Income Tax Planning in Probate: IRS Rules Gain from Post-Death Sale of Decedent's Real Property under Pre-Death Contract Wasn't IRD

Clients are often surprised to learn that, for the most part, inherited assets are received income tax free. In addition to being income tax free, the appreciation on capital assets received from a decedent is also forgiven. The tax mechanism that allows for the forgiveness of the appreciation is known as a “step-up” in basis. A step-up in basis allows the beneficiary to sell an asset received from a decedent income tax free.

Income in Respect of a Decedent (“IRD”)

The primary exception to the general step-up-in-basis rule is income in respect of a decedent (“IRD”). Common examples of IRD include pension, IRA and 401(k) distributions, certain annuity payments and the decedent’s final paycheck.  For a detailed explanation of IRD from a CPA's perspective, see Maximizing the Tax Deduction for Income in Respect of a Decedent.

IRD can also include post-death sales of the decedent's property if the sales contract was finalized prior to death.  This can be a very big deal.

For example,  assume Dad owned real property with a basis of $1,000 and a fair market value of $1,000,000 on the day he died.  Usually, this property would receive a step-up in basis to its date-of-death value.  So Son would inherit the property with a basis of $1,000,000.  If Son sells the property 1 day after Dad dies, he pays zero income tax on the sale.  However, if the real property was subject to a pre-death sales contract, and the sale closes 1 day after Dad dies, the gain would be considered IRD and Dad's estate would have to pay income tax on $999,000 in gain.  Assuming a 15% tax rate, the tax bite would be $149,850!

IRS Rules Gain from Post-Death Sale of Decedent's Real Property under Pre-Death Contract Wasn't IRD: "Economically material contingencies might have disrupted the sale prior to Decedent's death." 

Obviously, spotting IRD issues in a probate proceeding and knowing how to best manage them can save your client big bucks; and turn your average probate lawyer into the family hero.  In Private Letter Ruling 200744001, the IRS provides an excellent road map for understanding what IRD is and, most importantly, how to avoid paying income taxes on IRD if the pre-death contract is subject to "economically material contingencies that might have disrupted the sale prior to Decedent's death."  Remember that phrase, it's the key to everything that's going on in this private letter ruling.

IRS Private Letter Ruling 200744001:

Facts:

The information submitted states that Taxpayer, Decedent’s revocable trust, entered into a contract to sell a plot of real property on D1, with an intended closing date of D2. Before D2, however, a gas pipeline was discovered underneath the property, causing the parties to delay the sale until Taxpayer, the buyer and the pipeline’s operating company could resolve a number of issues. The parties needed to address matters such as providing for an easement for the pipeline company to enter onto the property as well as providing that the pipeline company would provide restitution for any damage to the property. Before the parties could resolve these issues, Decedent died on D3. The sale did not actually close until D4.

Law:

Section 691(a)(1) provides that the amount of all items of gross income in respect of a decedent (IRD) which are not properly includible in respect of the taxable period in which falls the date of the decedent's death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's es tate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (C) the person who acquires from the dec edent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

Section 1.691(a)-1(b) of the Income Tax Regulations provides that the term “income in respect of decedent” refers to those amounts to which a decedent was entitled as gross income but which were not properly includible in computing the decedent's taxable income for the taxable year ending with the date of the decedent's death or for a previous taxable year under the method of accounting employed by the decedent. Thus, the term includes income to which the decedent had a contingent claim at the time of the decedent's death.

Section 1014(a) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or ot herwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death.

Section 1014(b)(1) provides, in part, that for purposes of section 1014(a), property acquired by bequest, devise or inherit ance, or by the decedent's estate from the decedent shall be considered to have been acquired from or to have passed from the decedent.

In Rev. Rul. 78-32, 1978-1 C.B. 198, prior to death, a decedent had entered into a binding contract to sell real estate, had substantially completed all of the substantive prerequisites of consummation of the sale, and was unconditionally entitled to the proceeds of the sale at the time of death. The ruling holds that the gain realized from the sale of the real estate that was completed by the decedent's executor is income in respect of a decedent within the meaning of § 691(a).

In Taxpayer's case, important issues needed to be addressed before the sale of the property could be closed. The closing was delayed until D4 because of these issues. Taxpayer needed to attend to substantive as well as ministerial matters. The pipeline was not discovered until after the original contract was entered into; this created economically material contingencies that might have disrupted the sale prior to Decedent's death.

Ruling:

Based solely on the facts and representations submitted, we conclude that any gain realized from the sale of the property after Decedent's death does not constitute income in respect of a decedent within the meaning of § 691. We further conclude that basis of the property in Taxpayer's hands before the sale should be determined under § 1014(a).

The 11th Circuit on estate tax valuation discounts; dissent decries "doctrine of ignoble ease"

Estate of Jelke v. C.I.R., --- F.3d ----, 2007 WL 3378539 (11th Cir. Nov 15, 2007)

The best nugget of wisdom - and most entertaining quote - found in this opinion comes from Judge Carnes' dissent:

The death of a human being is profoundly important to the person who dies, but it matters not one whit to the laws of economics, which dictate the self-interest of the living.

At the end of the day, once you strip away all the extraneous drama inherent to most trusts-and-estates litigation, that's what it all boils down to: the laws of economics, dollars and cents, i.e., "show me the money."  Forget that bit of insight in the heat of a case and you're toast.

Now back to the scintillating world of estate-tax valuation law.

In this case the 11th Circuit reversed the Tax Court by holding that the proper valuation approach for estate tax purposes of stock interest owned by the decedent in a closely-held, investment holding company, was to apply a dollar-for-dollar reduction of the company's entire built-in capital gains tax liability.  The logic of this approach is best understood in terms of a concrete example, which the court provided at Footnote 25:

FN25. The Second Circuit used an example from tax treatise, Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 10.41 [4] n. 11 (Warren, Gorham & Lamont, 6th ed.1998), to illustrate that a hypothetical buyer and seller would allow a discount for built in capital gains tax:


In the example, A owns 100% of the stock of X corporation, which owns one asset, a machine with a value of $1,000, and a basis of $200. Bittker assumes a 25% tax rate and points out that if X sells the machine to Z for $1,000, X will pay tax of $200 on the $800 gain. Bittker adds that if Z buys the stock for $1,000 “on the mistaken theory that the stock is worth the value of the corporate assets,” Z will have lost $200 economically “because it paid too much for the stock, failing to account for the built-in tax liability (which can be viewed as the potential tax on disposition of the machine, or as the potential loss from lock of depreciation on $800 [of] basis that Z will not enjoy.”) Because of Z's loss, Bittker concludes, “Z will want to pay only $800 for the stock, in which even A will have effectively ‘paid’ the $200 built-in gains tax.”

Estate of Eisenberg, 155 F.3d at 58 n. 15.

Now that I've hit the tax issue, I want to come back to Judge Carnes' dissent.  He argues that the majority took the easy road when it overruled the Tax Court.  For Judge Carnes, taking the easy road is a much bigger SIN than calling a tax issue the wrong way.  Taking the easy road leads to the downfall of civilization!!  So saith Judge Carnes:

The tax code is nowhere near the center of my intellectual life, and generally I find estate tax law about as exciting as Hegel's metaphysical theory of the identity of opposites. There is, however, more involved in this case than just the estate tax issue presented, which is how to determine the fair market value of the decedent's distinctly minority interest in CCC, a closely held corporation whose assets consist primarily of marketable securities with a built-in capital gains tax liability.

The broader principles implicated by the majority opinion are timeless. They were discussed by Teddy Roosevelt at the close of the century before last:


I wish to preach not the doctrine of ignoble ease but the doctrine of the strenuous life; the life of toil and effort; of labor and strife; to preach that highest form of success which comes not to the man who desires mere easy peace but to the man who does not shrink from danger, from hardship, or from bitter toil, and who out of these wins the splendid ultimate triumph.

Vice President Theodore Roosevelt, The Strenuous Life, Address before the Hamilton Club in Chicago, Illinois (April 10, 1899), in The Penguin Book of Twentieth-Century Speeches 1 (Brian MacArthur ed., 1992). By adopting and extending the arbitrary assumption rule of least effort from Estate of Dunn v. Commissioner, 301 F.3d 339 (5th Cir.2002), the majority gives in to the judicial equivalent of the doctrine of ignoble ease. To avoid the effort, labor, and toil that is required for a more accurate calculation of the estate tax due, the majority simply assumes a result that we all know is wrong. We can do better than that. The tax court did.

Creditor claims in probate: substance trumps form

In re Estate of Koshuba, --- So.2d ----, 2007 WL 2934936 (Fla. 2d DCA Oct 10, 2007)

Florida law doesn't cut creditors any slack when it comes to blowing limitations periods [click here, here for recent examples], but creditors do get some leeway when it comes to "how" they make it known to the world that the estate owes them money.  As long as the creditor files something in the probate proceeding with sufficient detail to put interested parties on notice of "the character and extent of his claim," that should be sufficient.

Petition for Administration as "Claim" Form:

In the linked-to case the creditor filed a petition for administration of the decedent's estate in an attempt to enforce a real estate sales contract.  Here's how the court described his petition:

On September 12, 2003, Mr. Koshuba signed a contract agreeing to sell real property to Mr. Zilewicz. Mr. Koshuba died on December 1, 2003, before the parties closed on the contract. In order to enforce his right to purchase the property under the agreement, Mr. Zilewicz filed a Petition for Administration of the estate of Mr. Koshuba on June 17, 2005. The petition alleged, in part:

[Mr. Zilewicz] has an interest in these proceedings because of an obligation between [Mr. Zilewicz] and decedent's estate. Said obligation consists of a purchase and sales agreement made by and between petitioner and decedent as evidenced by the Notice of Interest in Real Estate recorded in the Public Records of Sarasota County, Florida, under instrument number 2004099787. [Mr. Zilewicz] is willing to act as petitioner because the heirs have made no application to administer the estate.

The trial court appointed Robin Vasquez as personal representative of the estate. On September 16, 2005, Mr. Zilewicz filed an Amended Petition for Appointment of Guardian ad Litem to represent the interests of unidentified heirs. In this document, Mr. Zilewicz alleged: “Petitioner and the decedent entered into a sales and purchase agreement for the purchase of real property located in Sarasota County, Florida. A copy of said agreement is attached hereto as Exhibit A.” This document also lists the nature of assets in the estate as “Unimproved Real Property” and lists the approximate value at time of death as $7000.

Trial Court Says "No," 2d DCA Says "Yes":

The probate court effectively struck the creditor's claim because "no cause of action was timely filed by the purchaser in accordance with F.S. 733.702(1), F.S. 733.702(6) and F.S. 733.710.”  The 2d DCA reversed on two grounds: "Form" and "Timeliness."

Form:

Here's how the 2d DCA addressed the "form" issue, basing it ruling on the pivotal Florida Supreme Court opinion in May v. Illinois National Insurance Co., 771 So.2d 1143 (Fla.2000).

We agree with the Personal Representative's assertion on appeal that Mr. Zilewicz's written statements, made within his Petition for Administration and the Amended Petition for a Guardian ad Litem, were substantially sufficient to place interested persons on notice of his claim. The documents filed in the probate proceeding by Mr. Zilewicz are defective as to form, but they sufficiently state the character and extent of his claim.

Timeliness:

Here's how the 2d DCA addressed the "timeliness" issue, focusing on a key 2002 legislative change:

We further conclude that a claim by Mr. Zilewicz was timely filed in accordance with sections 733.702 and 733.710, Florida Statutes (2003). In May, 771 So.2d at 1150, the court held that section 733.702, Florida Statutes (1991), is a statute of limitations that operates as a bar to claims not “ ‘filed within the later of 3 months after the time of the first publication of the notice of administration or, as to any creditor required to be served with a copy of the notice of administration, 30 days after the date of service of such copy of the notice on the creditor.’ “ Section 733.702(1) has since been amended to substitute “on or before” for “within,” thus allowing claims to be filed before the notice of administration. Ch.2002-82, § 6, Laws of Fla. (eff. April 23, 2002). The amendment is pertinent to the instant case and renders the claim timely under section 733.702. Also, Mr. Zilewicz's claim would not be time barred by the two-year statute of nonclaim in section 733.710, which bars claims not filed within two years after a person's death.

Estate tax deductions for claims against the estate: IRS proposes new regulations

Failing to properly coordinate how a claim against an estate is administered in the probate proceeding with how the claim is reported to the IRS for estate-tax deduction purposes can be a multimillion dollar mistake (see here).

In order to get this process right certainty as to what the applicable tax rules are is key.  Which is why the latest action by the IRS on this front should be helpful.  As reported here by Joel A. Schoenmeyer in the Death and Taxes Blog, the IRS is proposing amendments to the regulations relating to the amount deductible from a decedent's gross estate for claims against the estate (see here). 

In its "background" explanation to the proposed rule amendment, the IRS cited the need for greater uniformity amongst the courts as the primary reason for the proposed rule change.  Here's an excerpt:

The amount an estate may deduct for claims against the estate has been a highly litigious issue. Unlike section 2031, section 2053(a) does not contain a specific directive to value a deductible claim at its date of death value. Section 2053, in fact, specifically contemplates expenses such as funeral and administration expenses, which are only determinable after the decedent's date of death. Although numerous courts have addressed section 2053(a)(3), there is little or no consistency among the conclusions of those courts with regard to the extent (if any) to which post-death events are to be considered in valuing such claims.


*  *  *  *  *

After carefully considering the numerous judicial decisions and the analysis and conclusion in each, the legislative history of section 2053 and its predecessors, and the various possible alternatives, and in order to further the goal of the effective and fair administration of the tax laws, the proposed regulations adopt rules based on the premise that an estate may deduct under section 2053(a)(3) only amounts actually paid in settlement of claims against the estate. If the resolution of a contested or contingent claim cannot be reached prior to the expiration of the period of limitations for claims for refund, the estate may file a protective claim for refund to preserve its right to claim a deduction under section 2053(a).

Florida's unforgiving 2-year non-claim statute strikes again!

Bush v. Webb, 2006 WL 2872522 (Fla. 1st DCA October 11, 2006)

An overarching theme of Florida’s probate code (and recurring point of discussion on this blog) is the tension between basic due-process rights on the one hand and Florida’s strong public policy favoring the speedy administration of estates on the other. In order to move things along as quickly as possible (with the least amount of litigation expense possible), Florida law provides extremely short windows of opportunities for litigants to file claims.  Florida’s 2-year non-claim statute (733.710(1)) epitomizes this stated public policy because of its simplicity and utter disregard for due process or equitable considerations. When it comes to creditors, after 2 years it's game over . . . period, no exceptions.

The issue litigated in this case was whether language in a will explicitly directing the personal representative to pay the decedent’s funeral expenses trumps Florida’s 2-year non-claim statute. The 1st DCA described the will-language in contention as follows:

The decedent died on February 16, 2002. In her will, she bequeathed all her property to appellant and directed that her “just debts, funeral and administration expenses be paid as soon after [her] death as may be practical . . .”

The personal representative in this case was the decedent’s sister. Apparently the decedent’s children paid mom's funeral expenses then waited over two years to file a claim against mom’s estate seeking reimbursement. The PR said NO, the trial court said YES, and the 1st DCA sided with the PR, changing the answer to NO again. Here’s how the 1st DCA described the reasoning underlying its decision to reverse the probate court’s ruling:

It is undisputed in this case that appellees filed their claims against the decedent's estate more than two years after her death. Pursuant to section 733.710(1), the claims were barred. Contrary to appellees' argument, the decedent's directive that her estate pay her funeral expenses did not excuse their statutory obligation to file their claims against the estate within two years of the decedent's death. See Marshall Lodge No. 39, A.F. & A.M. v. Woodson, 190 So. 749, 751 (Fla.1939) (“We do not think that the provision of the will directing the executors to pay all of the just debts of the testator had any effect upon the operation of the statute of non-claim.”). Were that not the case, each of the decedent's creditors could have simply relied on the will and filed claims against the estate long after her death, thereby forever subjecting the estate to uncertainty. Such a situation would conflict with the purpose behind section 733.710(1).

Lesson learned:

If you even suspect an estate may owe you money, when in doubt file a claim . . . and do it sooner rather than later.  An early claim can always be withdrawn, a late claim is gone forever.

In case of first impression 2d DCA rejects Uniform Probate Code concept of a "partial objection" to creditor's claim

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

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

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

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

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

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

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

Lesson Learned:

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

Court says YES to widow's enforcement of decedesed husband's workers' comp' settlement agreement

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

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

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

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

*     *     *     *     *

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

[Emphasis added.]

Under Florida Law Creditors Have a Right to Fully Litigate Their Claims in Independent Actions Against Estates

Simpson v. Estate of Simpson, __ So.2d __ (Fla. 5th DCA Feb 17, 2006)

In this case the personal representative of the estate knew that her nephew was claiming he was entitled to an ownership stake in a citrus business owned by the decedent. Nephew never received the notice-to-creditors mandated by F.S. § 733.701. Nephew filed a petition under F.S. § 733.702(3) seeking an extension of time to file his claim against the estate based on the estate's failure to provide the statutorily required creditors' notice.

The evidentiary hearing on Nephew's petition for extension of time did not end well for him. Unfortunately Lake County Probate Judge Mark J. Hill failed to distinguish between (1) a proceeding to determine Nephew's entitlement to an extension of time vs. (2) a proceeding to determine the validity of his claims. According to the Fifth DCA, the undisputed evidence presented at the hearing established that Nephew was a "reasonably ascertainable" creditor who was not given notice, and thus entitled to an extension of time to file his claim against the estate.

The undisputed evidence establishes that Mark's claim was not only reasonably ascertainable, it was known to Anita. Robert testified that shortly after Jim died, Anita said to him, "We've got to make sure Mark gets his stock." However, after Mark turned 21 on September 17, Anita changed her position, stating, "I can't do anything to get the stock to Mark for his 21st birthday because it's all tied up in the probate court, and we can't touch it." Then, on October 2, 2001, Robert wrote a letter to Anita asking her to give Mark the 10.5 shares of stock. Clearly, Anita had actual knowledge of Mark's potential claim.

Once the evidence established that Nephew was entitled to file his claim, the probate court should have stopped there and let the parties fully litigate Nephew's claim in a separate independent action. That's not what the probate court did. Which was reversible error according to the Fifth DCA:

Instead of ending its inquiry there, the probate court proceeded to determine the validity of Mark's claim. Under the applicable probate statutes, the merits of Mark's claim should have been determined in an independent action. In disputes over the validity of timely filed claims, section 733.705(4) requires the claimant to "bring an independent action upon the claim" if an objection to the claim is served. Section 733.705(5) contemplates the use of an independent action after the probate court permits the filing of an untimely claim. It states, "A claimant may bring an independent action or declaratory action upon a claim which was not timely filed pursuant to s. 733.702(1) only if the claimant has been granted an extension of time to file the claim pursuant to s. 733.702(3)." The term "independent action" requires the filing of a separate action upon a claim against the estate. In re Pridgeon's Estate, 349 So.2d 741 (Fla. 1st DCA 1977). This requirement allows pleadings and responses sufficient to set the issues before the court prior to hearing. In re Fornash's Estate, 372 So.2d 128, 129 (Fla. 2d DCA 1979).

Knowledge of the Law + Wonderful Oral Advocacy + No Evidence = Getting Reversed on Appeal

Faerber v. D.G., 2006 WL 287322 (Fla. 2d DCA Feb 08, 2006)

Probate proceedings take place before judges, not juries. As such the parties involved (including judges), may not always feel strict compliance with Florida's rules of evidence is a necessary precaution (although Florida Probate Rule 5.170 states explicitly that the rules of evidence in civil actions generally apply to probate proceedings). That point of view is usually harmless because many of the evidentiary rules designed to shelter juries from unfair inferences may not be necessary where, as in probate proceedings, the judge is also the fact finder.

But simply skipping the need for ANY evidence is NOT acceptable, a point made by the 2d DCA in this case when it reversed a ruling by Collier County Judge Hugh D. Hayes granting a petition made pursuant to F.S. § 733.702(3) seeking leave to file a late claim against the estate because the purported creditor had allegedly been provided with insufficient notice of the claims period. According to this newspaper article, the 2d DCA's ruling will result in the dismissal of a $10 million lawsuit against the estate.

A trial court's ruling on a petition for more time to file a claim against an estate is usually reversed only if the trial court has "abused its discretion." This is a tough burden to overcome, but, as the 2d DCA makes clear in the following excerpt from its opinion, a ruling based on NO evidence is an abuse of discretion and subject to reversal:

[A]s the trial court acknowledged in its order, neither party presented any evidence below. Although, at the hearing, counsel for D.G. made certain representations as to how the Decedent and his family knew D.G. and how the Decedent's family was aware of D.G.'s involvement in the criminal case against the Decedent, counsel for Appellants objected, noting that such representations did not amount to factual evidence. We agree. See Steinhardt v. Intercondominium Group, Inc., 771 So.2d 614 (Fla. 4th DCA 2000) (stating that facts in dispute must be proven absent stipulation and that representations of counsel are insufficient). Because there was no other evidence presented at the hearing, we can only conclude that the trial court erroneously based its ultimate conclusion that D.G. was a reasonably ascertainable creditor on the assertions of D.G.'s counsel. This was an abuse of discretion. See Allstate Floridian Ins. Co. v. Ronco Inventions, LLC, 890 So.2d 300, 304 (Fla. 2d DCA 2004) ("Reaching the legal conclusion that [a]ppellees had shown due diligence when there was no evidence presented upon which to make such a finding is clearly an abuse of discretion."). Accordingly, we reverse the trial court's order granting D.G.'s petition for extension of time to file a claim against the Estate.


Because D.G. scheduled the hearing on his motion, failed to present any evidence at that hearing to establish that he had received insufficient notice of the claims period, and did not try to remedy the error when it was pointed out by Appellants' counsel, on remand the trial court is instructed to enter an order denying D.G.'s petition. (Emphasis added.)

Ouch!

Creditor strikes out again: Florida Probate Rules do not provide for "vacatur" of mistaken orders

Interim Healthcare of Northwest Florida, Inc. v. Estate of Ries, 2005 WL 2219224 (Fla. 4th DCA September 14, 2005) (Trial Court Affirmed)

Two public-policy priorities play themselves out every time a creditor seeks to satisfy its claim against a probate estate: (1) on the one hand, there is the public policy favoring expeditious and low-cost completion of the probate administration process; (2) on the other hand, a creditor's constitutionally protected due process rights must respected. As this case makes clear, procedural safety nets available to litigants in general civil litigation (think due process) do not always apply in the probate context. In general civil litigation Rule 1.540 of the Florida Rules of Civil Procedure provides for the "vacatur" of mistaken orders. As the creditor in this case learned, Rule 1.540 runs head on against the public policy favoring the expeditious and low-cost completion of probate proceedings. As such, as the Fourth District Court of Appeal makes clear in Footnote 1 to this opinion, Rule 1.540 simply does not apply in the probate context.

FN1. The Florida Probate Rules do not contain a provision for vacatur of orders--and this includes those striking claims as untimely--made final by the lapse of the time for appeal. The Rules of Civil Procedure no longer apply in probate except as specified in the probate rules. See Fla. Prob. R. 5.010. At one time a statute applied the civil rules to adversary proceedings in probate, but that statute was repealed in 2002. See Ch.2001-226, § 8, Laws of Fla. Thus, even though rule 1.540 might logically seem to support an attempt to vacate an earlier probate order made final by the lapse of the time for appeal, in this case that rule has no application. See In re Estate of Clibbon, 735 So.2d 487 (Fla. 4th DCA 1998).

When is a sweetheart gift really a "gift" or just words worth less than the paper they are written on?

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

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

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

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

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

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

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

What is the "Trust Exception" to the statute of limitations applicable to probate creditors' claims and when does it apply?

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

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

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


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

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

Party Reasonably Expected to Pursue a Personal Injury Cause of Action Against an Estate Is a Creditor Entitled to Actual Notice That the Probate Proceedings Are Pending

Longmire v. Estate of Ruffin, 2005 WL 2016944 (Fla. 4th DCA August 24, 2005) (Trial Court Reversed)

This Fourth District Court of Appeals opinion should make clear once and for all that if a personal representative should reasonably expect that the estate will be sued by a particular party, F.S. § 733.2121(3)(a) requires that the personal representative treat that potential plaintiff like a creditor entitled to actual notice that the probate proceedings are pending. Although this case involved a personal injury cause of action, there is no reason to believe the applicable rule would be different with respect to any other type of cause of action. Lesson learned: if a personal representative wants to take full advantage of the liability shield created by F.S. § 733.702(1), potential plaintiffs must receive actual notice that the probate proceedings are pending.