Florida Court Provides a Lesson in Nuncupative and Notarial Wills

Many lawyers have not heard the terms “nuncupative wills” and “notarial wills” since they took their bar exams (and some perhaps not even then). A recent Florida case provides us with a real world application of these terms.

In the case, a testator executed a will in New York before 3 witnesses and signed it at the end. The will expressly was limited to the U.S. property of the testator. Later, as an Argentinian resident, testator entered into a will in Argentina. This will had different beneficiaries than the New York will, and it also revoked all prior wills. A dispute arose whether the New York will could be probated in Florida, or whether the Argentina will could be (which would act to revoke the New York will).

The Argentina will was not signed by the testator, and the witnesses also did not sign. Here is the procedure that was followed:

The Testator orally pronounced her testamentary wishes to a notary who transcribed them. The Argentine will sets forth that the Testator made her attestations before the notary in the presence of three witnesses who were identified by name, address, and national identity card number. The Argentine will explains that the notary typed up the testamentary wishes and presented the typed document to the Testator, who declined to read it. The document was then read back to the Testator, who orally approved it in the presence of the witnesses. The notary signed and stamped the will, but the Testator and the witnesses did not sign it.

Florida law requires the testator to sign a will at the end and also requires two signing attesting witnesses. Fla.Stats. Sec. 732.502(1). So at first blush, the Argentina will cannot be probated in Florida. Fla.Stats. Sec. 732.502(1).

Florida does relax its execution requirements for wills signed by a nonresident of Florida. Fla.Stats. Sec. 732.502(2) provides in part “[a]ny will, other than a holographic or nuncupative will, executed by a nonresident of Florida, either before or after this law takes effect, is valid as a will in this state if valid under the laws of the state or country where the will was executed.” Since the will was admitted to probate in Argentina, it purportedly was valid in Argentina and thus this statute would allow its probate so long as it was not a holographic or nuncupative will.

So was the will “nuncupative?” Florida’s Probate Code does not provide a definition, and there is little Florida case law on the issue. Black’s Law Dictionary defines a nuncupative will as a “will made by the verbal declaration of the testator, and usually dependent merely on oral testament for proof.” The classic example is a testator who makes a declaration on his deathbed. Since the will at issue was orally dictated and not signed, it sure looks like a “nuncupative will.”

The proponents of the Argentina will attempted to get around the Florida restrictions by characterizing it as a “notarial will.” Fla.Stats. Sec 733.205 provides “[w]hen a copy of a notarial will in the possession of a notary entitled to its custody in a foreign state or country, the laws of which state or country require that the will remain in the custody of the notary, duly authenticated by the notary, whose official position, signature, and seal of office are further authenticated by an American consul, vice consul, or other American consular officer within whose jurisdiction the notary is a resident, or whose official position, signature, and seal of office have been authenticated according to the requirements of the Hague Convention of 1961, is presented to the court, it may be admitted to probate if the original could have been admitted to probate in this state.”

So was the will a “notarial will?” Again, Florida’s Probate Code does not define the term. The appellate court quoted a treatise that indicates a notarial will general involved four stages of creation:

First, the testator makes an oral declaration of the will to the notary and two witnesses. Second, the notary (or an assistant) reduces the will to written form. Third, after being read aloud by the notary, the will is signed by testator, notary, and witnesses, with the notary adding information about the execution, including, usually, its date and place and the names of witnesses. Finally, the will is retained by the notary and, in some countries, registered in a central register.

The third element was missing here – the testator and witnesses did not sign the will. But even if the will was a notarial will, there is the last requirement of Fla.Stats. Sec. 733.205 that still must be met – that the original will could have been admitted to probate in Florida. So if the will was nuncupative, then the fact that it was a notarial will would not help its admission.

The appellate court noted that it is possible to have a notarial will that is not nuncupative (i.e. it was signed by the testator). In that case, Florida would admit it. But unsigned notarial wills are nuncupative and thus cannot be admitted – thus the appellate court denied the admission of the will.

The appellate court closes its opinion with a call to the Florida legislature to make their job easier by enacting some statutory definitions for these these terms.

Malliero v. Mori, Mori & Corallo, 3rd DCA (September 30, 2015)

Applicable Federal Rates – October 2015

No Charitable Set Aside Deduction for Estate Due to Litigation

Under Code Section 642(c)(2) an estate may claim a current charitable contribution deduction for income tax purposes, notwithstanding that the income earned will not be paid or used for a charitable purpose until sometime in the future. That is, the estate need not actually pay income over to the charity in the year it is earned to obtain a charitable deduction – it is enough if the funds are set aside for later payment to the charity.

In a recent Tax Court case, the remainderman of the estate was a church. However, at the time the income tax return for the year at issue was filed (albeit filed late), there was ongoing litigation regarding who was entitled to what from the estate. Income earned during the year that appeared to be otherwise due to the church was now at risk of being diverted to pay other claimant beneficiaries and litigation costs.

Under Regulations, no charitable set-aside deduction deduction will be available if there is a risk that the set aside income may not find its way to charity. They require the estate to prove that the possibility that the amount set aside for the charitable beneficiaries would go to noncharitable beneficiaries be so remote as to be negligible. Treas. Regs. Sec. 1.642(c)- 2(d). In the case at issue, the IRS sought to disallow the deduction due to the risk that the set aside income could be diverted to noncharitable beneficiaries and expenses.

The Tax Court sided with the IRS and disallowed the deduction. The estate argued that due to the advanced state of settlement negotiations, there was little risk that the income would not go to two churches (at some point, another church was added as a beneficiary) at the time the return was filed. The court noted that at the time of the return filing, even if the pending settlement was finalized, the shares of the churches were still uncertain since the issues of legal fees and coexecutors’ commissions remained unsettled. Also, until that issue was resolved, the will was not validated. Based on these facts, the risk of loss of funds was not “so remote as to be negligible.”

This is the second case in 2015 with similar facts and a similar result. The first case was Estate of Eileen S. Belmont, et al.v. Commissioner, 144 T.C. No. 6, which I wrote about here. Estates and trusts seeking a set-aside deduction that are engaged in litigation should consider themselves warned that the IRS will scrutinize such deductions and contest them when appropriate, and that the Tax Court is apt to side with the IRS on these issues.

Estate of John D. DiMarco, TC Memo 2015-184.

3rd Quarter 2015 Federal Tax Overpayment and Underpayment Interest Rates

Florida Supreme Court Gives Expansive Protection to Husband’s Separate Property under a Prenuptial Agreement

A divorcing wife asserted that because a 20 year old prenuptial agreement made no specific reference to enhancement in value of nonmarital property attributable to marital labor or funds, the enhancement in value to the husband’s assets during the marriage is subject to equitable distribution. Similarly, the agreement did not specifically provide that the husband’s earnings will be his separate property, so the wife sought a finding that these were not protected under the prenuptial agreement.

The agreement did provide that the property “owned or hereby acquired by each of them respectively” would be free of claims of the other spouse. It also provided that “each party agrees that neither will ever claim any interest in the other’s property,” and if one party “purchases, [a]cquires, or otherwise obtains, property in [his/her] own name, then [that party] shall be the sole owner of same.”

Both the District Court of Appeals and the Supreme Court found that the above general waiver language was broad enough to protect enhancement in value of property and the husband’s separate earnings as separate property of the husband, thus denying the wife an interest in those assets upon divorce. While the ruling is fact specific based on the specific language of the agreement, it does call into question other lower court decisions that found earnings and appreciation to be marital property subject to division when they were not specifically described as separate property in the agreement.

Of course, these issues can be entirely avoided by providing specific waivers as to these items in the prenuptial agreement.

As an aside, the fairness of a marital agreement can be an issue in the enforceability of that agreement in Florida. In Casto v. Casto,  508 So.2d 330 (Fla. 1987), the Florida Supreme Court found that unfairness or unreasonableness can negate enforceability, although full and complete financial disclosures will still allow for enforceability even if the agreement is unfair or unreasonable. Casto continues to apply to postnuptial agreements in Florida. Prenuptial agreements are now governed by Fla.Stats. Section 61.079 – that statute similarly voids prenuptial agreements if unconscionable, with a savings if there is full and complete financial disclosure (measured at the time of the agreement and not at divorce) even though there were disproportionate wealth between the spouses, due to the $1.9 million the spouse would obtain under the agreement.

Hahamovitch v. Hahamvitch, Florida Supreme Court Case No. Sc14-277 (September 10, 2015)

Taxpayers Must Correctly Write-Off Balances for Partial Bad Debt Deduction

Code Section 166(a)(2) allows for a deduction for partially worthless debts for business debts. One of the requirements to be able to deduct is that the amount deducted “was charged off” on the books during the tax year.

In a recent Legal Advice issued by Field Service Attorneys, the taxpayer put a contra-asset account on its balance sheet to reflect a partial loss. The issue was whether that was sufficient to be a charge off on the books for this purpose.

The government attorneys noted  the case of International Proprietaries, Inc. v. Comm., 18 TC 133 (1952) that the creation of a reserve account, without an actual reduction in the accounts receivable account, was not enough to constitute a charge off – even though it did reduce net income. In the current analysis, the attorneys equated the creation of a contra-asset account as nothing more than a reserve.

The taxpayer sought to rely on Brandtjen & Kluge, Inc., 34 T.C. 416 (1960). In that case, the taxpayer increased its account entitled “Reserve for Doubtful Notes and Accounts” and debited bad debts, reducing its income. So far, pretty similar facts to our taxpayer. However, there, the taxpayer also made an adjusting journal entry in a new ledger account entitled “Reserve for Loss” with an explanation being “To charge bad debts with loss fro Canadian operation.” The court found that such account and explanation indicated a “sustained loss and not an anticipated future loss” and allowed the deduction.

The Legal Advice concludes that the current facts were closer to International Proprietaries than to Brandtjen, and thus disallowed the current loss.  

Thus, what the IRS and courts are trying to determine is whether the book entry shows a provision for losses anticipated in the future, or whether it shows a current loss and write-off. To avoid the issue entirely, taxpayers would be best served by actually reducing the balance of the receivable account to obtain partial worthlessness loss treatment.

As an aside, a taxpayer can defer the charge-off and deduction to a later year when partial worthlessness is greater, or wait to deduct the entire debt amount in the year of total worthlessness. For the taxpayer at issue here, the loss of the deduction for partial worthless should not result in a total loss – it should be able to deduct it in a later year (not beyond the year of total worthlessness) by doing the correct charge off on its books.

Legal Advice Issued by Field Attorneys 20153501F

No Section 121 Gain Exclusion When Seller of Residence Obtains it Back in Foreclosure

Marvin sold his principal residence for $1.4 million on an installment basis. He reported current gain of $657,796, and excluded $500,000 of that gain from income under Code Section 121 as a sale of a principal residence. The remaining $157,796 of gain was reported on the installment basis. After the sale, Marvin reported $56,920 of gain from cash installment payments received.

The buyer defaulted on his debt and Marvin foreclosed and took the property back. He recognized the remaining $97,153 in long-term capital gains, per the reacquisition of real property rules of Section 1038. Marvin did not resell the residence within a year of his reacquisition.

The IRS asserted that the original $500,000 Section 121 exclusion could not be used to offset gain on the sale and reaquisition, and thus applying the rules of Section 1038 Marvin had gain of $448,080 at the time of the foreclosure and reacquisition. Marvin argued that just because he foreclosed on the property does not mean that the initial $500,000 gain exclusion should not be available to him for purposes of the Section 1038 gain computation.

The Tax Court agreed with the IRS. It noted that Congress did put a special rule in Section 1038(e) that provides if a principal residence is reaquired, and then is resold within 1 year thereafter, the original Section 121 exclusion will continue to apply. Since Marvin did not resell within a year, he could not use this provision. The Tax Court reasoned that if the original Section 121 exclusion applied in a Section 1038 computation of gain for persons that did not resell within 1 year, then there would be no need for Section 1038(e) and it would be a meaningless Code provision. Thus, to give effect to Congress putting Section 1038(e) in the Code, Congress must have recognized that for situations when there is no resale within a year, that Section 121 would not apply.

DeBough, 106 AFTR 2d ¶2015-5192 (CA8 8/28/2015)