WIDOW VERSUS HUSBAND’S DAUGHTHERS: A recent case considers whose inheritance pays the estate tax? Can you sue the estate planning lawyer?

A very recent case out of the Midwest, decided literally days ago, demonstrates a typical battle in the inheritance war, pitting a surviving wife, or widow, against the three daughters of the deceased resident who created a multi-million-dollar trust.

At the center of the estate litigation was the question of who pays the US estate tax : the daughters or the widow? Or, to say it in a more precise way: who is responsible for paying the US estate tax?…….. a trust for the benefit of the three daughters, or a trust for the benefit of the surviving wife (widow)?

Here are the background facts: a wealthy man by the name of George hired an estate planning attorney to prepare estate planning documents for him, including a will and a revocable trust. The trust, by all accounts, appears to have been a very typical revocable trust, sometimes called a living trust. In Florida, for example, a basic estate plan for a Florida resident, perhaps just like George, would include a very simple will, also referred to as a “pour over will”, as well as a Florida revocable trust. The Florida revocable trust may be amended at any time that the creator of the trust is competent and sets forth an amendment in writing. The Florida revocable trust also may be terminated at any time by the creator. A revocable trust will typically dispose of, or give away, the Florida resident’s money, property, and wealth just like people used a last will, years ago, to do the same thing. Often, we refer to a revocable trust, which becomes irrevocable upon the death of the trust creator, as a client’s number one entity, or “vehicle”, for leaving inheritances when you die.

Back to the recent case from the Midwest: George hired this estate planning attorney and in 1982 George created a revocable trust. The revocable trust will hold the bulk of George’s assets and his revocable trust will distribute his wealth, upon his passing. Very common. Makes sense.

So who’s going to inherit all that wealth? George’s family includes three daughters and also a wife. He wants to leave his estate, his wealth, to his three daughters as well as his wife. Now, the opinion of the court in this case does not tell us more background facts about the family, but my guess is that George’s wife is not the mother of his three daughters.

Second and third marriages are increasingly common today, especially in Florida. Many wealthy Florida residents have children from a first marriage, or prior relationship, and a second or third spouse. A recurring tension seems to arise in Florida often, and, evidently in other parts of the country as well, between adult children from the first marriage and the second or third spouse. Now, lots of adult children may not like mom’s or dad’s new wife her new husband, but personal feelings, and animosities, even jealousies, often get kept below the surface until……………. there is money at stake. Someone dies. In Florida, you often see probate litigation, and Florida probate disputes, involving adult children litigating in a probate court with their mother’s or father’s second or third husband or wife.  The kids versus the widow.

So what does George’s revocable trust say? Well, he amends his revocable trust in 2001, and he creates two different trusts upon his death. One trust he refers to as a “family trust” and the other trust he refers to as the “marital trust.” For simplicity sake, let’s refer to the family trust as the “daughters trust” and let’s refer to the marital trust as the “wife’s trust.” This is because the family trust benefited the three daughters, and the marital trust benefited the widow or wife.

The revocable trust provides that upon George’s death, half his estate should go to the daughters trust and what’s left over, referred to as the “residue” of the revocable trust, would go to the wife’s trust. So, to be clear, there was this revocable trust. In the revocable trust, the terms said, in essence, “when I die, split my revocable trust into two new trusts, one for my daughters, and one for my widow.” Now, that may seem, in some cases, simple and fair. One half of the wealth under the revocable trust goes to his daughters and one half of George’s wealth goes to his wife.

But from a trust administration standpoint, that’s not, technically, how it goes. What the revocable trust is really saying, is that the trustee is being ordered to make a gift of one half of George’s revocable trust, to a new trust, for the benefit of his daughters. This type of inheritance, this type of trust distribution, is sometimes referred to as a “monetary devise” or a “specific devise”. The residue, whatever’s left over, if anything, goes to the wife’s trust. The big question is, whose share of the revocable trust, whose trust, pays for legal fees, probate fees, costs and expenses of administration of the estate, and…………… The federal estate tax?

This is a classic case of widows and adult children fighting over money and basic trust administration issues and concepts after the death of a wealthy family member. Who’s trust, the daughters trust or the wife’s trust is going to pay all the probate lawyers, trust lawyers? Who’s trust is going to pay off all the expenses of administering George’s estate, and the revocable trust? Oh yes, who’s going to pay off George’s debts? Who’s trust pays the federal estate tax as well as other legal obligations, like George’s final federal income tax, his outstanding credit card bills, any outstanding balances due, if any?

You can see that if the trust document doesn’t spell out whose trust pays for all these expenses and taxes, the daughters and the wife are going to be pointing fingers at each other. Or, put another way, it wouldn’t be uncommon for the daughters to want all of the estate expenses and taxes paid from the wife’s trust, and vice versa.

Now, good estate planning attorneys attempt to address the issue of paying a dead person’s expenses and taxes in the trust document itself. Most states, like Florida, have what’s called an “apportionment statute”. The apportionment statute tells everyone who bears the burden of paying George’s estate tax if his will or trust is silent and doesn’t tell us. Q:  Of all the people who could inherit wealth from the deceased wealthy person, whose inheritance might be reduced by the taxes and expenses? Well, lawyers who draft wills and trusts, probate lawyers, usually address this issue head on in the trust document or a will. An estate planning attorney will typically sit down with a client and ask him or her what part of the estate or the trust should pay expenses of administration and taxes. Sometimes, the estate tax and expenses of administering an estate or trust will come from very specific property, such as life insurance proceeds, or from the sale of stocks and bonds, or a piece of real estate. But most of the time, estate planning attorneys have common trust provisions in a person’s revocable trust which assign the tax liability, and all expenses for administering a trust or estate, to be paid from a specific share, such as a marital trust or a family trust. One legal commentator has suggested that this area of the law, whose inheritance will bear the brunt of the estate tax, is an area which is ripe for, or with, legal malpractice.  The suggestion is that estate lawyers don’t spend enough time with clients explaining exactly which beneficiaries, and which assets, bear the burden of paying the estate tax: and what alternatives for estate planning exist.

In George’s case his revocable trust stated that his estate tax, if any, should be paid from the wife’s trust. At first glance, it appears that George and his estate planning attorney clearly addressed the issue of who pays the estate tax right there in the trust document. However the corporate trustee, the CPA hired to complete George’s federal estate tax return, and George’s estate planning attorney reviewed the revocable trust agreement and the draft of the estate tax return. Something wasn’t right. According to the estate planning attorney, there was an error in the drafting of George’s revocable trust. Although the trust clearly said that the wife’s trust pays the US estate tax, this was not correct. To the credit of the estate planning attorney, he admitted, and even testified at his deposition, that one of George’s intents in creating the trust was to minimize his estate taxes. Long story short: evidently, and according to the estate planning attorney, George’s intent was to have his estate taxes paid from the daughters trust, not his wife’s trust. As you can imagine, this created a huge trust dispute.

The daughters sued the estate planning attorney and his law firm for legal malpractice. The daughters also sued the bank, which was trustee of the revocable trust after George’s death, arguing that the bank breached its duty of impartiality and confidentiality. The daughters also sued the estate, by suing the bank’s personal representative of their father’s estate, because the personal representative. The personal representative is typically the one who files the estate tax return and pays the estate tax. (The trustee of a person’s revocable trust, after the death of the creator of the revocable trust, often works very closely with the personal representative of that person’s estate. Because one’s revocable trust is responsible for paying all debts, obligations, taxes and expenses of the now deceased person, the trustee needs to work closely with the estate to make sure the estate has enough money to pay all of the decedent’s obligations.)

Of course, the widow, the wife, had a lot at stake as well, because her husband’s daughters wanted the taxes to be paid from the wife’s trust. So, enter the probate litigation lawyers.

What do you do in a probate lawsuit, or a trust lawsuit, like this? Well, because there’s a disagreement over who pays the estate taxes, a probate court would typically interpret the trust document to determine what it says. As well as the will. In Florida, probate courts interpret trust documents all the time, and issue orders, and make rulings about whose inheritance, or whose trust share, or whose trust, is going to be diminished.

Every day in Florida, probate courts make decisions about who’s going to pay somebody else’s debts and taxes. In Florida, when a court interprets a document such as a trust, it first reads the trust in its entirety to determine if it is “clear and unambiguous.” If the trust document is clear on its face, the court generally will read the trust document and stop there: and issue a ruling. However, if it is demonstrated to the probate court judge, that there is an ambiguity, that something in the trust document doesn’t really mean what it says, then a probate court in Florida may ask for evidence. The probate court judge may “look outside the four corners of the trust document” and hear testimony about the trust creator’s intent, or the circumstances surrounding the creation of the trust. What’s the purpose of the trust, or a specific part of the trust? What was the trust creator thinking? What was intended?

The probate court’s job is to determine, in an objective and impartial manner, what the trust creator’s intent was. Many times, these trust interpretation lawsuits end up being very important trials, with millions of dollars on the line. There are important evidence, and procedural rules, that trust litigators and probate litigators use to advance their clients case and to win at trial.

In Florida, if a drafting mistake was made, such as, evidently, in George’s case, all is not lost. Someone who is interested in the trust of the deceased Florida trust creator, also called a “settlor”, may file a petition for Reformation. This is a trust lawsuit which may also be filed as a “complaint” to correct, or reform, a mistake in the trust document. Now I know what you’re thinking to yourself: can you sue the probate lawyer or the estate planning lawyer? We need a recognize that no one is perfect. That lawyers do, and will, make mistakes. But if a legal mistake was made, the probate lawyer, or the estate planning lawyer may, or may not, be responsible for compensating you if there was a wrong. Now, back to the issue of reforming a trust document to correct a mistake:

Reformation of a trust document is not an invitation to rewrite the trust document. Trust Reformation in Florida is very narrow, and very specific: it is to correct the mistake. A mistake of fact, or mistake of law. There’s a very specific procedure to reform a trust or a will in Florida. There is a specific Florida law in the Florida trust code which deals with Reformation. Reformation of trust documents in Florida is a relatively new concept, and Florida law, now, also permits, or allows, a last will to be reformed.

Want a copy of this recent trust/estate litigation opinion from the court? Email michelle@pankauskilawfirm.com.

Finally, estate planning malpractice, and legal malpractice, against a Florida lawyer who writes wills and trusts has become a unique, perhaps odd, subspecialty of trust and estate litigation. Often times, and issue of who has the legal ability, or “standing” to sue an estate planning attorney arises. Also, and very importantly, the statute of limitations for estate planning malpractice, or for any type of legal malpractice for that matter, is two years.  The challenge becomes, when does that clock start ticking?