Report No. 14 (Thu. 1/17 cont.)
As we have done in January for the last eleven years, and again with the
permission of the University of Miami School of Law Center for Continuing
Legal Education, we will be posting daily Reports to this list containing
highlights of the proceedings of the 42nd Annual Philip E. Heckerling
Institute on Estate Planning that is being held January 14-18, 2008 at the
Orlando World Center Marriott Resort and Convention Center in Orlando,
Florida, a new venue for the Institute starting in 2007. A complete listing
of the proceedings will be published here and is also available on the
Institute's Web site at http://www.law.miami.edu/heckerling.
We also will be posting the full text of each of these Reports on the ABA
RPPT Section's Web site, as we have since the 2000 Institute. Those Reports
can be found at URL http://www.abanet.org/rppt/meetings_cle/heckerling. In
addition, each Report can also be accessed at any time from the ABA-PTL
Discussion List's Web-based Archive at URL
http://mail.abanet.org/archives/aba-ptl.html.
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This Report covers the Florida Law Update Special Session that was held on
Thursday afternoon and includes a recent commentary report on the Knight
Case from the RIA Newsstand Tax News Service. We anticipate that the next
Report will cover more of the Thursday sessions and the Wednesday ever
popular Q&A session (it's coming - we just are not sure how soon). Also,
even though the Institute ended on Friday, we will, as usual, keep posting
reports on it until we are all done. It typically takes a week or so
beyond the end of the Institute for us to complete this task. The last
Report will be denoted in the Subject line as the "Final Report."
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Special Session 4-C - Let The Sunshine In: A Florida Law Update
Thursday, January 17, 2008
Presenters: Bruce Stone of Coral Gables, Florida, and Amy Beller of Boca
Raton, Florida
Reporter: Craig Dreyer of Cleveland, Ohio and West Palm Beach, Florida
It should be noted Ms. Miller and Mr. Stone prepared a thorough outline
highlighting the high points of Florida law with suggested sample forms in
the appendix.
Ms. Miller started the session by highlighting the relevant Florida probate
code provisions including section 732, intestate and will, 733,
administration of estates, and 734, ancillary administration. In addition,
Florida rules 5.010 through 5.530 overlap and add to these
statutes. Section 736 is the new Florida trust code, which is based on the
UTC and significantly changes prior Florida law.
In Florida a testator must sign at end of the will, if others sign for
him it must be in his presence and at his direction. Witnesses must also
see the signing or hear the testator acknowledge that he signed the
will. Additionally, both witnesses must sign while they are in the
presence of the testator. Florida also allows separate tangible property
to be devised by a signed separate piece of writing that does not need to
be witnessed. This allows for an easier devise of tangible personal
property. Furthermore, if there are multiple signed separate writings the
latest in time governs.
The probate estate commences by the filing of a petition for administration
with the appointment of a representative. In Florida there is no need for
formal citation, one can file a petition and have entire process
ex-parte. Notice of administration is promptly served on the spouse and
beneficiaries. In a contested situation it is often a race to the
courthouse. It is important to file caveat at the courthouse as soon as
possible to prevent an estate administration. This prevents legal funds
from being paid by the estate and keeps the estate assets out of the hands
of the personal representative.
Once a will is filed in probate, notice must be served promptly to the
surviving spouse and beneficiaries. Notice of administration is sent
certified mail return receipt requested. Recipients have three months to
file objections pursuant to Florida statute. If one is trying to create a
revocation of probate they are at a disadvantage since the personal
representative has access to estate funds. The personal representative also
will have all of the decedent's records, so they will have a jump on
discovery in litigation.
A person is not qualified in Florida to be a personal representative if
they have been convicted of a felony, mentally or physically unable to
perform, are under 18 years of age, or are a non-resident of Florida who is
not the decedent's spouse or related by consanguinity or marriage. A
licensed attorney in Florida who is a non-resident cannot serve as a
personal representative in Florida.
The personal representative must file a bond unless waived in the will or
by the court. Different judges have different requirements as to whether a
bond is filed. Often judges disregard the code and say bond is a function
of judicial code. Judges often require bond in Florida. Judges will also
often allow a restricted account rather then a bond, but nothing can be
distributed without a court order.
Notice to creditors must be published in the county of probate once a week
for two weeks. Reasonably ascertainable creditors must be served
individually under the Polk case to start the statute of
limitations. Claims must be filed within the two-year statute of repose in
Florida. There are no excuses; neither the personal representative nor the
estate beneficiaries are liable for any claim not asserted within two years
of the decedent's death. There may also be other earlier statute of
limitation periods. Once a claim is filed there is a deadline for the
personal representative and others to object to the claim. The statute is
four months from the date of first publication or 30 days from filing the
claim. A claim must be filed in a court that has subject matter jurisdiction.
Generally there is no court approval of attorney's fees. An attorney can
compromise claims without court approval, but Mr. Stone generally
recommends going to court to avoid potential liability.
In Florida one does not need to go to court for power to sell real property
if there is adequate language in the will allowing this to happen. A
personal representative for ancillary probate must meet the same
requirements as a normal personal representative. They must post bond and
publish. Ancillary probate is not needed to maintain an action in the
Florida courts on behalf of the decedent's estate. The statute for
compensation of a personal representative does not fix compensation, but
creates a presumption of reasonable compensation for the personal
representative and executors. The burden falls on the personal
representative to establish it is a reasonable fee if challenged.
Mr. Stone noted Florida trust code was effective July 1, 2007. He also
mentioned that Georgia is also close to enacting its own version of the
UTC. The Florida Trust Code took five years to develop and then it was
passed unanimously. There are a number of mandatory provisions in the
Florida trust code that cannot be waived by a trust provision. Other
sections of the code can be modified by the documents. Therefore these
mandatory provisions must be known when drafting documents. In Florida,
any trust with testamentary aspect on or after the settlor's death is
invalid if the trust is not executed with the same formalities as a will.
This is a trap for non-Florida lawyers drafting trusts. This law applies
if the settlor is a Florida domiciliary regardless of where the document is
signed. Under the Florida trust code only revocable trusts must be executed
with will formalities. There is also a duty to provide accounting under the
Florida trust code. This provides a limitations period for claims to be
brought against the trustee upon providing an accounting. The Florida
trust code also provides an ability to modify or terminate trusts. The
duty to pay an amount to the probate estate cannot be modified.
A qualified beneficiary is one currently receiving income. The beneficiary
notice is extensive. If a trust has a provision that requires a child to
graduate college, Mr. Stone takes the position the person is a qualified
beneficiary. One must account to a qualified beneficiary and give them a
copy of the trust. Additionally, one can have a directed trustee in
Florida but the statute is not as powerful as the Delaware statute. The
Florida provision allows the trustee to generally follow the direction of a
directed individual. However, a trustee may not follow the directions if
it is against the manifest intention of trust or if trustee or if the
trustee knows it is a serious breach of fiduciary duty. There may be a
future amendment, which will allow the separation of functions similar to
the Delaware code giving the directed individual more power.
In Florida, the capacity needed to amend revoke or add property to a
revocable trust is testamentary capacity, which is the standard of a will,
not a contract like UTC. Also under the Florida Trust Code trusts are
revocable by default. Modification or termination of irrevocable trusts is
allowed under the Florida trust code as a trade off for extending the
perpetuities period to 360 years. It is a determinable number since under
2041(a)(2) there may be a tax trap for any states with no period of
perpetuities exercising POA. The statute was originally drafted for 1000
years, but the legislature changed it to 360. Basically if a trust can
last longer than the old period of perpetuities, the trust can be modified
for best interests of beneficiaries by the court taking into account a list
of factors. One can modify a trust without court approval, if all
beneficiaries agree including unborn minors and children through guardian.
The Florida trust code tried not to change creditor laws. It still does
not allow spouses or dependant children to collect against a trust with a
spendthrift clause. If a trustee must make distribution to a beneficiary
but does not make the distribution, the creditor can get only that amount
from the trust. Creditors cannot get a judgment from a fully discretionary
trust.
Ms. Beller then discussed the new provision for removal of a trustee. The
reasons for removal include a serious breach, lack of cooperation among
trustees, which substantially impairs trust administration and fairness,
and removal is in the best interests of all beneficiaries. The code does
not include a provision to determine the amount of a trustee's
compensation. Under Fla. Stat. 736.0813, trustees have duty to account
annually. Fla. stat. provides a six-month statute of limitation on
disclosure documents, and the beneficiary must be informed of this. This
can be done by sending a notice with disclosure or by separate writing
within 10 days of sending an accounting. A notice is prospectively
effective for accountings and reports for 1 year. However, if notice is not
part of an accounting or sent within 10 days thereof it is not
effective. It cannot be sent in a large stack of paper to detract form the
importance either.
Ms. Beller discussed how Fla. Stat.736.036 provides for designated
representatives to receive notice on behalf of a beneficiary, to prevent
them from knowing about the trust. The trust instrument must allow the
representative to act on behalf of the beneficiary and the representative
must have fiduciary duties. This applies to a trust created prior to the
effective trust code. If one is going to include language regarding a
designated representative, there are detailed restrictions in the statute.
Mr. Stone noted a spouse that has a QTIP with a limited power of
appointment makes the spouse guardian of the trust to prevent the
beneficiaries from receiving notices, but if the spouse is the sole trustee
this does not apply. The trustee has the option to serve beneficiaries
even if there is a designated agent. Ms. Beller also noted the Florida
tangible tax was repealed.
Mr. Stone noted that the homestead is one of most fertile areas of
malpractice in FL. Homestead in Florida has three different meanings.
First, it provides creditor protection on a home that sits on less than 160
acres outside municipal limits and for a home that sits on half of an acre
inside municipal limits. This is done without regard to value. Second,
homestead is provided under the save our homes amendment, which caps
increases in property taxes at the greater of 3% per year or CPI. He noted
that forgetting to register for the exemption is extremely
significant. The third aspect is that homestead is subject to restriction
on descent and devise if a spouse or minor child survives the decedent.
The presenters went through several scenarios regarding the descent of
Florida homestead property. The examples illustrated that Florida law will
often trump transfers intended at death and even often result in very bad
situations if a lawyer is not aware of exactly how the Florida Homestead
provision works. They also noted that postnuptial agreements can prevent
the application of the homestead property rules, but disclaimers do not work.
Mr. Stone discussed how holding homestead property in a revocable trust is
very dangerous. There is conflicting authority even if the client is the
trustee; one may lose protection from creditors under the Florida
constitution. Also, one may lose the save our homes protection unless
proper language is used. Therefore, be careful when changing homestead
property to avoid the decent statutes, because you may lose other benefits
as well as increasing your property tax bill.
The elective share is effective for residents dying after October 1, 2001.
In general it entitles the surviving spouse 30% of the elective
estate. Homestead and exempt property are not credited toward the elective
share; the spouse will receive homestead and exempt property over and above
his/her 30% share. For the elective share a QTIP trust with no invasion
power for the trustee will be valued for the elective share as if 50%
passed to the spouse. If there is an ability to invade principal to
provide for health, support, and maintenance the value included as part of
the elective share increases to 80%. If there is a 2065(b)(5) right then
100% is valued in the elective estate even if it is a testamentary power of
appointment.
Mr. Stone also mentioned that the typical estate planning with and A and B
trust may not work effectively in Florida as the exemption increases above
two million and the spouse elects the elective share. He notes a
contingent elective share trust is in the appendix of the materials, which
should be taken into account in drafting a Florida trust document. There
are some technical glitches in the elective share, which are in the process
of being corrected.
Ms. Beller noted that in terrorem clauses are not enforceable in Florida
under Fla. Stat. section 732.517. Pre-death will contests are also not
permitted by Fla. Stat. section 732.518. She also noted that trustees are
entitled to a reasonable fee for services. Fla. Stat. section 736.0708.
However, trustee compensation may be reviewed pursuant to Fla. Stat.
section 736.0201. For trustee attorney fees and costs incurred to any
trust, under Florida law if there is a conflict of interest, the trustee
must go to court and get court approval of fees. The Levine case provides
that Florida courts may do a forum non-convenes analysis for jurisdiction
over a trust although the statute reads differently. Under the Florida
trust code the principal place of administration 726.018 is the trustee's
principal place of business, trustees residence, or where records are
kept. Furthermore, an intestate distributee does not necessarily have
standing to wage a will contest under Florida law, if intervening wills
also exclude the distributee. Wehrheim v. Golden Pond Assisted Living
Facility, 905 So.2d 1002 (Fla. 5trh DCA 2005).
Fla. Stat. 731.401 provides arbitration clauses are enforceable. However,
they are not valid on a challenge to the validity of the document
itself. All fiduciary disputes and beneficiary disputes can be forced into
arbitration. An arbitration provision can also provide its own rules of
civil procedure.
Lawyers can serve as a trustee and personal representative and as an
attorney for the personal representative. They are entitled to
compensation for both positions. However, pursuant to rule, transactions
between lawyers and clients could be a conflict of interest and a lawyer
must get written waiver of conflict.
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RIA Newsstand 1/17/08: Supreme Court holds that trust investment advice
fees are subject to 2%-of-AGI floor.
Supreme Court holds that trust investment advice fees are subject to
2%-of-AGI floor
William L. Rudkin Testamentary Trust u/w/o Henry A. Rudkin, Michael J.
Knight, Trustee v. Comm (S Ct 1/16/2008), 101 AFTR 2d ¶2008-380
The Supreme Court, affirming the Court of Appeals for the Second Circuit,
has held that investment advisory fees paid by a trust are deductible only
to the extent that they exceed 2% of the trust's adjusted gross income
(AGI). These expenses do not qualify for the exception in Code Sec.
67(e)(1) under which costs paid or incurred in connection with the
administration of a trust that wouldn't have been incurred if the property
weren't held in the trust may be deducted in arriving at AGI.
RIA observation: The Supreme Court's decision resolves a conflict between
the Sixth Circuit, which held that such fees qualified for the Code Sec.
67(e)(1) exception, and the Federal, Second, and Fourth Circuits, and the
Court of Federal Claims, which held that they did not.
Background. Miscellaneous itemized deductions are allowed only to the
extent they exceed 2% of AGI. (Code Sec. 67(a)) For purposes of this floor,
a trust's AGI is computed the same way as for an individual, subject to
certain exceptions. (Code Sec. 67(e)) Under one exception, costs paid or
incurred in connection with the administration of the trust "which would
not have been incurred if the property were not held in such trust" may be
deducted in arriving at AGI. (Code Sec. 67(e)(1))
When the Tax Court held that a trust's investment advice costs were subject
to the 2% floor (O'Neill, William Jr. v. Com., (1992) 98 TC 227), the Sixth
Circuit reversed the Tax Court and held that investment counseling fees
paid by the trust to aid the trustees in discharging their fiduciary duty
to the trust beneficiaries were not subject to the 2% floor under the Code
Sec. 67(e)(1) exception. (O'Neill, William Jr. v. Com., (1993, CA6) 71 AFTR
2d 93-2052) Subsequently, the Sixth Circuit's approach was rejected by IRS
(nonacq 1994-2 CB 1), the Federal and Fourth Circuits, the Second Circuit
(in Rudkin) and the Court of Federal Claims.
RIA observation: In late July of 2007, IRS issued proposed regs providing
that costs incurred by an estate or non-grantor trust would be subject to
the 2%of-AGI floor for miscellaneous itemized deductions under Code Sec.
67(a). The proposed regs, which would apply to payments made after the date
they are finalized, also target a strategy of avoiding the 2% floor by
bundling expenses (such as nondeductible investment advisory fees and
deductible trustees' fees) into a single fee (see Federal Taxes Weekly
Alert 08/02/2007).
Facts. The Trustee of the William L. Rudkin Testamentary Trust (Trust) was
given broad authority to manage and invest trust funds. Exercising that
authority, the Trustee paid Warfield Associates, Inc. $22,241 for
investment advisory services during Trust's 2000 tax year. On its 2000 Form
1041 (U.S. Income Tax Return for Estates and Trusts), Trust reported total
income of $624,816 and a deduction of $22,241 on line 15a for "Other
deductions not subject to the 2% floor," which it described on an
attachment as investment management fees. Trust claimed no deduction on
line 15b for "Allowable miscellaneous itemized deductions subject to the 2%
floor."
IRS issued a statutory notice of deficiency that disallowed the full
$22,241 investment fees deduction and instead permitted a deduction of
$9,780, the amount by which $22,241 exceeded 2% of AGI of $623,050 (i.e.,
$12,461). The trustee challenged IRS, arguing that the investment advisory
fees shouldn't be subject to the 2% floor.
Second Circuit's holding. The Second Circuit, affirming the Tax Court's
decision, held that the investment advice fees were only deductible as
miscellaneous itemized deductions. The Second Circuit concluded that,
unambiguously, Code Sec. 67(e)(1) exempts from the 2%-of-AGI floor only
those costs incurred by a trust that could not have been incurred if the
property were held by an individual. It was obvious that individual
property owners can incur investment advice fees.
Supreme Court decides. The Supreme Court held that investment advisory fees
paid by a trust are deductible only to the extent that they exceed 2% of
the trust's AGI. The Supreme Court reasoned that in determining whether a
particular type of cost incurred by a trust "would not have been incurred"
if the property were held by an individual, Code Sec. 67(e)(1) excepts from
the 2% floor only those costs that would be uncommon (or unusual, or
unlikely) for an individual to incur. Although Code Sec. 67(e)(1) does not
expressly ask whether expenses are "customarily" incurred outside of
trusts, the Court determined that this is the meaning of the language in
Code Sec. 67(e)(1).
Although some trust-related investment advisory fees may be fully
deductible if an investment adviser were to impose a special, additional
charge applicable only to its fiduciary accounts, there was no indication
that Warfield did so, or treated Trust any differently than it would have
treated an individual with similar objectives because of the Trustee's
fiduciary obligations. Further, Trust never asserted that its investment
objectives or balancing of competing interests were so distinctive that any
comparison with those of an individual investor would be improper.
The Court found that the Trustee, who has the burden of establishing
entitlement to the deduction, failed to demonstrate that it was uncommon or
unusual for individuals to hire an investment adviser. The Court reject the
Trustee's argument that he engaged an investment adviser because his
fiduciary duties under Connecticut law require a trustee to invest and
manage trust assets as a prudent investor would. The Court reasoned that
the prudent investor standard doesn't refer to a prudent trustee, but looks
instead to what a prudent individual investor with the same investment
objectives handling his own affairs would do. Because a hypothetical
prudent investor in the Trustee's position would reasonably have solicited
investment advice, it was hard to say that the investment advisory fees
"would not have been incurred"i.e., that it would be unusual or uncommon
for such fees to have been incurredif the property were held by an
individual investor.
While the Supreme Court affirmed the Second Circuit's holding, it rejected
its approach, which asked whether the cost at issue could have been
incurred by an individual. The Court similarly rejected the Trustee's
argument that the proper inquiry was whether a particular expense of a
particular trust was caused by the fact that the property was held in
trust. The Court found that Code Sec. 67(e)(1) doesn't establish a
straightforward causation test, but instead looks to the counterfactual
question of whether an individual would have incurred such costs in the
absence of a trust. The Court concluded that under the Trustee's approach,
every trust-related expense would be fully deductible, allowing the
exception to the 2% floor in Code Sec. 67(e)(1) to swallow the general rule.
RIA Research References: For how the 2% floor applies to trusts, see FTC
2d/FIN ¶ C-2202; United States Tax Reporter ¶ 674; TaxDesk ¶ 653,001; TG ¶
2664.
Source: Federal Taxes Weekly Alert (preview), 01/24/2008, Volume 54, No. 04
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THE REPORTERS
Our on-site local reporters who are present in Orlando this year are Gene
Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado; Joanne Hindel Esq.
of Fifth Third Bank in Cleveland, Ohio; Jason Havens Esq. of Howard, Mobley
& Havens PLLC in Florida and Tennessee; Kimon Karas Esq. of McCarthy,
Lebit, Crystal and Liffman Co., LPA in Cleveland, Ohio; Bruce Stone Esq. of
Goldman, Felcoski & Stone, PA in Coral Gables, Florida; Craig Dreyer Esq.
of McDonald Hopkins LLC in Cleveland, Ohio; Carol Sobczak Esq. of The Law
Offices of Carol A. Sobczak in St. Helena, California; Ronda Martinez Esq.
of Fifth Third Bank in Southfield, Michigan; and Mike Stiff Esq. of
Hutchins & Stiff LLC in Denver, Colorado. The editor again this year will
be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver, Colorado, who
also is the Chief Moderator of the ABA-PTL List.
_________________________________________
GENERAL INFORMATION ABOUT INSTITUTE:
Inquiries/Registration:
Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone: 305-284-4762 / FAX: 305-284-6752
Web site: www.law.miami.edu/heckerling
E-mail: heckerling@law.miami.edu
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Headquarters Hotel - Orlando World Center Marriott
8701 World Center Drive
Orlando, FL 32821
Telephone (407) 239-4200, FAX (407) 238-8777
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NOTICE: Although audio tapes of all of the substantive session at the Miami
Institute currently are only made available to Institute registrants for
purchase, the entire proceeding of the Institute are published annually by
Lexis/Nexis. For further information, go to their Web site at
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proceedings is also available on CD ROM from Authority On-Demand by
LexisNexis Matthew Bender. For further information, contact your sales
representative, or call (800) 833-9844, or fax (518) 487-3584, or go to
http://www.bender.com or write to Matthew Bender & Co., Inc., Attn: Order
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