A recent appellate court decision from Florida’s Fifth District Court of Appeal provides yet another reason for one to plan for the disposition of their estate in such a manner that probate can be avoided.

The case is Bernadette Lauritsen, as Personal Representative of the Estate of William C. Wallace vs. Brian A. Wallace, Case No. 5D-10-1020, Opinion filed April 1, 2011.  The case arose out of Orange County, the Orlando area.

Lauritsen was William Wallace’s daughter.  Brian  Wallace was his son.  As is often the case when a parent dies, the children fight over the estate.  In this case the attorney’s fees incurred by the squabbling children essentially bankrupted the estate. 

What makes that an especially bitter ending to this probate story is the circumstances surrounding the death of William Wallace.  He committed suicide after killing his incapacitated wife, Barbara, and his step-daughter, Sandra Leone.

This issue for the probate court was whether a provision in Wallace’s will that the mortgage debt owed to Wallace, from his son (Brian) and daughter in law, be forgiven at Wallace’s death; or, whether the probate court would require that Brian and his wife repay the debt so that the creditors (mostly attorneys)  of Wallace’s estate could be paid.  The mortgage and promissory note were payable to Wallace and his wife, Barbara.  The promissory note was the only non-exempt asset in Wallace’s estate, and thus the only asset that could be used to pay the cost of administration of the estate and any creditors’ claims.

Who Owned the Note?

The first issue the appellate court addressed was who actually owned the mortgage and note since Wallace killed his wife first, and then himself.  Typically, when husband and wife jointly own an asset, without a specific designation of the form of ownership, it is presumed to be tenants by the entireties.  Under Florida law that is a very favorable form of ownership, especially for asset protection purposes.  One attribute of such form of ownership is the right of survivorship.  With tenancy by the entireties, when one spouse dies the ownership of the asset is immediately vested in the survivor.

However, in this case, Wallace killed his wife, and then killed himself, apparently believing that upon his wife’s death, he owned the mortgage and note, and the provision in his will would forgive the indebtedness from his son, Brian.  (Such speculation of intent is based on the fact that Wallace wrote his will just 11 days before he killed his wife and step-daughter, and then himself.)

Section 732.601(3), Florida Statutes (2007) provides that in such circumstances (where one spouse kills another spouse) the deaths of the wife and Wallace were deemed to be simoultaneous.

As a result of the simultaneous deaths, Wallace owned one half of the promissory note and his wife owned one half of the note, as tenants in common.  As tenants in common, each had the right to dispose of their one half ownership through their estate proceedings.  Since the wife did not have a will, her share was available to her creditors, or otherwise could be distributed through her intestate estate.

Only Wallace’s one-half share was governed by the provision in his will forgiving his son’s indebtedness.

LESSON NUMBER ONE:  When joint tenancy with rights of survivorship is involved (the same is true for beneficiary designations), unexpected consequences can arise in probate, or otherwise, that can thwart the intentions of the owner of those assets.

Was the Debt Forgiven?

The appellate court’s ruling was that the note was not forgiven; that Brian, and his wife, must repay the note so that the costs of administration (personal representative and attorneys’ fees) and any creditor’s claims (there was a major credit card debt involved) must be paid before the forgiveness of indebtedness could be applied.

Citing various statutes included in the Florida Probate Code, the court made it clear that a specific provision of a will that debt owed to the decedent be forgiven will be given effect only if there are sufficient other assets in the estate to pay the costs of administration and any creditor claims.

In its legal analysis of how it came to that conclusion, the court relied on several Florida, and some out-of-state, cases, to explain that had Wallace included a provision in the promissory note that forgave the indebtedness upon his death, that the promissory note legally would have been forgiven at Wallace’s death.

The distinction is that the will is governed by the Florida Probate Code, which has a set of statutes that governs the disposition of assets through probate.  If the terms of the promissory note itself contains a forgiveness of debt at death, then the promissory note never makes it into the probate estate and is not subject to the rules and statutes governing probate.

LESSON NUMBER TWO:  If you rely on a will for the disposition of your assets, all of the rules of the Florida Probate Code, as they exist at the time of your death, apply to govern the disposition of your estate; or, alternatively, don’t allow any assets to go into your probate estate that can be effectively transferred at death through any other method that won’t involve the Florida Probate Court and the application of the Florida Probate Code.

Estate Planning Implications

From an estate planning perspective, there are a number of issues raised by this case that should be addressed in all estate planning.

First, we should always provide for the order of death for spouses, and ensure that our planning contemplates a predeceased spouse, or beneficiaries predeceasing the disposition of the assets.  By the way, most consumer oriented software and do it yourself will packages do not contain those provisions, because the applicable law varies from state to state.  For instance, only 12 states recognize tenancy by the entireties as a form of ownership.

Second, if we want to provide for the forgiveness of indebtedness at the death of the lender to family members or loved ones, we should provide for such forgiveness in the original documents, or properly executed amendments to those documents, and not rely on a provision in our will to accomplish that result.  If the asset (promissory note) is included in the probate estate, it will be subject to the cost of probate administration, and will be subject to the claims of the estate’s creditors.

Third, we certainly want to ensure that assets that are not subject to the claims of creditors during our lifetime (e.g., retirement plans, including IRAs, life insurance death benefits, annuities, , etc.), are not payable to our probate estate, thus subjecting those otherwise exempt assets to the cost of probate administration and creditors’ claims.  The establishment of a testamentary trust, and the proper beneficiary designations to that testamentary trust, can avoid that potentially disastrous result.

Finally, we should consider using the asset protection planner’s mantra to direct all of our planning:  “Control everything, own nothing!”

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