Florida Eliminates the Benefit-of-the-Beneficiary Rule

Historically, the settlor’s intent is the key item in guiding the administration of a trust. Further, a settlor has a pretty free hand in crafting how a trust will operate, subject to some public policy limitations and legal doctrines (such as the Rule Against Perpetuities).

Knowingly or unknowingly, Florida may have elevated the interests of the beneficiaries of a trust over the settlor’s desire and intent, when it adopted provisions from the Uniform Trust Code into the Florida Trust Code. In adopting these UTC provisions, the Florida Trust Code adopted the benefit-of-the-beneficiary rule. That rule is a mandatory, nonwaivable requirement that a trust and its terms be for the benefit of the trust beneficiaries. The rule can be interpreted to swing the balance in the enforcement of trust provisions away from what the trust settlor desired and towards what is deemed to be in the best interests of the beneficiaries.

What are the potential implications of the benefit-of-the-beneficiary rule? If priority is given to benefitting the beneficiary instead of allowing full dispositive freedom to the settlor to construct a trust as he or she desires, then perhaps spendthrift clauses become unenforceable. Perhaps a court may find a direction not to diversify trust assets as not benefitting a beneficiary, and refuse to enforce it (or worse, holding a trustee liable for failure to diversify after the fact). Other provisions in a trust that a court deems unreasonable or that do not to benefit a beneficiary may be likewise modified by a court or determined to be unenforceable - these may include provisions barring modification or early termination of a trust, or provisions that provide a tax benefit to the settlor but not to the beneficiary. And aside from the possible change or enforceability of trust provisions, there will likely be an increase in litigation as beneficiaries seek to press these issues, rightly or wrongly.

Both the comments to the Uniform Trust Code and in the Restatement (Third) of Trusts note the swing, and the potential in the disruption in the administration and interpretation of trust  documents by that swing, so these concerns are more than just barking at shadows by those who have raised them.

Principally because of these issues, in a recent bill (HB 277) that cleared both houses of the Florida legislature and is awaiting the governor’s signature, the benefit-of-the-beneficiary rule was removed from the Florida Trust Code. Below are the key changes to the statute (items in bold have been added, and strike-out language has been removed:

Applying Overpayments of Tax to Tax and the Offshore Penalty in the OVDP Program

The OVDP program allows taxpayers to remedy deficient disclosure filings relating to offshore accounts for a fixed penalty amount. As part of the program, taxpayers must file either original or amended tax returns which include the income earned by their foreign accounts for the most recent eight tax years for which the due date has passed. In addition to other applicable penalties, an offshore penalty is imposed in lieu of other penalties relating to failure to properly disclose foreign accounts.

In preparing or amending returns for the prior eight years, it is possible that an overpayment of tax and one or more of those years can arise. The issue has been raised whether this overpayment of tax can be applied towards taxes due in one or more of the other seven years, and/or towards the offshore penalty.

A recent Chief Counsel Advice advises that the answer is "sometimes." One prerequisite that will always apply is that a claim for refund for the overpayment year(s) must be filed. If a refund is allowable under general applicable statute of limitation rules (generally a refund claim must be filed within three years of the due date for the subject return or within two years of payment of tax for the year per Code §6511), then offsets are permitted. However, since taxpayers are going back eight years, it is likely that the earlier years will be outside the general statute of limitations period on refunds and thus any overpayments in those years will not be available for refund or offset.

Note that the statute of limitations under the OVDP program for the eight years of filings is extended as part of the program. The CCA notes that if the statute is extended within the general refund statute of limitations period, then the statute of limitations for these refund offsets will likewise remain open during the extended statute of limitations period.

CCA 201719026 (May 12, 2017)

Florida Wills go Electronic

A bill has cleared both Houses of the Florida legislature authorizing electronic wills and electronic will execution in Florida. Absent an unexpected veto by Gov. Scott, the last wills of testators may now precede them into the cloud(s).

The new statute has endeavored to reduce avenues for fraud and misdeeds. Only time will tell whether electronic wills will be more or less subject to fraud and improper usage than paper wills. Paper wills are not affected by the new legislation, except as they may be revoked and replaced by electronic wills.

Here are some key provisions and observations regarding the new statutes, based on my initial review:

     1. If the testator signed electronically, so must the witnesses. The two witness requirement remains in effect.

     2. Electronic signatures are similar to what you may be familiar with in regard to opening bank and brokerage accounts online, where the signing person types his or her name or otherwise marks the document electronically. It does not require the signatory to affix a digital signature - that is, the signatory need not establish a digital online identity with a third-party provider that is then affixed to an electronic document.

     3. The testator and the two attesting witnesses must still be in the presence of each other. However, commencing in 2018, such presence requirement may be met by a live video conference arrangement between the signatories. Such videoconferences must meet numerous statutory requirements, including the participation of and attestations by either an attorney or a notary public, a timestamp recording of the conference, and the verbal answering of six questions by the testator. Such videoconference witness presence requirements will also extend to living wills.

     4. If the will contains a self-proving affidavit, the will and affidavit must be electronically stored with an authorized custodian. The custodian must be a Florida resident or entity, must obtain a surety bond and required liability insurance, and must meet numerous requirements as to maintaining its electronic database, limiting access to the electronic records, and otherwise dealing with and releasing the electronic records. Thus, absent the involvement of such a third-party custodian, electronic wills will not be self proved, and will be admitted to probate only upon the testimony of the two witnesses or if they are not available, of two disinterested persons. Custodians will be responsible for the negligent loss of their electronic records.

     5. Persons drafting electronic wills should include in the wills the designation of the custodian, and also designate who has access to the electronic will if such access is intended to be granted to persons otherwise than those authorized in statute.

     6. These electronic rules extend to the execution of revocable trusts that have testamentary provisions.

These new rules should facilitate the business of Internet-based will preparation companies. They may also facilitate the signing of wills prepared by attorneys when it is not practical for the testator to come to the attorney's office or otherwise sign with proper formalities. Perhaps larger law firms may establish in-house qualified custodian capacities for the benefit of their clients, but given the obligations imposed on qualified custodians and liability exposures I would think we will soon see third-party companies doing business in Florida that offer such qualified custodian capacities along with online video-conferencing facilities and procedures to assist in the signing process. I also wonder whether once electronic signing becomes more routine whether most attorneys will adopt electronic signing in their offices (through the use of third-party software and custodians) in lieu of traditional paper wills and pen on paper signing.

Tax Changes in the Republican Bill to Replace Obamacare

Most of the attention on the bill relates to coverage and subsidy changes. However, the bill does have some significant tax relief included. While the bill still faces changes to get through both houses of Congress and the existential question whether the Senate will pass it, it is not too early to take a look at these changes.

One key change is to eliminate the 0.9% Medicare surtax on wages. Currently, earners pay a 1.45% payroll tax on wages up to $200,000 ($250,000) if married. Earnings above that level are subject to an additional 0.9% payroll tax. This  0.9% payroll tax will go away under the bill (but not until 2023).

Another is the elimination of the 3.8% Medicare tax on investment income. As a tax practitioner, I've got my fingers crossed on this one. From day one, I couldn't stand the complexity of this tax - the whole statutory scheme was crazily complicated for such a small tax. I would love to see the net investment income definitions, modified AGI definitions, rules for applying to trusts, and interfacing with the passive loss rules swept away into the dustbin of tax history. If I never see the acronyms NII and MAGI again, it will be too soon.

Health Savings Accounts (HSAs) would also get a boost - the amount of deductible contributions to an HSA in a year would double from current levels. The bill would also end the Obamacare prohibition on using HSAs to pay for over-the-counter medications. Siimilar benefits will apply to flexible spending accounts.

After 8 years of tax proposals that pretty much only increased taxes (except perhaps as to the increased exemption amounts for transfer taxes), it is a strange feeling to see tax incentives and reductions once more on the table.