefits of ante-mortem probate, however, should not be withheld from the public merely because the technique contains flaws or because it may be difficult to determine the proper model to use.

Today there are four states expressly authorizing pre-death will contests by statute: Arkansas, North Dakota, Ohio and Alaska. The pro's and con's of these statutes is the subject of a recent article in the ABA's Probate & Property Magazine entitled Before the Party's Over: The Arguments For and Against Pre-Death Will Contests. In my opinion, the best part of this article is the very funny cover illustration by Max Licht. On a more serious note, anything we can do to keep up the drumbeat in favor of this much-needed legislation is a good thing, and hopefully this article gets more people thinking about it.

Lesson learned?

If you're a working lawyer, it's easy to dismiss talk of pre-death will contests as theoretical mumbo jumbo only academics have the luxury of fooling around with. That would be a mistake. Wrapping our heads around the "worst evidence" problem makes us better practitioners, especially when we have our estate planning hats on. If the risk of a future challenge is present, we can't naively rely on the fact that there is no doubt the client has capacity and is acting of his own free will, we need to anticipate how the worst-evidence rule can undermine the best laid plans, and proactively stack the deck in the client's favor through smart defensive planning. For an excellent discussion of the more commonly used defensive-planning techniques you'll want to read Will Contests - Prediction and Prevention.

2d DCA: Can a judge cut your attorney's fees in a contested guardianship proceeding without explaining why?

Juan Antunez — Wed, 13 Mar 2013 12:16:55 -0500

In re Guardianship of Ansley, 94 So.3d 711 (Fla. 2d DCA August 17, 2012)

As I recently wrote here, a judge's attorney's fee order is automatically subject to reversal if it doesn't contain detailed findings of fact explaining why and how the judge arrived at his or her final fee-award conclusions.

Transparency in this context is not a luxury; it's the bare minimum we have a right to expect of our judiciary. Here's how our supreme court articulated this crucially important point in Fla. Patient's Comp. Fund v. Rowe, 472 So.2d 1145 (Fla.1985):

[G]reat concern has been focused on a perceived lack of objectivity and uniformity in court-determined reasonable attorney fees. Some time ago, this Court recognized the impact of attorneys' fees on the credibility of the court system and the legal profession when we stated:

There is but little analogy between the elements that control the determination of a lawyer's fee and those which determine the compensation of skilled craftsmen in other fields. Lawyers are officers of the court. The court is an instrument of society for the administration of justice. Justice should be administered economically, efficiently, and expeditiously. The attorney's fee is, therefore, a very important factor in the administration of justice, and if it is not determined with proper relation to that fact it results in a species of social malpractice that undermines the confidence of the public in the bench and bar. It does more than that. It brings the court into disrepute and destroys its power to perform adequately the function of its creation.

Baruch v. Giblin, 122 Fla. 59, 63, 164 So. 831, 833 (1935).

Can a judge cut your attorney's fees in a contested guardianship proceeding without explaining why? NO

Turning now to the linked-to case above. In this contested guardianship proceeding the former guardian's attorney's fees were contested. As explained by the 2d DCA, at the end of the fee hearing the petitioning attorney submitted a proposed fee order containing the kind of detailed findings of fact necessary for a properly drafted fee order. In other words, the petitioning attorney did his job. The trial judge then simply crossed out the $21,694.52 figure reflected at the end of the proposed fee order and wrote the amount of $16,520 above it. The trial judge gave no explanation for why he reduced the fee request by almost 1/4 or $5,174. In other words, as explained by the 2d DCA, the trial judge did not do his job.

The amount that the circuit court authorized the guardian to pay Mr. Martin is obviously less than the sum supported by the findings in the order concerning the reasonable hourly rates, the time expended, and the expenses incurred. Undeniably, there is an internal inconsistency in the order; the amount of fees and expenses awarded does not equal the amount of fees and expenses that the circuit court found were reasonable.

. . .

A comparison of the amount of the actual award in the order under review and the amount requested by Mr. Martin indicates that the circuit court intended to award less than the full amount sought in the petition. However, we do not know what led to the circuit court's ruling. The above-noted internal inconsistency in the order results in the lack of any meaningful findings concerning the reasonable hourly rates and the number of hours compensated. The order also omits any statement of other factors that the circuit court considered in reducing the amount requested. These deficiencies make it impossible for this court to engage in meaningful appellate review of the order on appeal. . . .

In short, we are unable to determine the basis for the circuit court's award. It follows that we also cannot determine whether there is competent, substantial evidence in the record to support the award. Accordingly, we reverse the order under review. . . . We remand for the circuit court to enter a new order that sets forth the basis for the award, including the hours determined to be compensable, the hourly rate, and the other factors considered in arriving at the award. . . . The order must also itemize the costs allowed.

The 2d DCA obviously reached the right conclusion; all they're doing is telling the trial judge to explain his ruling. Which is why it was disappointing to read Judge Villanti's special concurrence in which he makes clear he doesn't really understand why it's so important for judge's to explain their fee rulings.

While Mr. Martin is entitled to ask the court to specify exactly why it chose the amount it did, what is really to be gained in so asking? In my view, a request for an order that identifies how Mr. Martin overcharged the ward's estate in the hopes that the trial court will suddenly agree that it abused its discretion in not awarding the full amount requested in the first instance is simply fodder for further litigation and a second appeal.

Respectfully, does Judge Villanti not understand that the amount of the fee ruling isn't the point of the majority's opinion (if properly drafted, the amount of a fee order is almost untouchable on appeal); what really matters in terms of this appellate decision is the message it sends to trial judges: how you explain your fee rulings is just as important as what your final rulings are. In fact, as stated by our supreme court, not explaining yourself in a fee order is "a species of social malpractice" that "brings the court into disrepute and destroys its power to perform adequately the function of its creation." So yes, there is much to be gained by sending this case back to the trial judge and ordering him to please explain the basis of his ruling.

U.S. Supreme Court to decide when a breach-of-trust judgment against a former trustee is dischargeable in bankruptcy

Juan Antunez — Mon, 11 Mar 2013 20:02:06 -0500

Bullock v. BankChampaign, N.A., 133 S.Ct. 526 (U.S. October 29, 2012) [docket]

Trusts and estates cases rarely make it to the U.S. Supreme Court, so when they do it's big news [e.g., see here]. This time around the Supreme Court's granted cert in a case arising out of our very own 11th Circuit in Bullock v. BankChampaign, N.A. (In re Bullock), 670 F.3d 1160 (11th Cir.2012). The case involves a former trustee (Mr. Bullock) who declared bankruptcy in order to wipe away a breach of trust judgment.

Under 11 U.S.C. § 523(a)(4) a judgment entered against a fiduciary for fraud or misappropriation of trust funds (i.e., "defalcation") is not dischargeable in bankruptcy. I've previously written about this rule here and here as applied both to trustees and personal representatives.

What's interesting about this case is that all of the courts who have reviewed the facts agree the trustee's actions giving rise to the original judgment against him actually caused no economic harm to the trust's assets and that he apparently acted innocently at all times. For a good summary of the facts see here, here. Based on these facts, the U.S. Supreme Court's going to have to decide what level of mens rea (if any) is necessary to trigger the non-discharge rule for defalcation by trustees.

Here's how the "question presented" for the Supreme Court in this case was framed by the trustee:

What degree of misconduct by a trustee constitutes "defalcation" under §523(a)(4) of the Bankruptcy Code that disqualifies the errant trustee's resulting debt from a bankruptcy discharge - and does it include actions that result in no loss of trust property?

According to the 11th Circuit's opinion, there's a wide split among the circuit courts as to the meaning of defalcation under § 523(a)(4).

This Court recognizes that there is a split among the circuits regarding the meaning of defalcation under § 523(a)(4). . . .

The Fourth, Eighth, and Ninth Circuits have concluded that even an innocent act by a fiduciary can be a defalcation. . . .

The Fifth, Sixth, and Seventh Circuits require a showing of recklessness by the fiduciary. . . .

The First and Second Circuits require a showing of extreme recklessness. . . .

The Third Circuit has not addressed the issue, and the Tenth Circuit has made the brief statement in an unpublished opinion that defalcation requires some portion of misconduct.

The trustee unsuccessfully argued in favor of the 1st and 2d Circuits' "extreme recklessness" standard, which apparently would have resulted in a win for him. The 11th Circuit instead adopted the non-extreme recklessness standard applied by the 5th, 6th and 7th Circuits. The 11th Circuit held the former trustee's judgment should NOT be discharged because even if he acted innocently, as a trustee he should have known his actions were improper, thus he acted recklessly.

Applying the recklessness standard for defalcation to the facts of the instant case, this Court concludes that the bankruptcy court was correct in determining that Bullock committed a defalcation by making the three loans while he was the trustee of his father's trust. Because Bullock was the trustee of the trust, he certainly should have known that he was engaging in self-dealing, given that he knowingly benefitted from the loans. Thus, his conduct can be characterized as objectively reckless, and as such, it rises to the level of a defalcation under § 523(a)(4). Accordingly, the bankruptcy court's order must be affirmed on the issue of whether the Illinois judgment debt was non-dischargeable under § 523(a)(4) as a debt arising from a defalcation while Bullock was acting in a fiduciary capacity.

What do we mean by "defalcation" as applied to fiduciaries, and should we apply a strict-liability standard for culpability or require some level of intentional malfeasance? These are fundamental questions for any trusts and estates litigator, which will make the U.S. Supreme Court's take on this case a must-read even if (like me) you have no intention of ever setting foot in a bankruptcy court. Stay tuned for more . . .

Predicting the future of the U.S. estate tax

Juan Antunez — Tue, 05 Mar 2013 08:56:30 -0500

Anyone can tell you what the current state of the law is when it comes to the federal estate and gift tax rules (news flash: for the first time in over a decade they're permanent, click here). For those of us in the trenches, the more interesting question is "what's next?"

If I had to bet on what the next "big thing" in the estate-tax world is going to be, I'd go with one of the five "structural reforms" proposed by the President in his 2013 budget (and explained/scored in this recently published Congressional Research Service report). None of the ideas covered in the CRS Report is new, which means they've all demonstrated staying power (usually a good predictor of future enactment). And all of the proposed fixes have the added political bonus of increasing tax revenues without raising tax rates or lowering the exemption amount.

Want to know the future? Read on . . .

CRS Report:

[T]he current size of the exemption and the rate of tax have been set in permanent tax law, and there is not much indication of a reconsideration. There are, however, some more narrow proposals aimed at abuse that have been included in some other legislation and in the President’s budget proposals. These provisions are described below. All of the estimates of revenue gain are for FY2013-FY2022 and are obtained from the FY2013 budget proposals. Most of the provisions were also estimated by the Joint Committee on Taxation and this source is used in the discussion below except in one case. Note that estimated budget effects would be altered and presumably reduced by the recent estate tax legislation.

[1] Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust (GRAT) is a trust that allows the grantor to receive an annuity, with any remaining assets transferred to the trust recipient. The value of the gift is reduced by the value of the assets used to fund the annuity. If the assets in the trust appreciate substantially, then virtually all of the gift can be reduced by the value of the annuity, while still providing a substantial ultimate gift to the recipient. If the grantor dies during the annuity period, the remaining value of the annuity is included in the estate. This trust approach could be a method of transferring assets roughly tax free if the assets appreciate at a rate faster than the discount rate used to value the annuity. The grantor needs to survive over the period of the annuity. To assure the latter will be likely to occur, many of these trusts have very short annuity periods, as short as two years. The GRAT proposal contained in H.R. 4849 in the 111th Congress and in the President’s budget proposals would impose a minimum annuity term of 10 years, disallow any decline in the annuity, and require a non-zero remainder interest. The provision was estimated to raise $3.6 billion over 10 years.

[2] Minority Discounts

There are existing restrictions to keep estates from engaging in artificial actions designed to reduce the value of estates (such as freezes on assets). As discussed above, courts sometimes allow estates to reduce the fair-market value when assets are left in family partnerships in which no one has a majority control. These discounts have even been allowed when assets are in cash and readily marketable securities, and the setting up of these family partnerships has become an estate tax avoidance tool. A provision in the Administration’s proposal would disallow these discounts. The JCT did not estimate this provision because of the lack of specific detail, but the Administration’s estimate was $18.1 billion over 10 years.

[3] Consistent Valuation

Currently, there is no explicit rule preventing a low valuation of fair-market value for an estate and a high valuation of the asset for purposes of stepped up basis in the hands of the heir. A low value of an asset reduces the estate tax, but a high value (because it reduces the amount of gain) reduces the capital gains tax. Requiring the same value for both purposes was projected to raise $3 billion over 10 years.

[4] Limit the Duration of Generation-Skipping Trusts

When generation-skipping transfers are made to a trust, the estate tax exemption applicable to them also exempts the associated earnings during the trust lifetime. In the past, a trust life has been limited because most states had a Rule Against Perpetuities that generally limited trusts to a 21-year life. Most of these laws have been eliminated. This Administration proposal would limit the life of a GST trust to 90 years. The revenue effect would be negligible over the next 10 years.

[5] Coordinate Grantor Trusts Income and Transfer Tax Rules

In a grantor trust, an individual is treated as owner for income tax purposes. However, the trust and the individual are treated as separate persons for purposes of the estate and gift tax. This proposal from the Administration would include the assets of the trust in the grantors estate and subject distributions to the gift tax if the grantor is the owner for income tax purposes. If the grantor ceases to be the owner, the assets would be subject to a gift tax. This proposal was projected to raise $3.3 billion over 10 years.

3d DCA: Can arguing for the appointment of a court-appointed guardian to handle litigation for an incapacitated adult if she previously executed a valid DPOA get you (and your lawyer) sanctioned?

Juan Antunez — Mon, 18 Feb 2013 19:09:25 -0500

Albelo v. Southern Oak Ins. Co., --- So.3d ----, 2013 WL 440199 (Fla. 3d DCA February 06, 2013)

Durable powers of attorney (DPOA's) empower disabled or incapacitated adults to manage their business and personal affairs privately and without court supervision. This includes handling litigation. That's the law. If you don't like it, get the law changed . . . but don't try to wish the issue away by making frivolous arguments in court.

In In re Estate of Schiver, 441 So. 2d 1105 (Fla. 5th DCA 1983), the 5th DCA held that an attorney-in-fact acting pursuant to a properly drafted DPOA could elect the principal's right to an elective share. According to the 5th DCA:

[DPOA's have] the beneficial effect of avoiding the time, expense and embarrassment involved in having to establish guardianships for incompetent persons. . . . The holder of a [DPOA] is appointed by the donor of the power, and essentially performs the same functions as would a court appointed guardian. While not a “guardian” in the legal sense, the attorney in fact has fiduciary duties similar in nature.

In Smith v. Lynch, 821 So. 2d 1197 (Fla. 4th DCA 2002), the 4th DCA upheld a probate judge's refusal to appoint a guardian for a legally incapacitated adult who had previously executed a valid DPOA. According to the 4th DCA "the appointment of a guardian would serve no useful purpose and would unnecessarily interfere with the family.” In support of its decision, the 4th DCA cited F.S. 744.344, which provides that an “order appointing a guardian must be consistent with the incapacitated person's welfare and safety, must be the least restrictive appropriate alternative, and must reserve to the incapacitated person the right to make decisions in matters commensurate with the person's ability to do so.”

Bottom line, our legislature intended DPOA's to be private, non-court supervised, less restrictive alternatives to guardianships. This is basic stuff for Florida probate lawyers. But is it so basic it's frivolous to even argue otherwise? YES.

3d DCA: 57.105 sanctions triggered by arguing against DPOA and for guardianship:

In the linked-to case above a 78-year old woman executed a valid DPOA in favor of her son. Acting under the authority of this DPOA, son sued mom's property-insurance company (Southern Oak Insurance Company) seeking to recover damages to mom's home caused by a burglary. By the time son filed suit on mom's behalf it was undisputed she was suffering from age-related cognitive disabilities. According to Southern Oak this meant mom's claim could only be prosecuted by a court-appointed guardian. For reasons unexplained in the 3d DCA's opinion, Southern Oak somehow convinced the trial judge to buy into its argument, resulting in a dismissal of mom's lawsuit. This is the kind of ruling that drives probate lawyers nuts. On appeal, it apparently struck a nerve with the 3d DCA as well (in a bad way!).

This is an appeal by an octogenarian, Maximiliana Albelo, from a trial court order dismissing her premises liability complaint with prejudice, for failure to file a petition in probate to determine her own incapacity. We summarily reverse the order on appeal and grant Albelo's motion for an award of appellate attorney fees pursuant to section 57.105(1), Florida Statutes (2011). We write only to explain the reasons for our award of sanctions against Southern Oak Insurance Company and its counsel.

This is a garden-variety premises liability claim brought by Albelo for damages to her home caused by a burglary. The burglary and the existence of a loss are conceded. It is equally undisputed Albelo suffers from age-related cognitive disabilities. Although Southern Oak did not receive notice of the claim until more than a year after the burglary, the company paid $1690 on her claim. A few months later, Albelo filed a sworn proof of loss, supported by a public adjuster's estimate in the amount of $57,760.66. Southern Oak is of the view the sworn claim is fraudulent and instigated not by Albelo, but rather by her son. Southern Oak also is concerned about the binding effect a judgment obtained by Albelo might have against it in the future.

Albelo responds that in April 2007—one month before the burglary, when she was seventy-eight years old—she duly executed a Durable Power of Attorney (DPA) in favor of her son. Section 709.2119, Florida Statutes (2012), regulating powers of attorneys and similar instruments, provides explicit protection to Southern Oak in the circumstances of this case. It states:

(1)(a) A third person who in good faith accepts a power of attorney that appears to be executed in the manner required by law at the time of its execution may rely upon the power of attorney and the actions of the agent which are reasonably within the scope of the agent's authority and may enforce any obligation created by the actions of the agent as if:

1. The power of attorney were genuine, valid, and still in effect;

2. The agent's authority were genuine, valid, and still in effect; and

3. The authority of the officer executing for or on behalf of a financial institution that has trust powers and acting as agent is genuine, valid, and still in effect.

§ 709.2119. Southern Oak does not contest the formalities of execution and has not sought to rescind the power of attorney on the ground Albelo was incompetent at the time she executed the document. Southern Oak's and its counsel's persistence in arguing Albelo was required to seek a guardian for herself as a condition of continuing this action was frivolous.

Added Bonus:

For those of you caught up in a similar case, you may find the research reflected in the Appellant's winning Initial Brief on appeal helpful.

2d DCA: Is personal service of process needed to challenge a DPOA?

Juan Antunez — Sun, 17 Feb 2013 16:14:48 -0500

Griffith v. Slade, 95 So.3d 982 (Fla. 2d DCA August 22, 2012)

Contesting durable powers of attorney (DPOA's) is the kind of case that usually ends up on a probate litigator's desk. Probate matters are all in rem proceedings. Since in rem proceedings aren't based on personal jurisdiction, probate litigators (like me) get used to litigating cases without ever having to go through the trouble of personally serving anyone. Here's the problem: this mindset can be a trap when you run across a case that "feels" like a probate matter, but isn't. Prime example: DPOA litigation.

Is personal service of process needed to challenge a DPOA? YES.

When family members contest a DPOA's validity, it's usually a thinly-veiled inheritance dispute. This means these cases look and feel a lot like your standard probate case. They're not. One big difference: DPOA cases are NOT in rem proceedings; you need to personally serve opposing parties if you want your winning court order to mean anything. In the linked-to case above the contesting parties skipped this step, relying instead on the old probate standby: service by certified mail. This cut-to-the-chase approach may have worked with the trial judge, but it fell flat on appeal. Here's why:

[In this case], neither a summons nor other process was issued, and service of process was not accomplished. Griffith was sent a “Notice of Hearing” via certified mail. Although Florida Rule of Civil Procedure 1.070(i) provides that defendants may accept service of process by mail and waive formal service, the rule has strict requirements that were not followed here. For example, there is no evidence in the record that the “Notice of Hearing” was accompanied by the petition, requested that Griffith waive service of a summons, or informed Griffith of the consequences of compliance or failure to comply with the request to waive service. See [Shurman v. Atl. Mortg. & Inv. Corp., 795 So.2d 952, 954 (Fla.2001)]. Significantly, “[a] judgment entered without service of process is void and will be set aside and stricken from the record on a motion at anytime.” Myrick v. Walters, 666 So.2d 249, 250 (Fla. 2d DCA 1996) (quoting Kennedy v. Richmond, 512 So.2d 1129, 1130 (Fla. 4th DCA 1987)) (alteration added).

We have also considered the possible effect of the notice requirements contained in section 709.08, Florida Statutes (2010)[FN1]. Section 709.08(5) provides in pertinent part as follows:

(a) A notice, including, but not limited to, a notice of revocation, notice of partial or complete termination by adjudication of incapacity or by the occurrence of an event referenced in the durable power of attorney, notice of death of the principal, notice of suspension by initiation of proceedings to determine incapacity or to appoint a guardian, or other notice, is not effective until written notice is served upon the attorney in fact or any third persons relying upon a durable power of attorney.

(b) Notice must be in writing and served on the person or entity to be bound by the notice. Service may be by any form of mail that requires a signed receipt or by personal delivery as provided for service of process. Service is complete when received by interested persons or entities specified in this section and in chapter 48, where applicable.

The statute does not contemplate an alternative method for service of process, but rather it addresses the notice referenced by section 709.08(4)(a), which provides: “Any third party may rely upon the authority granted in a durable power of attorney that is not conditioned on the principal's lack of capacity to manage property until the third party has received notice as provided in subsection (5).” In other words, a notice may be issued that informs the recipient that a person may no longer have authority to act pursuant to a power of attorney. However, such notice is not sufficient to bring a person within the jurisdiction of a court for legal proceedings. Indeed, nothing in the statute suggests that it may be used instead of service of process to bring a person before the court.

Although we acknowledge the circuit court's concern over the alleged behavior of Griffith, “[p]rocedural due process requires that each litigant be given proper notice and a full and fair opportunity to be heard.” Carmona v. Wal–Mart Stores, E., LP, 81 So.3d 461, 463 (Fla. 2d DCA 2011). Griffith was afforded neither.

Because service of process was never properly accomplished or waived, we reverse the order terminating Griffith's power of attorney and the order denying her motion to strike and set aside the order terminating her power of attorney.

[FN1]: In 2011, the Florida Legislature substantially revised and renumbered Chapter 709, and repealed sections 709.01, 709.015, 709.08 and 709.11. Ch.2011–210, § 33, at 3273, Laws of Fla. (2011) [click here]. These changes became effective on October 1, 2011, and are not applicable to the case at bar.

4th & 5th DCA: How to draft attorney's fees and costs orders that won't get reversed on appeal

Juan Antunez — Mon, 04 Feb 2013 14:52:53 -0500

Bishop v. Estate of Rossi, --- So.3d ---- 2013 WL 132449 (Fla. 5th DCA January 11, 2013)

In Fla. Patient's Comp. Fund v. Rowe, 472 So.2d 1145 (Fla.1985), the Florida Supreme Court adopted the federal "Lodestar" method for determining the amount of reasonable attorney's fees and costs in contested proceedings. However, our supreme court also made clear that "how" trial judges go about explaining the reasons for their fee orders is just as important as what their ultimate rulings are. If a fee order's going to get reversed, it's almost always because the trial judge got the "how" part wrong.

How to draft attorney's fees and costs orders that won't get reversed on appeal:

In Fla. Patient's Comp. Fund the court held that the only way a trial judge can assure parties that the amount of attorney's fees/cost they're paying was determined in a just, objective and uniform manner is to enter orders containing detailed findings of fact as to the appropriate:

hourly rate,
number of hours reasonably expended, and
the appropriateness of reduction or enhancement factors listed in Rule 4-1.5(b) of the Rules of Professional Conduct.

If a fee order doesn't contain these findings it is per se erroneous and subject to reversal. In other words, even if the trial judge's fee order reaches the right conclusion, if it doesn't explain in detail the reasons why (thereby giving all interested parties confidence in the ruling's fairness), the order is per se wrong. That's what happened in the linked-to case above (a contested probate proceeding) applying the fee-shifting rule found in Probate Rule 5.080, and why the order was reversed:

In awarding attorney's fees, the trial court made two distinct findings; first, entitlement to fees and, second, the reasonable amount of such fees. Entitlement to attorney's fees is largely a question of law. While specific factual findings are helpful when reviewing a determination of entitlement, such findings are not essential where, like here, “entitlement to attorney's fees is based on the interpretation of contractual provisions ... or a statute ... as a pure matter of law....” Hinkley v. Gould, Cooksey, Fennell, O'Neill, Marine, Carter & Hafner, P.A., 971 So.2d 955, 956 (Fla. 5th DCA 2007).

However, where the court sets the amount of the fee, “[t]he law is clearly established that an award of attorney's fees ‘must ... contain express findings regarding the number of hours reasonably expended and a reasonable hourly rate for the type of litigation involved.’” Quality Holdings of Fla., Inc. v. Selective Invs., IV, LLC, 25 So.3d 34, 37 (Fla. 4th DCA 2009) (citations omitted) (emphasis added). This lodestar method of determining reasonable attorney's fees, adopted by our state Supreme Court in Florida Patient's Comp. Fund v. Rowe, 472 So.2d 1145 (Fla.1985), applies equally to probate matters. See In re Estate of Platt, 586 So.2d 328, 335 (Fla.1991). Because the trial court here did not make written findings in the order in which it awarded $9,870.00 worth of attorney's fees against Bishop, it is not possible to ascertain from the face of the order whether the trial court considered and determined the reasonable number of hours expended and the reasonable hourly rate(s).

Mitchell v. Mitchell, 94 So.3d 706 (Fla. 4th DCA August 15, 2012)

Our state court system is overworked and under-resourced. The probate bench is no exception. So if a probate judge believes some's asking for excessive attorneys fees, the temptation is to simply cut the request by a certain % and call it a day. Understandable, but counter to the full-disclosure ethos underlying Florida Patient's Comp. Fund. If a judge is going to cut your fees, same rules apply: NO detailed findings of fact explaining the reasons why = REVERSAL.

This case involved a contested guardianship proceeding in which the probate judge cut one co-guardian's attorney's fee request by 40% in an order that didn't contain detailed findings of fact explaining the reasons why. Maybe a 40% cut was the right call, maybe it wasn't. Under Florida Patient's Comp. Fund it doesn't matter if the order doesn't contain detailed findings of fact explaining itself. By the way, also note the parting reference to the need for itemized "cost" findings.

[T]he trial court's order contains insufficient findings; it does not comply with the requirement that the court make express findings regarding the number of hours reasonably expended and a reasonable hourly rate for the type of litigation involved. Furthermore, the trial court's order fails to explain the basis for a reduction in fees which the court determined was for “multiple lawyers on the same matter.” While this reduction may have been warranted, the trial court should make a specific finding explaining which work was duplicative. The mere fact that both a partner and an associate appeared at a particular proceeding does not necessarily mean that their work was duplicative.

Although the trial court utilized the correct legal standard in concluding that the legal services must be beneficial to the ward to be compensable, see § 744.108, Fla. Stat. (2010), Thorpe v. Myers, 67 So.3d 338, 345 (Fla. 2d DCA 2011), on remand, the trial court should make a specific finding as to which fees and costs were non-compensable on this ground. The trial court's conclusion that only 60% of the services of the father's attorneys benefitted the ward was not supported by any specific findings. In short, “[t]he circuit court's order must set forth the basis for the award, including the hours determined to be compensable, the hourly rate, and the other factors considered in arriving at the award.” Id. at 346. Additionally, as appellant points out, the order failed to itemize the costs allowed. On remand, the trial court “must also itemize the costs allowed.” Id.

Florida's Principal & Income Act gets an update

Juan Antunez — Mon, 21 Jan 2013 12:10:57 -0500

If you're representing a personal representative or trustee in a complicated estate or trust administration case, the "who gets what" question won't be easy to answer. No surprise there. What may be surprising, especially to lawyers, is how large a role Florida's Principal and Income Act (Ch. 738) or "FPIA" often plays in these cases.

Here's why: trusts and estates have two basic classes of owners: income beneficiaries and principal beneficiaries. Sometimes the same people are both income and principal beneficiaries, sometimes they're not. When they're not, there's an inherent conflict: if a receipt is accounted for as income, the income beneficiary benefits to the detriment of the principal beneficiary, and vice versa. It's up to PR's and trustees to resolve this conflict, and the way they do that is governed by the FPIA.

Who gets what?

In a traditional trust where the income beneficiary receives distributions of income at least annually and the principal beneficiary gets the trust principal at the death of the income beneficiary, the FPIA rules governing income/principal determine the benefits to be shared between the beneficiaries. Same goes for wills: the FPIA governs what the income is and who gets it. However, these are all default rules, and according to F.S. 738.103(1), these rules can all change depending on what the will or trust agreement says. For example, if a trust agreement says that receipts from the sale of a particular asset must be allocated 25% to income and 75% to principal, you do exactly that, and there's no need to decipher the FPIA rules otherwise governing the transaction. Bottom line, to the extent the written instrument provides guidance on accounting for income and principal, this guidance is treated by Florida law as the final authority.

For an excellent explanation of how the FPIA works in real life, you'll want to read Things That May Surprise You About Florida’s Principal and Income Act and Related Accounting Law, Parts I and II, a two-part series published in the Florida Bar Journal by William C. Carroll and John W. Randolph, Jr., which I previously wrote about here and here.

So what changed in 2013?

Since its adoption in 2002, there have been three separate "glitch bills" to fix various problems with the FPIA. During the 2012 legislative session, Florida adopted its fourth FPIA glitch bill [click here]. For an in-depth explanation of the statutory changes, you'll want to read the Legislative Staff Analysis. For a plain-English explanation of the FPIA changes most relevant to those of us in the trenches, you'll want to read Principal & Income Act Updated, published in the Winter 2013 edition of ActionLine by attorney Edward F. Koren and CPA F. Gordon Spoor. Here's an excerpt from the ActionLine article:

Fiduciary Duties; General Principals

While most of Florida’s Principal and Income Act is intended to apply to all fiduciaries, including trustees and personal representatives [F.S. 738.102(4)], certain sections of the Act that were intended to apply to all fiduciaries contained the word “trustee.” Additionally, the word “fiduciary(ies)” was used in certain sections that were only intended to apply to “trustee(s).” The 2012 Revisions clarify some of these inconsistencies by using the word “trustee” rather than “fiduciary” in all sections intended to apply only to trusts. Additionally, the 2012 Revisions added a specific provision that states that, “All provisions of this chapter also apply to any estate that is administered in Florida, unless the provision is limited to a trustee rather than a fiduciary.” [F.S. 738.103(3)].

. . .

Addition of “Carrying Value”

The 2012 Revisions re-introduce the concept of “inventory value” by . . . adopting the phrase “carrying value.” In addition to harmonizing . . . F.S. § 736.08135(2)(b) with Florida Probate Rule 5.346, Appendix B(IV), several statutes within the [FPIA] were revised to reference “carrying value” within the context of income and principal allocations. [F.S. 738.202, 738.401(6), and 738.603].

“Carrying value” is defined in F.S. § 738.102(3) as “the fair market value at the time the assets are received by the fiduciary.” This is different from “cost basis,” which is defined in the Internal Revenue Code. For the estates of decedents, and trusts described in F.S. § 733.707(3) after the grantor’s death (i.e., revocable trusts), the carrying value of assets received upon the grantor’s death is the value as determined for federal estate tax purposes (or date of death if no estate tax return is re- quired). For assets acquired during the administration of the estate or trust, the carrying value is equal to the acquisition cost of the asset.

. . .

Changes to Unitrust Provisions

The ease of administration aspect of a unitrust has caused it to gain wide acceptance. Typically, the annual unitrust amount is based on the valuation of the trust as of a specific date. [F.S. 738.1041(2)(b)2.d.] Recent market fluctuations, however, have impacted the value of trust as- sets, resulting in significant variations in the annual calculation of the unitrust amounts. In an effort to minimize these fluctuations, the 2012 Revisions incorporate a “smoothing rule” to be used when computing the fair market value of the unitrust. The smoothing rule incorporates an “Average Fair Market Value” concept [F.S. 738.1041(1)(a)], which requires that fair market value for purposes of the unitrust computation be computed using the average of the fair market value of the trust’s assets at the beginning of the current year and each of the prior two years.

. . .

Distributions To Residuary And Remainder Beneficiaries

As was the case under the 1974 Act, the 2012 Revisions now require that accounting income be allocated to beneficiaries based upon carrying values, except in cases where dispro- portionate distributions are made. This greatly simplifies trust administration by not requiring valuation of trust assets each time a distribution is made--unless disproportionate distributions are made [F.S. 738.202].

. . .

Distributions From Entities

The 2002 Act provided that cash distributions from entities not in liquidation were allocated to income. In determining if a distribution was in liquidation, absent a representation from the entity, a default rule existed that provided that any distributions made by the entity in excess of 20% of the entity’s gross assets (as shown on the entity’s year end financial statements immediately pre- ceding the initial receipt) was deemed to be made in liquidation.

. . .

The 2012 Revisions attempt to . . . clarify the application of the 20% rule used in determining liquidating distributions. For non-publicly traded entities, cash distributions are treated as income unless they are determined to have been received in liquidation. If the total distributions by the entity exceed 20% of the entity’s gross assets as shown on the entity’s year-end financial state- ments immediately preceding the initial receipt, the distribution will be allocated to income to the extent that total distributions received from the entity – for the number of years or portions thereof while it was subject to the trust – have not equaled a cumulative annual return of 3% of the entity’s carrying value, computed at the beginning of each period included in the measuring period. Distributions in excess of this amount are treated as principal [F.S. 738.401(5)(b)].

For publicly traded entities, cash distributions are treated as income unless they are determined to have been made in liquidation. The 20% default rule is replaced by 10% of the entity’s fair market value as of the beginning of the measuring period. If total distribu- tions exceed this 10% threshold, such distributions will be income to the extent that amounts allocated to income for the number of years (or portion of years) that the trust held an interest in the entity have not equaled a cumulative return of 3% of the entity’s fair market value at the beginning of each measuring period [F.S. 738.401(e)].

After The Fiscal Cliff Deal: Estate And Gift Tax Explained

Juan Antunez — Wed, 16 Jan 2013 08:42:12 -0500

For the first time in over a decade we have permanent federal estate and gift tax rules.

For those of us who didn't make it to the Heckerling conference in Orlando this year (including me, I usually go every other year), you'll want a quick and easy way to explain what the heck happened to the estate and gift tax after the fiscal cliff deal. There's no shortage of folks willing to give you their two cents on the subject, but separating the wheat from the chaff can be challenging.

So I was happy to run across an article by Forbes staff writer Deborah L. Jacobs entitled After The Fiscal Cliff Deal: Estate And Gift Tax Explained. Ms. Jacobs does a good job of explaining the new law in the type of plain English, question-and-answer format, clients like to hear; but she's also thorough enough to keep an audience of lawyers and CPA's interested. Good stuff, highly recommend it. Here's an excerpt.

Who has to pay federal estate tax? Once you’re worth more than a certain amount, taxes shrink your estate. Under the 2010 tax law, we can each transfer up to $5 million tax-free during life or at death. That figure is called the basic exclusion amount, and it is adjusted for inflation. In 2012 it was raised to $5.12 million per person. The new tax law does not change how much you can pass tax-free. On Jan. 11 the IRS announced that, with the inflation adjustment, the estate tax exclusion amount for deaths in 2013 would be $5.25 million.

Do spouses have to pay the tax when they inherit from each other? The new law doesn’t change this either. There is an unlimited deduction from estate and gift tax that postpones the tax on assets inherited from each other until the second spouse dies. This marital deduction, as it is called, applies only if the inheriting spouse is a U.S. citizen.

How much can the second spouse pass tax-free? Here’s where things get a bit complicated — but in a good way. The 2010 tax law gave married couples a wonderful tax break, which the new law has made permanent. Widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This enables them together to transfer up to $10.5 million tax-free. Tax geeks call this portability.

. . .

How does this relate to lifetime gifts? The lifetime gift tax exclusion and the estate tax exclusion are expressed as a total amount – currently $5.25 million per person – and it is possible to use this exclusion (sometimes called the “unified credit”) to transfer assets at either stage or a combination of the two. If you exceed the limit, you (or your heirs) will owe tax of up to 40%.

. . .

Are there lifetime gifts that don’t count? Absolutely, and this is a common source of confusion. We can each give another person $14,000 per year without it counting against the lifetime exemption. (The amount went up at the end of 2012, as I reported here.) Spouses can combine this annual exclusion to double the size of the gift. Don’t confuse it with the basic exclusion–that $5.25 million discussed above.

Added Bonus:

For those of you who live for tax stat's, you'll want to read this recently published Congressional Research Service summing up the economics of the current state of affairs as follows:

Compared with the $1 million exemption and 55% rate under pre-EGTRRA law, the new rules lose an average of about $37 billion over the next 10 years, a two-thirds reduction in estate tax revenues. Regardless of the exemption levels considered, few estates are affected by the tax. The estate tax is a highly progressive tax, with about three-fourths collected from estates in which decedents are in the top 1% of the income distribution. At a $5 million exemption, less than 0.2% of estates will be subject to the tax. Although concerns have been raised about the effects of the tax on small businesses and farmers, estimates indicate that only a small share of these decedents would be affected.

. . . . .

Only a small portion of high-income decedents would be affected by the tax under the $5 million exemption.

The estate tax will affect less than 0.2% of decedents over the next decade.
The estate tax is concentrated among high income taxpayers: 96% is paid by the top quintile, 93% by the top 5%, 72% by the top 1%, and 42% by the top 0.1%.
About 0.2% of estates with half or more of their assets in businesses will be subject to the estate tax.
About 65 farm estates (or approximately one per state) are projected to be subject to the estate tax, and constitute 1.8% of taxable estates. Less than a fourth (0.4%) is projected to have inadequate liquidity to pay estate taxes. Less than 1% (0.8%) of farm operator estates is projected to pay the tax.
About 94 estates (about two per state) with half their assets in small business and who expect their heirs to continue in the business are projected to be subject to the estate tax; they constitute 2.5% of total estates. Less than a half (1.1%) is projected to have inadequate liquidity to pay estate taxes.

5th DCA: If your witness can't testify to the "content" of the lost will, do you still have a case?

Juan Antunez — Mon, 07 Jan 2013 20:15:54 -0500

Brennan v. Honsberger, --- So.3d ----, 2012 WL 5969617 (Fla. 5th DCA November 30, 2012)

This is the second time this case has been up on appeal. The first time around the issue was whether live witness testimony is required as a matter of law to prove a lost will or whether affidavits alone will do if your probate judge says it's OK. As I previously wrote here, the 5th DCA held that live witness testimony is required, it's NOT optional.

OK, so now we know affidavits aren't going to cut it; you need live witness testimony. But not just any old witness will do, under F.S. 733.207 your witness [1] must be "disinterested," and, just as importantly, [2] your witness must have firsthand knowledge of the "specific content" of the lost will. As the 2d DCA recently held in Smith v. DeParry [click here], if you don't nail both requirements, your lost will is going to stay lost.

Now back to our case. On remand, the trial judge again admitted the lost will to probate, this time based on witness testimony. So far so good. Here's what didn't happen: the witnesses had nothing to say about the content of the will they witnessed. Not surprisingly, the 5th DCA once again reversed the trial judge (is there a pattern here?). Bottom line, if your witness can't testify to the content of the lost will, game over:

On remand, the trial court conducted an evidentiary hearing at which Ms. Kessinger and Ms. Liles testified. Although both witnesses testified (consistent with their previously submitted affidavits) as to the execution of the will, neither had knowledge of its content.

In our prior opinion, we stated that as the proponent of a lost will, Ms. Honsberger was required to present the testimony of at least one disinterested witness to establish its content. Id. at 897. Because Ms. Honsberger failed to do so, the trial court erred in admitting the 2002 will to probate.

4th DCA: Jasser v. Saadeh and the "prisoner's dilemma" as metaphor for settlement "agreements" in guardianship litigation

Juan Antunez — Mon, 31 Dec 2012 20:13:06 -0500

Jasser v. Saadeh, 97 So.3d 241 (Fla. 4th DCA July 18, 2012)

Karim Saadeh, now in his eighties, emigrated from Jordan with his wife and lived the American dream: he raised a family of three children and became a very successful businessman. Saadeh and his wife were wealthy at the time of his wife's death in 2007. After his wife's death, Saadeh met a younger woman through one of his wife's relatives. Apparently, his children weren't happy about the new girlfriend. When they found out he was loaning her money, they took matters into their own hands, admittedly transferring "over a million dollars" from his bank accounts (they had co-signing authority) to accounts they controlled alone. And according to their father, that's not all they did:

Saadeh was upset when he discovered that his children had drained his accounts. Around the same time, he discovered that substantial money and jewelry located in a safe were missing. Because his children had the combination to his safe, he suspected that they had likewise taken these assets. He called the police, who then made a report of the theft. In the report, the children denied taking the money and jewelry from the safe; however, they admitted transferring the monies from the bank accounts. The police report states that the officer found that Saadeh appeared in control of his faculties. Still angry about what he considered his children's deceit, Saadeh removed his remaining funds from the bank to prevent his children from acquiring more of his money.

If you're wealthy, old, your memory is failing (whose isn't?), and your children are worried about your new girlfriend getting her hands on "their" inheritance, here are the facts of life:

At some point one or all of your children will probably sue to have you adjudicated mentally incapacitated (which means you lose control of your money); and
No matter what you've heard about how totally screwed up a guardianship proceeding can get if there's enough money at stake . . . real life can be far worse. This dog's breakfast of a case is a prime example.

When Saadeh's lawyer sent his children a letter demanding they return their father's money and presumably also threatening an "or else" (and yes, there is an "or else," click here, here), they fought back by (surprise!) filing a petition to have dad adjudicated incapacitated.

For reasons not important to the ultimate outcome of this case, the judge authorized two separate rounds of examining committee evaluations. That's six separate examiners. One died before he could submit his report (again, how/why is not important to the case). Here's the important part: the other five examining committee members were unanimous . . . Saadeh was legally competent. Unfortunately, dad was put through the ringer before exiting a free man at the other end of this case.

The "prisoner's dilemma" as metaphor for settlement agreements in guardianship litigation:

In trusts and estates litigation parties are eventually confronted with the following stark reality: it doesn’t matter how “right” you are, the costs, heartache, and uncertainties inherent to actually litigating your case through to trial can be worse than simply paying the other side to make it all go away. That’s the choice Saadeh was presented with by his children: agree to our terms and get your life back. The way the deal was structured was that Saadeh would sign a trust agreement and other documents transferring all of his earthly belongings to an irrevocable trust controlled by a third party trustee. Under the trust agreement Saadeh was the sole lifetime beneficiary and his children were the remainder beneficiaries. In other words, to get his life back, dad had to agree to an immediate irrevocable gift of a remainder interest in all he owned to his children and he had to agree to give up control of his own money for the rest of his life.

Here’s how the standard settlement logic breaks down in guardianship litigation. As a matter of law, while dad is subject to a guardianship he lacks the legal right to contract (the guardianship strips him of that right). Because dad can’t sign a contract, his children have no legal certainty he’ll live up to his side of the bargain until after they’ve agreed to terminate the guardianship. In other words, all sides have to trust each other. The “dilemma” faced by the parties is that, whatever the other does, each is theoretically better off reneging on its side of their non-legally-binding bargain (dad can take 100% of his property back once the case is dropped; children can be 100% sure dad can never take his property back by keeping the guardianship in place indefinitely after dad signs trust). However, assuming a fair deal, the outcome obtained if both sides renege is worse for everyone (no one’s guaranteed to get what they want; litigation continues) than the outcome obtained if both sides honor their bargain (both sides guaranteed to get some of what they want; end of litigation). This is a classic example of the “prisoner's dilemma.” This kind of deal is based on trust (not a binding contract), so it won’t work if one side believes it wasn’t treated fairly or was pressured into something it never really wanted. Unfortunately, that’s what happened in this case.

According to the 4th DCA, when the trial court entered an order authorizing the trust "it was not informed of catastrophic gift tax consequences if the trust was created, nor was it informed that the trust could not be revoked by Saadeh himself." Also, although the facts surrounding creation of the trust were "disputed," Saadeh:

. . . continually testified that he was misled as to the terms of the trust and that his execution was not voluntary. He was told that the execution of the trust was the only way he could end the guardianship proceedings and get his life back to normal. . . .

[Saadeh's] court-appointed attorney . . . admitted that he told him that if he signed the trust, the proceedings would be over.

After Saadeh's legal rights were reinstated he, not surprisingly, attacked the trust he'd signed prior to termination of the guardianship proceeding. Again not surprisingly, the trial court ruled in his favor. According to the trial judge the trust was void because at the time Saadeh signed the trust agreement he lacked the legal right to pretty much do anything . . . including signing a contract. Here's how the 4th DCA connected the legal dots:

We agree with the trial court that when the court conferred the ward's rights on the ETG, it removed them from the ward; both cannot simultaneously exercise those rights. Section 744.3031(1) provides that the court shall specify the rights to be exercised by the ETG. In this case, the order delegated to the ETG all legal rights, reserving only the right to vote to the ward. Thus, the court removed the ward's right to contract. The fact that the court removed his right to contract was specifically discussed not only in the original hearing appointing the ETG but in almost every other hearing thereafter.

. . .
As found by the trial court in granting summary judgment, at the time of the execution of the trust, the right to contract had been removed from Saadeh, as the parties acknowledged to the court the day that the trust was signed. Section 736.0402(1), Florida Statute (2008), provides that “[a]trust is created only if: (a) the settler has capacity to create a trust.” § 736.0402(1)(a), Fla. Stat. (2008) (emphasis added). Thus, because Saadeh had no legal right to execute the trust, the trust was invalid and void. The trial court's ruling was correct.

Jasser v. Saadeh, --- So.3d ----, 2012 WL 6601383 (Fla. 4th DCA December 19, 2012)

I’m guessing Saadeh's children were caught flat footed by their father’s success in unwinding a “deal” they probably believed was final. If dad were a regular litigant, they’d be right: settling parties are bound by the deals they agree to. But dad wasn’t a regular litigant; he was the “ward” of the court-appointed ETG. You can’t have it both ways in guardianship litigation. Either the ward is incapacitated or he’s not. He can’t be incapacitated for purposes of the threat of ongoing litigation, but NOT incapacitated for purpose of your settlement agreement. Anyway, not willing to leave well enough alone, the children filed a separate declaratory judgment action seeking to force dad to live by the trust agreement the judge had just set aside in the guardianship proceeding. Again the trial judge ruled against them, this time on res judicata grounds. In a separate opinion linked-to above, the 4th DCA again sided with the trial judge. Here’s why:

This Court has explained that “[f]our identities are required for res judicata to be applicable to a case: ‘(1) identity of the thing sued for; (2) identity of the cause of action; (3) identity of the persons and parties to the actions; and (4) identity of the quality or capacity of the persons for or against whom the claim is made.”’ Tyson v. Viacom, Inc., 890 So.2d 1205, 1209 (Fla. 4th DCA 2005) (quoting Freehling v. MGIC Fin. Corp., 437 So.2d 191, 193 (Fla. 4th DCA 1983)).

In this action all four identities are present. As to identity of the thing sued for, the children sued to establish the validity of a trust over the assets of their father in both the prior proceeding and this proceeding. As to identity of the cause of action, they sought a declaratory judgment to determine the validity of the trust executed by Saadeh and the management of the trust assets. At the least, the claims they raise in the second suit could have been brought in the first suit and could have been properly litigated in that suit.

As to the identity of the persons and parties to the action, in the first case, they sued individually, and in this case they sued in their capacity as trustees. “The term ‘parties' has frequently been given a much broader coverage than merely embracing parties to the record of an action[.]” Seaboard Coast Line R.R. Co. v. Indus. Contracting Co., 260 So.2d 860, 863 (Fla. 4th DCA 1972). As the supreme court explained later, “[f]or one to be in privity with one who is a party to a lawsuit or for one to have been virtually represented by one who is party to a lawsuit, one must have an interest in the action such that she will be bound by the final judgment as if she were a party.” Stogniew v. McQueen, 656 So.2d 917, 920 (Fla.1995) (citing Se. Fid. Ins. Co. v. Rice, 515 So.2d 240 (Fla. 4th DCA 1987)). The children, as trustees, fit within that broad definition. While the children also added their father's corporation as a defendant because it was an asset of the void trust, it too can be considered a party for res judicata purposes.

Finally, the quality and capacity of the persons for and against whom the claim is made remain the same. In this case, the “real party in interest” on each side remained the same. We conclude that the court did not err in dismissing on the ground of res judicata.

4th DCA: Can filing a time-barred will contest get you (and your lawyer) sanctioned?

Juan Antunez — Thu, 27 Dec 2012 21:27:30 -0500

Shuck v. Smalls, --- So.3d ----, 2012 WL 6027820 (Fla. 4th DCA December 05, 2012)

In civil litigation you usually have years to file your complaint: most statute of limitations periods fall within the 2-6 year range. Not surprisingly, most civil litigators assume the same rules apply to probate litigation. Big mistake! For example, under F.S. 733.212(3) you've only got 3 months to file a will contest after you've been formally served with the petition for administration. This ultra-short limitations period is a huge trap for the unwary and - not surprisingly - a recurring topic on this blog [click here, here].

Can the 5-day mail rule buy you more time to file your will contest? NO

When you miss a filing deadline by just a few days, the 5-day grace period for mailed service under Probate Rule 5.042(b) can be a life saver. Not so for will contests. Why? Because the 5-day mail rule doesn't apply to pleadings and motions served by formal notice. In this case the petition for administration was served by certified mail on the will challengers. This counts as formal notice. Bottom line: no 5-day grace period. So saith the 4th DCA:

In this case, appellants' petition challenging the will and the qualifications of the personal representative were untimely under section 733.212(3), Florida Statutes. On February 10, 2006, counsel for Smalls served the Notice of Administration by certified mail on appellants Charles Shuck, Carol Shuck, and Sandra Walker. Charles and Carol Shuck received the Notice of Administration on February 13, 2006, and Sandra Walker received it on February 14, 2006. However, appellants' petition was not filed until May 19, 2006, which was over three months after the Notice of Administration.

Appellants suggest that their petition was timely because Florida Probate Rule 5.042 (2006) provided for an additional five-day grace period because service was achieved by mail. This argument is without merit. The relevant version of rule 5.042(d) provides:

(d) Additional Time After Service by Mail. Except when serving formal notice, or when serving a motion, pleading, or other paper in the manner provided for service of formal notice, when an interested person has the right or is required to act within a prescribed period after the service of notice or other paper on the interested person and the notice or paper is served by mail, 5 days shall be added to the prescribed period.

Fla. Prob. R. 5.042(d) (2006) (emphasis added).

Here, the Notice of Administration was served on appellants by formal notice. Because appellants received formal notice, the five-day grace period provided by rule 5.042 was inapplicable and the three-month limitations period expired before the petition was filed.

Can filing a time-barred will contest get you (and your lawyer) sanctioned under 57.105? YES

In this case the parties challenging the will somehow managed to convince the trial judge to give them a pass on their time-barred will contest; the trial court denied a motion to dismiss. At the time, this probably felt like a big win. Not so in retrospect. According to the 4th DCA, just because you managed to pull a fast one on your trial judge at the beginning of the case doesn't mean you get a free pass from then on.

Because the petition was clearly time-barred, we agree with appellees' argument on cross-appeal that the trial court abused its discretion in failing to award section 57.105 attorney's fees from the inception of the case. Cf. Zweibach v. Gordimer, 884 So.2d 244 (Fla. 2d DCA 2004) (a time-barred claim may expose a party to an award of fees under section 57.105). Even though appellants were able to persuade the trial court to deny the motion to dismiss, this does not change the fact that their claims were clearly time-barred and were objectively frivolous at the inception of the case. That appellants were able to convince the trial court to make a legally incorrect ruling on the motion to dismiss should not shield them from liability under section 57.105.

Also, because the case was time barred, the attorneys should have known better . . . which means they're personally on the hook for 50% of the $441,500 in attorney's fees, plus cost and expert witness fees ultimately awarded against their clients. Here's why:

Finally, we note that section 57.105(1), Florida Statutes (2007), shifts attorney's fees and costs to “a losing party and the losing party's attorney” in equal amounts when the court finds that a claim or defense was not supported by the material facts necessary to establish it, or that it would not be supported by applying then-existing law to those material facts. However, the losing party's attorney is not personally responsible if he or she has acted in good faith, based on the representations of his or her client as to the existence of those material facts. Id. “Fees must be assessed against counsel as provided by statute unless the attorney can show good faith. This places the burden where it should be.” Horticultural Enters. v. Plantas Decorativas, LTDA, 623 So.2d 821, 822 (Fla. 5th DCA 1993).

In this case, the fees awarded under section 57.105 presumptively should have been awarded against both appellants and their counsel. Furthermore, because appellants' claims were time-barred, this precludes appellants' attorneys, as a matter of law, from asserting any good faith reliance upon the representations of their clients.

Does a sanctions order under F.S. 57.105 = a fee-shifting order under F.S. 733.106(4)? YES

Under F.S. 733.106(4) a probate judge can shift the cost of litigating frivolous probate claims against the losing side's share of the inheritance by directing "from what part of the estate they shall be paid." As I wrote here, according to the 4th DCA "this section does not give the trial court unbridled discretion to award fees from any part of the estate," so it's reversible error to shift legal fees under F.S. 733.106(4) in the absence of a finding of "bad faith, wrongdoing, or frivolousness."

In this case the losing side tried to get the fee-shifing order under F.S. 733.106(4) reversed because the judge didn't make a specific finding of "bad faith, wrongdoing, or frivolousness." True enough, said the 4th DCA, but this kind of finding is basically implied any time a judge sanctions you under F.S. 57.105. So if you're already getting sanctioned under that statute, the specific findings needed for a fee-shifting order under F.S. 733.106(4) are satisfied by default. Bottom line: if you're getting nailed with a 57.105 sanction in a probate case, expect to also get it under 733.106(4). Here's why:

Section 733.106(4), Florida Statutes (2007), provides that “[w]hen costs and attorney's fees are to be paid from the estate, the court may direct from what part of the estate they shall be paid.” In In re Estate of Lane, 562 So.2d 352, 353 (Fla. 4th DCA 1990), however, we limited a trial court's discretion under section 733.106(4) to circumstances in which the will contestant engaged in “bad faith or wrongdoing.” FN3 More recently, we reaffirmed the bad faith requirement pronounced in Lane, but clarified that frivolous litigation would support an assessment of fees under section 733.106(4). See Geary v. Butzel Long, P.C., 13 So.3d 149, 153 (Fla. 4th DCA 2009).

Appellants contend that the trial court should not have awarded fees against only their share of the estate under section 733.106(4), because the trial court did not make any specific finding that appellants' claims were frivolous or filed in bad faith. However, because we have concluded that appellants' claims were frivolous from their inception, this is sufficient to satisfy the “bad faith or wrongdoing” requirement of Lane. See Geary, 13 So.3d at 153. Thus, the trial court did not abuse its discretion in assessing fees against appellants' share of the estate under section 733.106(4).

FN3. Although the Florida Supreme Court did not specifically mention a “bad faith” requirement when it discussed section 733.106(4) in Carman v. Gilbert, 641 So.2d 1323, 1326 (Fla.1994), we do not read Carman as explicitly or implicitly overruling Lane. The issue of whether Lane correctly interpreted section 733.106(4) was not before the court in Carman.

3d DCA: Can a trustee be personally liable for an opposing party's legal fees in a breach of trust lawsuit?

Juan Antunez — Sun, 09 Dec 2012 21:15:52 -0500

Jacobson v. Sklaire, --- So.3d ----, 2012 WL 1414447 (Fla. 3d DCA April 25, 2012)

Will I personally have to pay the other side's legal fees if I lose this lawsuit?

That's a question we usually don't have to grapple with because Florida, like the rest of the U.S., follows the "American rule": win or lose, all sides pay their own legal fees unless there's specific statutory (or contractual) authority saying otherwise. For trustees, the prospect of being personally liable for an opposing party's legal fees is doubly remote. They usually don't even have to pay their own legal fees (the trust is usually on the hook for that expense), let alone someone else's.

Everyone pays their own legal fees, and trustees get to pay their fees from trust assets. That's the norm, and where you need to start from if you're representing a trustee in any litigation. But you can't stop there. From beginning to end, each decision made in any case involves its own distinct litigation risk analysis. And one of the biggest risks trustees will want managed/analyzed in any case is personal liability for legal fees. So if your trustee client is facing the prospect of litigation, he needs to know that NO, trustees don't always get their legal fees paid from trust assets [click here], and YES, he could be personally liable for a beneficiary's legal fees if the case is lost. It's this second risk your trustee clients will probably find most surprising, and it's also the focus of the 3d DCA opinion linked-to above.

Can a trustee be personally liable for a beneficiary's legal fees in a breach of trust lawsuit?

It doesn't happen often, but under F.S. 736.1004 it is possible for a trustee to end up being personally liable for a beneficiary's legal fees, which is what happened in this case. Here's how the 3d DCA summed up the operative facts and its ruling in three short paragraphs:

Jacob Sklaire died in 2004. He created the Jacob Sklaire Trust, in which he gifted to his wife, Joyce [the Beneficiary], $475,000. At his death, the Trust contained approximately $636,000. Michelle and Aline, daughters, are Co–Trustees and remainder beneficiaries of the Jacob Sklaire Trust. After Jacob died, the Co–Trustees refused to distribute the gift to the Beneficiary, who then filed a complaint to compel distribution of the gift from the Trust. The Co–Trustees answered, asserting defenses of lack of capacity, undue influence and fraud, and counterclaimed for funds allegedly wrongfully taken by the Beneficiary from trust assets during Jacob's life. The trial court denied the affirmative defenses and dismissed the counterclaim with prejudice. The Beneficiary prevailed at trial, and the trial court awarded her costs and fees from the Trust. The Co–Trustees appealed the final judgment and this Court affirmed.

The Co–Trustees thereafter agreed to an order taxing the Beneficiary's costs against the Trust, and agreed to pay the Beneficiary's attorney's fees from the Trust. The Co–Trustees had, however, without court approval paid their own attorney's fees out of the same Trust during the course of the litigation, counterclaim and appeal, leaving less than necessary to pay the Final Judgment and orders on attorney's fees and costs. The Beneficiary filed motions to compel payment, and moved to hold the Co–Trustees personally liable for the amounts, asserting breach of fiduciary duty. The trial court awarded the Beneficiary's appellate fees and costs against the Trust and deferred ruling on the Co–Trustees' individual liability.

The bulk of the money that was improperly diverted from the Trust was ultimately repaid by the Co–Trustees' original law firm, and by the Co–Trustees themselves. There were, however, insufficient funds left in the Trust to completely satisfy a balance of about $112,000 remaining from the original amounts ordered repaid, i.e., what was improperly removed from the Trust originally, plus attorney's fees, plus post-judgment interest. Following an evidentiary hearing, the trial court rendered the order on appeal here, which found that the Co–Trustees in this breach of trust action were jointly and severally liable to the Beneficiary for attorney's fees and costs pursuant to [F.S. 736.1004]. Finding no error, we affirm.

Does there have to be a finding of "bad faith, wrongdoing, or frivolousness" before a court can shift fees under F.S. 736.1004?

The probate code version of F.S. 736.1004 is F.S. 733.106. Most trusts and estates litigators would consider these statutes as being analogous, with the only difference being one applies in trust actions and the other in probate proceedings. Under F.S. 733.106, a probate judge can shift fees against the losing side by directing "from what part of the estate they shall be paid." As I wrote here, according to the 4th DCA "this section does not give the trial court unbridled discretion to award fees from any part of the estate," so it's reversible error to shift legal fees under F.S. 733.106 in the absence of a finding of "bad faith, wrongdoing, or frivolousness." This precondition doesn't appear anywhere within the text of the statute, but according to the 4th DCA it's necessary for the reasons explained in Geary v. Butzel Long, P.C., 13 So.3d 149 (Fla. 4th DCA 2009):

In In re Estate of Lane, 562 So.2d 352 (Fla. 4th DCA 1990), we examined the propriety of a probate court's order assessing attorney's fees from a will contest proportionally against the specific beneficiaries as well as the residuary estate. We noted that section 733.106(4), Florida Statutes, permits the court to direct from what part of an estate a fee assessment shall be paid (just as section 733.6175(2) does). However, we explained:

This section does not give the trial court unbridled discretion to award fees from any part of the estate. Before the trial court may assesses fees against a beneficiary's share of an estate there must be a finding of bad faith or wrongdoing by the beneficiary or other circumstances which would warrant such an assessment.

Id. at 353. Despite our use of “bad faith and wrongdoing,” we relied on and agreed with Cohen v. Schwartz, 538 So.2d 922 (Fla. 3d DCA 1989), in which the court suggested that in trying to close a prolonged estate, the trial court could assess attorney's fees against a beneficiary's portion of the estate for frivolous litigation consistent with section 733.106(4). We agree that if the litigation pursued is frivolous, then the court would have the authority under that section to assess fees against a specific beneficiary's portion of the estate.

We don't know if the trial court in the Sklaire case predicated its fee-shifting ruling on a finding of "bad faith, wrongdoing, or frivolousness," nor do we know if the issue was even addressed by the litigants in their appellate briefs. It's simply not mentioned in the 3d DCA's opinion. However, given the amount of attention the 4th DCA's F.S. 733.106 rulings have attracted in certain probate Bar circles (a lot!), I think it's only a matter of time before someone argues the same precondition should apply to F.S. 736.1004. Unlike the 4th DCA's critics, I don't think this is a big deal.

As a practical matter, most trial judges aren't going to assess legal fees against a losing party unless someone's really made a mess of things or gone way beyond the bounds of acceptable behavior. So if your trial judge is inclined to assess fees, he or she is probably not in a good mood to begin with, which means it shouldn't be all that difficult to also get a finding of "bad faith, wrongdoing, or frivolousness" if you ask for it. So why not ask? If your fee order gets appealed, you'll be glad you did.

The Domestic Asset Protection Trust: Ranking the Jurisdictions

Juan Antunez — Mon, 26 Nov 2012 15:36:43 -0500

A decade ago states were racing to pass legislation making dynasty trusts possible. According to one 2005 study I wrote about here, the winners of that legislative race (including Florida) reaped roughly $100 billion in new trust business. So yes, the stakes are high.

Today, the legislative race is all about asset protection trusts. The concept originated offshore in the Cook Islands, a tiny chain of islands in the South Pacific, and migrated onshore when Alaska became the first U.S. state making self-settled asset protection trusts legal. Currently there are 14 states with some form of domestic asset protection trust (DAPT) legislation in effect (Florida isn't one of them).

Love 'em or hate 'em, you'll want to hang on to this 14-state DAPT chart.

The latest puff piece touting the benefits of DAPT's appeared in this month's issue of the ABA's Real Property, Trust and Estate Law Journal entitled The Domestic Asset Protection Trust: Ranking the Jurisdictions. The ABA article has an easy to read chart summarizing the DAPT legislation in the 14 states where they're currently legal. Sooner or later someone's going to ask you if it's a good idea to set up a DAPT in state "X". When they do, you'll be glad you have this 14-state DAPT chart handy.

Are DAPT's a good idea?

I was, and am, a big fan of dynasty trusts. DAPT's, not so much. And I'm not alone. My views are reflected in the following quote from this blog post by California attorney Jay Adkisson, author of the Wealth Conservation blog, one of the best blogs published in the trusts and estates universe:

[T]he real problem with DAPTs is that they are so far significantly untested. We’ve got a pretty good idea after the Anderson and Lawrence cases what happens with [foreign asset protection trusts (it's not pretty, click here)], but what will happen with DAPTs is largely a crapshoot. Whether they realize it or not, many clients in DAPTs are the lab rats in a great legal experiment which, in this author’s opinion, is not hopeful as far as DAPTs for non-DAPT settlors and their assets are concerned.

* * * * *

For what it is worth, your writer and his law firm only very rarely use self-settled trusts of any kind for asset protection planning. My advice has long been to “avoid self-settled trusts altogether whenever possible”

What about "exemption" planning for Florida residents?

Especially in a state like Florida, which affords extremely generous asset protection to its residents in the form of statutorily-sanctioned creditor exempt assets (think homestead property, TBE property, insurance, annuities, pension plans, IRA's), there's a lot of very effective planning you can do way before you need to even consider a DAPT. I did a seminar back in 2005 on this type of planning. Much has changed since then, so don't rely on my outline without doing your own research, but if you're interested in a better understanding of what I mean by exemption planning, click here for a copy of the 2005 outline.

5th DCA: Does a trustee's breach of fiduciary duty = "fraud" for equitable lien on homestead purposes?

Juan Antunez — Wed, 21 Nov 2012 12:22:18 -0500

Hirchert Family Trust v. Hirchert, --- So.3d ----, 2011 WL 2415787 (Fla. 5 Dist. Jun 17, 2011)

The one crack in the almost impenetrable shield protecting Florida homestead property from creditors is the amorphous "equitable lien" doctrine. In In re Gosman, 2007 WL 707365 (Bankr.S.D.Fla. Mar 05, 2007), the bankruptcy court articulated the following two-part test for determining "the very narrow circumstances warranting the imposition of an equitable lien" on homestead property under Florida law:

that the money was obtained fraudulently or through egregious conduct, and
that the money obtained was utilized to invest in, purchase or improve the targeted homestead property.

Does a trustee's breach of fiduciary duty = "fraud" for equitable lien purposes? YES!

What's interesting about the linked-to case above, especially for trusts and estates litigators, is that the 5th DCA held that a trustee's breach of fiduciary duty is a form of "constructive fraud" warranting imposition of an equitable lien on the trustee's Florida homestead property if, as happened in this case, the money obtained as a result of the breach was used to invest in, purchase or improve the targeted homestead property.

Contrary to the trial court's conclusion, we believe that a breach of fiduciary duty is “constructive fraud” and thus may form the basis to apply the exception to the homestead protection. As this court explained in First Union National Bank of Florida v. Whitener, 715 So.2d 979, 982 (Fla. 5th DCA 1998):

Constructive fraud is the term typically applied where a duty under a confidential or fiduciary relationship has been abused, or where an unconscionable advantage has been taken. Constructive fraud may be based on misrepresentation or concealment, or the fraud may consist of taking an improper advantage of the fiduciary relationship at the expense of the confiding party.

In Allie v. Ionata, 466 So.2d 1108, 1110 (Fla. 5th DCA 1985), this court further explained:

Florida courts have recognized that constructive fraud may exist independently of an intent to defraud. It is a term which is applied to a great variety of transactions that equity regards as wrongful, to which it attributes the same or similar effects of those that follow from actual fraud and for which it gives the same or similar relief.

(Emphasis added).

So what can you do with an equitable lien on homestead property? THINK FORCED SALE

Once you're granted an equitable lien on homestead property, your judgment or "debt" is now secured to the extent of the value of the homestead property. This debt can be satisfied just like any other secured debt, subject to whatever equitable conditions your trial judge may impose. For example, you could obtain a court order compelling a sale of the targeted homestead property by a court-appointed receiver to satisfy the debt owed to you. That's what the plaintiff/successor trustee in the linked-to case did.

[T]he [trial] court entered a postjudgment order (“Postjudgment Order”) that is in essence a mandatory injunction requiring Appellee to convey the Kissimmee Property to a court-appointed Receiver, who was instructed to sell the property.

By the way, this type of enforcement order isn't an outlier. It's exactly the type of order you'd expect to get if your judge follows the approach accepted in most jurisdictions, as reflected in section 56 of Restatement (Third) of Restitution & Unjust Enrichment, comment "c":

Enforcement of equitable lien. An equitable lien has the ordinary characteristics of a lien for security, the obligation secured being the defendant's liability for unjust enrichment in the amount determined by the court. The lien is accordingly subject to the defendant's right of redemption: the lien may be discharged, and the property freed from the encumbrance, if the defendant pays the claimant the amount of the underlying liability. If the judgment is not satisfied, the claimant/lienholder can obtain a judicial sale of the property subject to lien, the proceeds being applied to the satisfaction of the defendant's obligation to the claimant. If the proceeds are inadequate for this purpose, the claimant has an unsecured claim against the defendant for the deficiency.

. . .

Restitution via equitable lien is a flexible and adaptable remedy, because the court that imposes the lien can establish whatever conditions to its enforcement (or “foreclosure”) may be appropriate in the circumstances of the case. In particular, an equitable lien that may be foreclosed only on stated conditions can be used to shield an innocent recipient from the prejudicial effect of personal liability in various circumstances.

Tax Court: Is a beneficiary's claim to a distributive share of the estate tax deductible?

Juan Antunez — Mon, 19 Nov 2012 09:16:13 -0500

Estate of Bates v. Comm'r, T.C. Memo. 2012-314, 2012 WL 5445778 (U.S.Tax Ct. Nov. 7, 2012)

While we know what the federal estate tax rules are until the end of 2012, what happens in 2013 and beyond is anyone's guess. Under current law the estate tax exemption is scheduled to drop significantly from $5,120,000 in 2012 to $1,000,000 in 2013, and the top estate tax rate is scheduled to jump from 35% to 55%.

At a top rate of 55%, the federal estate tax automatically makes the IRS the single largest creditor for most large estates. That's the bad news. Here's the good news: as I've previously explained here and here, with a reasonable amount of sensitivity to the tax issues looming in the background of every taxable estate, litigation can often be shaped to create win-win opportunities by mining the tax code for "free money" to settle cases.

Consider the economics of the settlement agreement reached in the Tax Court case linked-to above. In this case the estate settled a will/trust contest by paying the challenger approximately $500,000 to drop his claims. The decedent in this case died in 2005, when the top estate tax rate was 47%. If the $500,000 settlement is a tax deductible expense, the heirs get a 47% deduction = to $235,000. Bottom line, if done right a $500,000 settlement payment "costs" the heirs only $265,000 after taxes. This is the kind of math that gets deals done and makes probate litigators look like geniuses . . . or not.

When the estate filed its estate tax return, instead of characterizing the $500,000 settlement payment as a validly deductible creditor claim under IRC § 2053, the exact opposite was done. The payment was characterized as a NON-deductible payment to an estate beneficiary as follows:

FUNDS PAID TO REGGIE LOPEZ IN EXCESS OF BEQUEST BY DECEDENT IN SETTLEMENT OF TRUST CONTEST LAWSUIT TO SETTLE TITLE TO BENEFICIARIES

As explained by the Tax Court, there's no way this kind of payment was ever going to fly as an estate tax deduction.

The estate contends that the settlement payment to Mr. Lopez is deductible. Pursuant to section 2053(a)(3), a claim against an estate is deductible if it is supported by adequate consideration and not attributable to the testator's testamentary intent. See sec.2053(c)(1)(A); Estate of Huntington v. Commissioner, 100 T.C. 313, 316, 1993 WL 99962 (1993), aff'd, 16 F.3d 462 (1st Cir.1994); Estate of Lazar v. Commissioner, 58 T.C. 543, 553, 1972 WL 2476 (1972); Estate of Pollard v. Commissioner, 52 T.C. 741, 745, 1969 WL 1656 (1969). The settlement payment to Mr. Lopez is not deductible because the payment lacked adequate consideration and was consistent with decedent's testamentary intent. See sec.2053(c)(1)(A); Estate of Huntington v. Commissioner, 100 T.C. at 316; Estate of Lazar v. Commissioner, 58 T.C. at 553; Estate of Pollard v. Commissioner, 52 T.C. at 745.

In support of his determination, respondent cites Estate of Huntington and Estate of Lazar, where the Court concluded that settlement payments to beneficiaries were not deductible. The estate contends that these cases are distinguishable because the settlement payments were paid to family members. While the settlement payments in these cases were to family members, the Court's reasoning is equally applicable to cases involving nonfamily members. Decedent had a longstanding and extremely close relationship with Mr. Lopez, expressly provided that he would receive estate assets, and memorialized her testamentary intent in both the First Trust and the Second Trust. In addition, the superior court resolved the amount of estate assets that Mr. Lopez was entitled to receive, and the settlement payment was paid in full satisfaction of any claim relating to the First Trust or the Second Trust. Furthermore, on the estate tax return, the estate reported that Mr. Lopez was a beneficiary and the settlement payment was paid to settle title to beneficiaries. During decedent's lifetime Mr. Lopez was paid for the services he rendered, and no part of the settlement payment related to a claim for unpaid services. In short, Mr. Lopez's claim represented a beneficiary's claim to a distributive share of the estate rather than a creditor's claim against the estate. See Estate of Lazar v. Commissioner, 58 T.C. at 552.

Lesson learned?

If you're dealing with a taxable estate, it’s imperative that every decision made by the parties and their lawyers with respect to how they characterize and prosecute their trust/probate claims is considered against this backdrop. Whether a dispute is resolved through litigation or settlement, the nature of the underlying action determines the proper tax consequences. The taxability of a settlement is controlled by the nature of the litigation. The nature of the litigation is in turn controlled by the origin and character of the claim that gave rise to the litigation. And it’s the parties – not the IRS – that ultimately control this initial link in the causal chain.

Is it possible to frame the same set of facts as either a creditor claim against the estate or a will contest? If the answer is yes, one type of case is tax deductible (creditor claim), the other isn't (will contest). Did the contestant's lawyer only prosecute the challenger's individual interests or did this lawyer help the estate properly administer the estate for everyone's benefit? If it's the former, no tax deduction; if it's the latter, challenger's legal fees may be tax deductible (think more free money to settle). Get these questions right, everyone wins. Get them wrong . . . not so good.