A recent Florida Bar Journal article caught my eye this morning.  The article (which, not surprisingly, was submitted on behalf of the Trial Lawyers Section) is a forceful argument in favor of allowing Florida trustees and personal representatives to be subject to punitive damages. 

The premise of the article is that Florida courts should reject the traditional principles that prohibit the award of punitive damages against Florida fiduciaries.  This traditional rule is based in the archaic common law distinction between courts of law and courts of equity.  Courts of law typically involve jury trials, where jurors could decide on the need for additional damages beyond the amount necessary to make the plaintiff whole.   Courts of equity were traditionally overseen by a single judge (chancellor), and folks just weren’t comfortable giving the chancellor the authority to award punitive damages in the absence of a jury trial. 

Courts that follow the modern rule (which just sounds better than the minority rule) believe that the distinction between law and equity has been thrown out the window.  Florida circuit courts are no longer bifurcated into law and equity, and the rules of civil procedure use only one form of action allow equitable claims to be joined with legal claims.  The erosion of the distinction between law and equity lead some courts (and the authors) to conclude that there is no longer any basis for disallowing punitive damages in equitable cases, particularly in suits against fiduciaries. 

But does the consolidation of claims into one form of action necessarily mean that there is no longer any distinction between law and equity?  At least one court has answered in the negative.  In R.S. #17 Corp vs. Cornblit, the 3^rd DCA stated (with dissent):

We are of the opinion that the consolidation of law and chancery procedure, under the revised rules, did not abolish chancery or law, and that the substantive law should be applied to the actual allegations and relief sought in a complaint or petition as was done prior to the adoption of the revised rules. Rule 1.040, Florida Rules of Civil Procedure, 1967, 30 F.S.A., simply provides that there shall be one form of action to be known as “civil action.”

This is where the point of disagreement lies.  Courts that adopt the modern rule believe that there is no longer any distinction between law and equity and that the traditional rule should be discarded.  Those that still hold to the traditional rule believe that, while the concepts of law and equity have perhaps drawn closer to each other, there is still a distinction between the two that justifies the prohibition against the award of punitive damages in equitable matters. 

The second part of the article is scheduled to be published in December, where the authors will advocate for the modern rule and apply it specifically to the fiduciary and probate context. 

What do you think?  Are there any policy reasons for protecting  trustees and personal representatives from liability for punitive damages?

A recent amendment to the Florida Probate Code allows surviving spouses to opt out of the automatic life estate that is given to surviving spouses under Florida law.  Instead, the surviving spouse can claim a 50 percent tenant-in-common interest in the homestead property.  And if the surviving spouse is incapacitated, her guardian can make the elector for her.

The new law provides much-needed relief from the so-called Florida homestead trap.  The trap was created by the automatic life estate in homestead property that Florida law provides to surviving spouses.

A life estate can be a useful mechanism in many situations.  It assures that the life tenant has property for his or her life, with the remainder passing to other beneficiaries automatically (outside of probate) at the life tenant’s death.  But the life estate has a few serious drawbacks, including:

1. Impaired Ability to Deal With the Property. The life tenant usually needs the consent of the remaindermen to deal with the property.
2. Potential for Family Conflict. The life tenant and remainderman are stuck in a co-ownership relation, with each are responsible for separate categories of expenses.  Conflict can result if one of the parties cannot or will not pay his or her respective share.
3. Valuation Issues. It is difficult to tell how much the life estate and remainder interest are worth.  If the property is sold, there could be an argument over who gets what from the sale proceeds.

But perhaps the most significant drawback of a life estate is that traditionally there has been no escape.  This is where the “trap” comes in.  The judicial remedy of partition—which allows co-owners to get out of the co-ownership arrangement—is only available to owners with concurrent interests in property (such as tenancy in common).

But with the life estate, the interests of the life tenant and remaindermen are possessory at different points in time. During the lifetime of the life tenant, the remainderman  have no possessory interest; after the death of the life tenant, the heirs of the life tenant have no possessory interest.  The remedy of partition is not available for this non-concurrent form of ownership. So the life tenant has had no mechanism to terminate the life tenancy.  As a result, the life tenant is stuck in a situation where he or she is responsible for increasing responsible taxes, property insurance, repairs, homeowner or condo association fees, or other expenses of homeownership, without the ability to sell the property without the involvement of the life tenants.

The new legislation is designed to remedy this situation.  By giving the surviving spouse the option of electing a tenancy in common in lieu of a life estate, the legislation makes the remedy of partition available to the life tenant.  If the life tenant does not want to be in the tenancy, he or she can simply elect tenancy-in-common in lieu of the life tenancy and seek partition of the property. The life tenant has six months from the decedent’s death to make this election.

Want to start a fight between Florida estate lawyers?  Ask a handful whether or not it is prudent to transfer homestead property to a trust.

Estate lawyers use living trusts (also called revocable trusts) for a number of reasons, including the potential for probate avoidance, better incapacity planning, and preserving privacy.  Some would argue (and I would agree) that the benefits of living trusts are often oversold.  But they are good estate planning tools nonetheless … if they fit a client’s goals and are used correctly.

One of the most important steps in using a living trust is funding—transferring assets into the trust. It is important that a person’s asset profile match his or her estate plan.  An unfunded trust—in which assets remain in the client’s name—does not avoid probate or otherwise achieve the purpose of having the trust in the first place.

In many states, transferring homestead property to a living trust is routine.  But Florida has a tricky set of homestead rules that require it to be considered separately from other assets.  Many Florida estate attorneys think that transferring property to a trust is a bad idea for several reasons, including:

1. Possibility of risking homestead property tax benefits
2. Possibility of losing insurance coverage when the homestead property is transferred from the trust after the grantor’s death
3. Possibility of causing the homestead property to become a countable asset of the grantor for purposes of determining eligibility for Medicaid benefits
4. Possibility of losing the asset protection benefits given to homesteads in Florida

Others believe that these risks can be mitigated with proper planning.  Special provisions can be included in the trust to address some of these concerns.  Some Florida estate lawyers believe that the benefits of probate avoidance justify taking a few extra steps to move the homestead property into the trust.

The debate often comes down to different ways in which Florida estate lawyers approach estate planning.  It is tempting to adopt a one-size-fits-all approach and apply it to every client who comes in the door.  One attorney decides that he doesn’t “do” living trusts, so every client gets a will-based estate plan.  Another attorney decides to make living trusts a “profit center” for her firm and starts marketing them to all clients, whether they need them or not.

These approaches miss the point: it is the client’s goals that should control.  If a client’s goals can best be achieved through a will-based estate plan, that’s what the attorney should use.

But if a living trust is a good fit for the client’s goals, the attorney should consider it notwithstanding the fact that trusts are sometimes oversold.  And if there are compelling reasons to transfer the homestead property into the trust and risks can be mitigated, transfer it!

It all comes down to what tools will work best to reach the client’s goals without extraordinary risk.

A life estate is an interest in property for the life of an individual—called a life tenant—that passes to someone else at the death of the life tenant.  The person who receives the property after the death of the life tenant is called a remainderman.  In a recent case, a Tennessee court had to interpret a will that left a life estate to a life tenant with a remainder to her “bodily heirs.”

Robert Stone’s will left a life estate to his daughter Nellie, with the remainder to go in equal shares to Nellie’s “bodily heirs.”   Nellie had three children, but two of those children died before Nellie did. One of the deceased children was survived by four children (Nellie’s grandchildren).  The question before the court was whether Nellie’s grandchildren could be considered Nellie’s “bodily heirs.”

“Bodily heirs” (sometimes called “heirs of the body”) is antiquated language for lineal descendants.  The term is intended to distinguish between a person’s natural descendants and the person’s other heirs, such as a spouse or friend.  Like most states, the Tennessee court defined “bodily heirs” to mean lineal descendants of a specific person who would inherit the property through intestate succession. “Bodily heirs” does not necessarily mean “children.”  The term includes generations, extending down to grandchildren, great grandchildren, etc.

The court held that biological grandchildren qualify as lineal descendants of their grandparents. If Nellie’s four grandchildren were her biological grandchildren (as opposed to adopted grandchildren), then they will be able to inherit the property under the terms of the will. There was some question as to which of the four were actually biologically related to Nellie or were adopted or stepchildren of Nellie’s son. The appellate court remanded the case to determine which ones were biological grandchildren of Nellie so that those individuals could inherit their portion of the estate.

Here is a lesson in the importance of clear drafting.  If Mr. Stone’s will had included clear definitions of the class of beneficiaries he intended to benefit (instead of relying on arcane language like “bodily heirs”), this confusion could have been avoided. If the will isn’t clear enough, then the courts are called on to interpret the language of the will in accordance with binding precedent.

Chambers v. Devore, No. W2008-02548-COA-R3-CV, 2009 WL 3739443 (Tenn. Ct. App. Nov. 9, 2009).