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Wednesday, August 31, 2011


Our last Florida update relates to changes to Florida’s probate and trust code. The following summary has been written by Sean Lebowitz of our office.

     On April 14, 2011 and April 29, 2011, the Florida legislature enacted several significant changes to the probate and trust code (hereinafter referred to as “legislation”). The bill was signed by the Governor on June 21, 2011. Some of the key sections of the legislation became effective on July 1, 2011 and others will become effective on October 1, 2011. In essence, the legislation creates or substantially modifies the following subject matters: I) Intestate succession; II) Reformation of a will; III) Challenges to revocation of a will and trust; IV) Attorney-client privilege relating to fiduciaries; and V) Timing for requesting attorney’s fees in a trust matter. The author urges probate and trust litigators to review the entire legislation because it contains nuances not fully addressed in this article.

I. Intestate Succession

     When a decedent dies without a will, the assets are distributed according to the laws of intestacy. Currently, the intestate share of a surviving spouse where all of the decedent’s descendants are also descendants of the surviving spouse is the first $60,000.00 and half of the remaining estate. Effective October 1, 2011, the legislation amends Florida Statute § 732.102(2) so that the intestate share of a surviving spouse of a decedent where all of the decedent’s descendants are also descendants of the surviving spouse (or if there are no descendants) is the entire estate. The legislation also creates Florida Statute § 732.102(4) to provide that if the surviving spouse has descendants that are also the decedent’s descendants and has descendants not related to the decedent, the surviving spouse’s intestate share is half of the estate.

II. Reformation of a Will

     Reformation of a testamentary document is an effective, yet often times overlooked, probate litigator’s technique to reform a document to conform to the settlor’s intent. Since 1998, Florida case law permitted reformation of a trust instrument to correct a mistake. See In re Estate of Robinson, 720 So. 2d 540 (Fla. 4th DCA 1998). In 2007, the Florida legislature codified and expanded common law to permit reformation to correct a trust to cure a mistake as well as reformation of a trust to achieve a settlor’s tax objectives. See Fla. Stats. §§ 736.0415 and 736.0416.

     Effective July 1, 2011, the legislation created Florida Statutes §§ 732.615 and 732.616. These statutes mirror the above-referenced trust code statutes to permit reformation of a will to correct a mistake and to modify a will to achieve a testator’s tax objectives. The mistake statute, Florida Statute § 732.615, allows an interested person to seek reformation of the terms of a will to conform to the testator’s intent, and provides a burden of proof of clear and convincing evidence. The statute even permits reformation that is completely inconsistent with the apparent terms of the will.

     The tax modification statute, Florida Statute § 732.616, permits an interested person to seek reformation of the terms of a will to achieve a testator’s tax objectives in a manner that is not contrary to the testator’s “probable intent.” These statutes are significant because reformation of an unambiguous will was previously never permitted by case law or statute. In addition, the legislation creates Florida Statute § 732.1061 which requires that in actions under reformation of a will to correct a mistake and modification of a will to achieve tax objectives, the court must award attorney’s fees and costs to the prevailing party. Nonetheless, the statute also gives the court discretion in awarding and allocating fees using the concept of equity.

III. Challenges to Revocation of a Will and Trust

     Florida law provides that a will or trust is void if procured by fraud, duress, mistake or undue influence. A testator or settlor may revoke a will or trust by writing or act. Until the legislation, there was no mechanism to challenge a revocation of a will or trust by physical act based upon fraud, duress, mistake or undue influence. The legislation amends Florida Statutes §§ 732.5165 and 736.0406 to provide that revocation of a will or trust is void if procured by undue influence, fraud, duress or mistake. A challenge to the revocation of a testamentary document cannot take place until the instrument becomes irrevocable or at the settlor’s demise.

IV. Attorney-client Privilege relating to Fiduciaries    

     Florida law provides that communication between an attorney and the client is confidential if it is not intended to be disclosed to third parties. The legislation clarifies and expands existing law so that communication between a fiduciary client and the attorney is confidential and privileged. See Fla. Stat. § 90.5021. The legislation also amends Florida Statutes §§ 733.212(2)(b) and 736.0813 which create new reporting requirements for personal representatives and trustees. The reporting requirement compels personal representatives and trustees to provide notice to the beneficiaries that an attorney-client privilege exists between the fiduciary and the attorney employed by the fiduciary. See Fla. Stats. §§ 733.212(2)(b) and 736.0813.

V. Timing for Requesting Attorney’s Fees in a Trust Matter

     The Florida Trust Code provides that trust proceedings are governed by the Florida Rules of Civil Procedure. In civil litigation, Florida Rule of Civil Procedure 1.525 is commonly used which requires a party to serve a motion seeking fees or costs within 30 days after the filing of a judgment. By amending Florida Statute § 736.0201(1), the legislation clarifies and confirms that Florida Rule of Civil Procedure 1.525 applies to all judicial proceedings concerning trusts.

     The legislation also creates Florida Statute § 736.0201(6) which states that Florida Rule of Civil Procedure 1.525 applies to all judicial proceedings concerning trusts, but provides the following two exceptions: “A trustee’s payment of compensation or reimbursement of costs to persons employed by the trustee from assets of the trust [and] [a] determination by the court directing from what part of the trust fees or costs shall be paid, unless the determination is made under s. 736.1004 in an action for breach of fiduciary duty or challenging the exercise of, or failure to exercise, a trustee’s powers.”


In likely response to earlier cases in various states questioning the creditor protection aspects of an inherited IRA, Fla.Stats. §222.21(2)(c) has been modified to expressly include such IRAs in Florida’s statutory protection scheme.


Florida has modified Fla.Stats. §608.433 to both clarify and change the rights of creditors vis-à-vis LLC owner interests owned by debtors.

First, the statute has been modified to make clear that the charging lien is the sole and exclusive remedy of a creditor against a debtor’s LLC interest, if the LLC has more than one member. A creditor is expressly prohibited from seeking a foreclosure sale of the member’s LLC interest.

Second, if the debtor is the sole member of the LLC, a creditor’s remedies are not restricted to a charging lien. Thus, for example, the creditor can foreclose on the member’s LLC interest, and the purchaser at the foreclosure sale can obtain full voting and other powers over the interest (that is, the sold interest will not be limited to an “assignee” interest). However, before remedies other than a charging lien are allowed, the creditor must establish to the satisfaction of a court that distributions under a charging order will not satisfy the judgment within a reasonable time. The new statute should provide statutory certainty to the issues raised in the 2010 Olmstead decision.

Thus, the use of single-member LLC’s should not be relied upon as an asset protection mechanism. For planning, the addition of bona fide additional members may allow for a limitation of remedies to a charging lien if not subject to challenge on a sham, fraudulent conveyance, or other equitable theory.

Monday, August 29, 2011


Further to my last posting, the IRS acted today to also extend the offshore initiative filing deadline for FAQ 17 & 18 filings to September 9, due to Hurricane Irene. While the announcement only refers to FBAR filings, FAQ 17 & 18 themselves have the new deadline, and thus September 9 also applies to Form 5471 and Form 3520 filings.

For those not familiar with FAQ 17 & 18, these questions allow the late filing of FBARs and Forms 5471 and 3520 without risk of late filing penalties, if the taxpayer otherwise reported all income in the subject years.

It looks someone in Washington D.C. is reading this blog!


Sunday, August 28, 2011


In recognition of the anticipated disruption to come from Hurricane Irene, the IRS has pushed back the compliance submission deadline for its 2011 offshore voluntary disclosure initiative from August 31, 2011 to September 9, 2011. This extension applies to all taxpayers – not just those affected directly by Hurricane Irene. The later date also extends the filing date for requesting a 90 day extension to submit the complete disclosure package.

It is unclear whether this extension also applies to taxpayers who have paid all of their tax but are filing late Forms 5471, 3520, and/or FBAR’s under FAQ’s 17 and 18, since those FAQ’s still reference the August 31, 2011 date.

IRS Announcement, August 26, 2011

Wednesday, August 24, 2011


Under the Fifth Amendment to the U.S. Constitution, a taxpayer may refuse to answer specific questions or produce specific records if it would violate his or her privilege against self-incrimination. In a recent appellate case, the taxpayer was under a grand jury investigation as to whether he used undisclosed Swiss bank accounts to evade taxes. The taxpayer claimed that the Fifth Amendment protected him from having to provide his records relating to his foreign bank accounts. More specifically, a subpoena was issued for the taxpayer to produce “[a]ny and all records required to be maintained pursuant to 31 C.F.R. § 103.32 [subsequently relocated to 31 C.F.R. § 1010.420] relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during each specified year.”

The information identified in the subpoena mirrors the banking information that 31 C.F.R. § 1010.420 2 requires taxpayers using offshore bank accounts to keep and maintain for government inspection. The information the subpoena seeks is also identical to information that anyone subject to § 1010.420 already reports to the IRS annually through Form TD F 90-22.1, known as a “Report of Foreign Bank and Financial Accounts,” or “FBAR.”

The taxpayer argued that the information he provided could be used to prosecute him criminally if it conflicts with other information he provided to the IRS. He also argued that if he had to deny he had such information, he could be guilty of a felony of not meeting legal requirements to maintain such records.

Notwithstanding the risk of criminal prosecution relating to responding to the record requests, the Ninth Circuit Court of Appeals held that the Fifth Amendment privilege did not apply under the “Required Records Doctrine.” This exception to the privilege applies under Grosso v. U.S., 21 AFTR 2d 554 (S Ct 1968) if:

a. The purpose of the government’s inquiry is regulatory and not criminal prosecution. Here, the government’s purpose under the Bank Secrecy Act was essentially regulatory. It was important to the Court that the activity being regulated (participation in offshore banking) is not inherently unlawful, and thus information reporting in regard to it is not essentially related to criminal prosecution.

b. And, the information requested is contained in documents of a kind the regulated party customarily keeps. In this situation, bank customers would generally keep basic account information both to comply with required reporting of offshore bank information and to be able to access their accounts.

c. And, the records have public aspects which render them at least analogous to public documents. The records here had public aspects because individuals had to retain them for five years and provide them to the government upon request. Further, such records were required to be kept to aid in the enforcement of a valid regulatory scheme.

Thus, taxpayers under investigation in regard to offshore bank accounts will not be able to rely on the Fifth Amendment to deny access to their banking records.

In re: M.H., 108 AFTR 2d Para. 2011-5203

Sunday, August 14, 2011


Article X, section 4(c), of the Florida Constitution provides that “[t]he homestead shall not be subject to devise if the owner is survived by spouse or minor child.”  What happens if a Florida resident acquires property while he has a minor child and lives in it as his primary residence – but instead of acquiring property in his own name he acquires it as joint tenant with rights of survivorship with a third party, and then dies?

Option One – the property is not the decedent’s homestead, and it passes entirely at his death to the other joint tenant.

Option Two – the property is the decedent’s homestead, and his interest in the property does not pass to the joint tenant as an invalid devise under the foregoing Constitution provision.

These were the facts in Marger v. De Rosa, wherein the administrator ad litem for the estate of Mr. Marger asserted Option Two – that is, the homestead nature of the property trumped the JTWRS status of ownership.

Both the trial court and the Second District Court of Appeals found for Option One. The appellate court noted:

“This language [in the Constitution] does not restrict the type of interests in real property a person may acquire or how a person may title his or her property. Instead, it restricts a person's attempt to devise property he or she owns when homestead status has attached to that property.”

Since the property was not homestead property at the time of the joint purchase, the homestead restriction was determined not to apply.

Marger v. De Rosa, 57 So.3d 866 (2nd DCA 2011)

Thursday, August 11, 2011


The IRS has issued detailed guidance regarding estates of 2010 decedents that elect out of federal estate tax. The guidance has lots of details, and should be reviewed by any persons involved with the estates of decedents that died in 2010.

While not intended as a comprehensive analysis of the new guidance, some highlights and interesting points follow:

1. Form 8939 will be used to opt-out of estate tax (the Section 1022 election), and to allocate available basis step-up among eligible assets.

2. Form 8939 is due no later than November 15, 2011. Since the form is not out yet, estates should start gathering information now. The are only limited circumstances for an extension or a later amendment.

3. A conditional Form 8939 (one that is effective only if assets exceed the remaining unified credit amount of the decedent) is not allowed.

4. If the Section 1022 election is made, the decedent’s GST exemption is allocated by attaching Schedule R to the Form 8939. For decedents that made a 2010 inter vivos gift, the Form 8939 is not used to elect out of the automatic allocation of GST exemption. If the gift was made before December 17, 2010, the time for filing a Form 709 with the election out is extended to September 19, 2011. If the gift was on or after December 17, the regular 2010 Form 709 filing dates apply.

5. Note that the Form 8939 must report ALL of the decedent’s assets, not just those for which a basis step-up allocation applies (except for cash and IRD items, and noncitizens who are nonresidents only report U.S. assets). The form must also report property that was required to be included on another donor’s Form 709 if gifted to the decedent within 3 years of his or her death.

6. The executor must provide a statement to each recipient of property acquired from the decedent within 30 days of the filing of the Form 8939.

7. If the decedent creates separate interests in an item of property (such as a life estate and remainder), the basis interest must be allocated to all such separate interests if an allocation to any portion is desired.

If the opt-out election is not filed, the estate must file a Form 706, unless the assets of the decedent total less than the decedent’s available unified credit amount. Those estates that do not file a Form 706 because the value of its assets do not require one and for which an opt-out election does not make sense should NOT file a Form 8939 since this could act to reduce the available amount available to step-up the basis in the decedent’s assets.

Notice 2011-66  and Revenue Procedure 2011-41

Saturday, August 06, 2011


In the previous posting on June 23, 2011, we discussed the use of charitable lid/defined value clause planning, and how it had recently been upheld in by the Tax Court in Hendrix. Such planning has now successfully weathered another attack – this time in the 9th Circuit Court of Appeals in Petter. This time, the IRS dropped its public policy objections and focused on denial of the gift tax charitable deduction for additional amounts passing to charity by reason of a revaluation of gifted or sold property under regulations prohibiting a condition precedent to a deductible charitable gift.

In Petter,  the taxpayer transferred UPS stock to a family LLC. She then gifted LLC units to two trusts and a charitable organization. The gift was accomplished via a transfer of a fixed number of LLC units. A formula was employed to allocate the transferred units between the two trusts and the charitable organization. The amount allocable to the trusts was intended to equal the value of the taxpayer's unused unified tax exemption. More specifically, the allocation clause allocated to each trust a portion of the LLC units equal to "one-half the [maximum] dollar amount that can pass free of federal gift tax by reason of Transferor's applicable exclusion amount allowed by Code Section 2010(c). Transferor currently understands her unused applicable exclusion amount to be $907,820, so that the amount of this gift should be $453,910." To the extent the value of the transferred LLC units exceeded this allocation to the trusts, such remaining LLC units from the transfer were allocated to the charitable organization. The transfer documents also provided that  if the value of the units was finally determined for federal gift tax purposes to be different than as originally computed, the trusts and charitable organization would reallocate those units amongst themselves in accordance with that final determination. Subsequent to the gift, a sale of additional LLC units to the two trusts was undertaken on an installment basis. The sold units were allocated to the two trusts and another charitable organization in a similar manner.

The LLC interests were eventually revalued higher than the value used on the Form 709. This triggered additional units passing to the charitable organizations.

Generally, gifts to charities are not subject to gift tax pursuant to the gift tax charitable deduction under Code Section 2522(a). However, no charitable deduction is allowed "[i]f, as of the date of the gift, a transfer for charitable purposes is dependent upon the performance of some act or of the happening of a precedent event in order that [the transfer] might become effective" (emphasis added). Treas. Reg. Section 25.2522(c)-3(b)(1). The IRS argued that the transfer of the additional LLC units to the charities is subject to a condition precedent within the meaning of that regulation. The condition precedent is the IRS audit that ultimately determines that the reported value of the LLC units is too low and triggers the additional transfer.

The IRS further bolstered its argument by citing Code Section 2001(f)(2).  That provision provides that a value as finally determined for gift tax purposes means the value shown on the taxpayer's return unless the IRS audits and challenges the value. The IRS thus argued that under the taxpayer's formula, the value, and thus the amount passing to charity, was fixed by the value reported on the gift tax return. Any IRS action to change that value was a subsequent action, and thus a necessary precedent event, to increase what passes to the charity - thus that increase would be a prohibited precedent event to the transfer at the time of the gift.

The appellate court found that there was no condition precedent -  the Taxpayer's transfers became effective immediately upon the execution of the transfer documents and delivery of the units. The only post-transfer open question was the value of the units transferred, not the transfers themselves. The court stated the "clauses merely enforce the foundations' rights to receive a pre-defined number of units...Thus, the IRS's no way grants the foundations rights to receive additional units." Similarly, the court noted "that value was a constant, which means that both before and after the IRS audit, the foundations were entitled to receive the same number of units. Absent the audit, the foundations may never have received all the units they were entitled to, but that does not mean that part of the Taxpayer's transfer was dependent upon an IRS audit." If the charities did not agree with the reported value, they could have brought suit to determine the proper value applying the gift tax definition and thus did not need an IRS audit to get all they needed (although the court notes this was unlikely to occur).

The appellate court overcame the IRS' argument that Code Section 2001(f)(2) set the value as finally determined for gift tax purposes at the returned value, by noting that Code Section 2001(f)(2) applies to set the value as finally determined for purposes of gift only for purposes of applying Code Section 2001(f)(1) which relates to determination of values only after the period for assessment of tax has expired. Code Section 2001(f)(2) does not apply to set that value for other Chapter 12 gift tax purposes.

The decision is important for several reasons. It applies a well-reasoned and supported appellate court defeat to the IRS' condition precedent argument. Also, it may signal IRS surrender on the public policy arguments it has been asserting, per its withdrawal of those arguments from the appeal issues. Lastly, another Circuit Court of Appeal is voicing its approval of the formula clauses.

The appellate court invites the IRS to seek a change in the law if it is troubled by these clauses. One hopes that Capital Hill would resist such changes. While the clauses can be subject to abuse, for the majority of taxpayers they provide a mechanism to allow them to make full use of available transfer tax exemptions without being subject to the risk of taxes arising from challenges to a good faith valuation.

Petter v. Commissioner (9th Cir. 2011)

Tuesday, August 02, 2011


Noncompetition covenants are common when interests in businesses are sold. The buyer typically would like to amortize (deduct) the cost of the covenant as quickly as possible, so as to get the tax savings from the deduction sooner rather than later. Absent any special statutory treatment, the cost of the covenant is usually written off over the number of years that the covenant applies.

However, if Code Section 197 applies to the covenant, the buyer must amortize it slowly, over a 15 year term. In a recent case, the First Circuit Court of Appeals held that Section 197 applies to a one-year covenant not to compete when it was issued in conjunction with a redemption of a 23% corporate shareholder.

The case turned on whether Code Section 197(d)(1)(E) characterizes such a covenant as a section 197 intangible. That section includes as a section 197 intangible “any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof.”

The taxpayer argued that the term "thereof" at the end of this provision requires that the interest sold any trade or business must be substantial, and that the 23% sold here is not substantial. Thus, the covenant would not be a section 197 intangible.

The IRS argued that the term "thereof" does not not modify the term "interest" but instead modifies the term "trade or business." Applying the IRS' interpretation, there are thus two circumstances that will treat the covenant as a section 197 intangible. The first is the purchase of an INTEREST in a trade or business, such as stock, no matter how small that interest is. The second is the purchase of assets of the trade or business (that is, the purchase of the trade or business itself), in which case the sale must be at least of a substantial portion of the total assets to trigger section 197 treatment.

At first, the IRS interpretation appears strange, if not outright ridiculous. However, if you look at it long enough, it does appear to be more reasonable, and if you keep looking at the clause, you soon have no idea what it really means.

The Tax Court accepted the IRS’ interpretation. It based this in part on the policy of Code Section 197 to discourage over allocation of purchase price to a covenant by a buyer. However, this is probably not a fair basis on which to base the interpretation, since in a stock sale there is a natural tension between the buyer and seller that limits the ability of the buyer to over allocate purchase price to a covenant not to compete. This is because the covenant not to compete will be ordinary income to the seller, while the allocation of sale proceeds to the asset being sold would generate only capital gain. The buyer will thus be bargaining for a lower allocation of proceeds to the covenant not to compete.

Nonetheless, with this case the IRS' interpretation of Code Section 197(d)(1)(E) must be given due consideration in regard to any sales of interests in business entities that are accompanied by a covenant not to compete, no matter how small the percentage interest that is being sold.

Recovery Group, Inc., 108 AFTR 2d ¶ 2011-5114 (CA 1 7/26/2011)