Although many attorneys and financial planners have recently been touting the benefits of revocable inter vivos trusts (i.e., probate avoidance, guardianship avoidance, and confidentiality), more and more families of decedents having revocable trusts as a part of an estate plan are finding themselves involved in litigation over unresolved legal issues.⁽¹⁾ The Joseph Robbie estate is currently involved in a will and trust construction which illustrates potential estate planning traps for any estate that pours over into a revocable inter vivos trust.

Joe Robbie, well known for his ownership of the Miami Dolphins football franchise, left an estate plan that included a pour over will and a revocable inter vivos trust. Pleadings filed with the Dade County Probate Court reflect the following:

1. During his lifetime, Joe Robbie created a revocable trust (the “Joe Robbie Trust”). The trust was funded with less than $100 at the time of his death.
   
   

2. Joe Robbie’s will provides that upon his death, his entire residuary estate pours into the Joe Robbie Trust.
   
   

3. Joe Robbie’s wife, Elizabeth, was provided with all of the income from the Joe Robbie Trust (commencing upon the death of Joe Robbie) during her lifetime, as well as certain additional discretionary funds. The income interest provided to Elizabeth would qualify for the marital deduction as a QTIP trust if Elizabeth continues as the income beneficiary of the Joe Robbie Trust and his personal representatives make a QTIP election.
   
   

4. Instead of taking only the share of trust income provided for her in the Joe Robbie Trust, Elizabeth filed a petition to opt for an elective share of her husband’s estate.⁽²⁾

The Robbie case raises two important issues unresolved under Florida law:

1. Whether a surviving spouse who files for an elective share forfeits his or her right to income from the remaining estate assets that pour over into a revocable inter vivos trust created by the deceased spouse; and
   
   

2. Assuming a surviving spouse who files for an elective share does forfeit his or her right to income from assets pouring into a revocable inter vivos trust, if the result is an increase in estate taxes, should such increase in tax be charged against the elective share amount?

Impact of Elective Share

Florida Law Unclear
Florida law is unclear as to whether a surviving spouse who files for an elective share forfeits rights to income from the remaining estate assets that pour over into a revocable inter vivos trust created by a decedent. F.S. §732.211 states that if a spouse files for an elective share, the remaining assets of the estate, after payment of the elective share, shall be distributed as though the surviving spouse had predeceased the decedent. The application of this statute is clear where the decedent’s will provides for distributions to the spouse or to a testamentary trust created for the spouse.⁽³⁾ However, the more difficult question arises where the estate’s assets pour over into a revocable inter vivos trust. Does F.S. §732.211 result in treating the surviving spouse as if he or she predeceased the decedent for purposes of the revocable inter vivos trust?

Estate of Harper
There is currently no Florida case or statute directly on point. The most analogous case was decided by the U.S. Tax Court in the Estate of Harper v. Commissioner, 93 TC 368 (1989), which ruled on similar facts under Kentucky and Ohio law. In Harper, the executors claimed a marital deduction for: i) the statutory share amount passing outright to the surviving spouse, and ii) the income interest passing to the surviving spouse pursuant to the decedent’s revocable trust, which, prior to the decedent’s death, was only nominally funded. The revocable trust provided for the creation of a testamentary marital deduction QTIP trust for the surviving spouse upon the death of the decedent. The IRS disallowed the marital deduction for the QTIP assets based upon its position that the surviving spouse forfeited her interest in the QTIP trust when she elected against the decedent’s will. The Tax Court in Harper analyzed applicable statutory state law (both Ohio and Kentucky) and found that neither state’s statutes, as of the date of the spouse’s election, had addressed the effect of the election on the surviving spouse’s right to assets pouring over into the decedent’s revocable inter vivos trust.

The Tax Court in Harper stated that the Ohio courts in the case of Carnahan v. Stallman, 29 Ohio App. 3d 293, 504 N.E. 2d 1218 (1986), had ruled that a surviving spouse’s election did not result in forfeiting rights under a revocable inter vivos trust although a contrary result would occur for a testamentary trust. The facts in Carnahan are similar to the facts in the Robbie case. The court in Carnahan stated:

Were the surviving spouse’s beneficial interest, in fact, created by the residuary clause of the will as a testamentary trust, then that beneficial interest, along with all other provisions of the will in favor of the spouse, would have been rejected when she elected to take against the will. Such is not the case however.
. . .
The terms of the trust which ultimately establish the wife’s beneficial interest in the residuary trust assets arise independently under the terms of the inter vivos trust. Not being incorporated by reference, the trust agreement was not in evidence before the probate court when the will was probated . . . .
. . .
That is, only after the assets are transferred to the trustee does the wife’s beneficial interest arise. At that point they are no longer part of the decedent’s estate, but are part of the trust estate . . . .⁽⁴⁾

Although Kentucky did not have a similar case, the court in Harper stated that a similar result should occur under Kentucky law. The court relying, in part, on the fact that, subsequent to the subject election, Ohio changed its statute to specifically provide that a surviving spouse who elects against a will forfeits rights under a revocable inter vivos trust funded through a pour over will, held that the surviving spouse retained her rights to income from the QTIP trust and allowed a marital deduction.

Comparison to Florida Law
Florida’s elective share statute is very similar to the statute in Kentucky (both statutes provide that the electing surviving spouse forfeits interest in assets given by will).⁽⁵⁾ Thus, the Harper case is at least persuasive authority for the position that the filing for an elective share by a surviving spouse under Florida law should not result in forfeiture of rights under a revocable inter vivos trust which receives assets from the probate estate.

One Florida case supports this conclusion by analogy. In the ease of In re Estate of Katz, 528 So.2d 422 (FL 4th DCA 1988), the decedent’s estate plan included both a will and a revocable inter vivos trust. The trust was funded with substantial assets during the decedent’s lifetime and was also the recipient of additional assets through the decedent’s pour over will. Shortly before the decedent’s death, the decedent’s revocable trust was amended to name certain charities as beneficiaries. The decedent’s children tried to set aside the revocable trust distributions under the Florida mortmain statute then in effect. The court in Katz held that the mortmain statute did not apply to a revocable inter vivos trust (i.e., the application of the mortmain statute was limited to wills).⁽⁶⁾

Although the above cases support the position that the filing under Florida law for an elective share should not result in a surviving spouse forfeiting his or her rights to assets pouring over into a revocable inter vivos trust (i.e., the revocable trust assets are not a part of the decedent’s probate estate), other Florida cases may lead one to consider a contrary result if the revocable inter vivos trust is "incorporated by reference" into the will.⁽⁷⁾ Many pour over wills include such incorporation language. Certainly an equitable argument can be made that an election against a decedent’s will by a surviving spouse should be considered strictly as an election (i.e., the surviving spouse can either take what the deceased spouse planned or alternatively take the elective share percentage; however, an election should not permit the surviving spouse to receive both the elective share percentage as well as all of the other assets or interests provided by the deceased spouse in his or her will and trust, including assets pouring over into a revocable inter vivos trust). Allowing the surviving spouse the elective share as well as the interest in assets pouring over into a revocable inter vivos trust encourages the surviving spouse to file an election which upsets a decedent’s dispositive desires.

Insight
The Tax Court opinion in Harper provides an insightful analysis of the issues described above:

It may well be that an inter vivos trust of the type involved herein should be considered a testamentary trust and treated no differently for purposes of the surviving spouse’s exercise of a right of election than it would be if it had been established by the will. But this involves a matter of policy which it is not for us to decide but rather falls within the scope of legislative action either at the state level as Ohio has done . . . or a change in estate tax law by Congress . . . .

Estate Tax Consequences

The estate tax consequences of a spouse filing for an elective share are best explained with an example. Assuming the probate court in the Robbie case follows the analysis of the Harper case and rules that an election by Elizabeth does not result in the forfeiting of her interest in assets pouring over into the Joe Robbie Trust, it is likely that no additional estate taxes will become payable as a result of Elizabeth’s election. The Joe Robbie estate would be entitled to a marital deduction: i) for assets passing outright to Elizabeth as a result of the election, and ii) for assets pouring over into the marital trust created in the Joe Robbie Trust assuming the trust provides Elizabeth with a QTIP interest and an appropriate QTIP election is made by the personal representatives.

However, if the probate court holds that when Elizabeth filed for the elective share, she forfeited her right to income from the Joe Robbie Trust and, assuming the case is appealed, the appellate court agrees, then the IRS would probably disallow a marital deduction for the 70 percent share of the Robbie residuary estate passing to the Joe Robbie Trust. Thus, a construction by the probate court that Elizabeth’s election results in forfeiting her interest in the assets of the Joe Robbie Trust could, according to memoranda filed in the probate court, result in accelerating $25 million in estate taxes that otherwise may be deferred until Elizabeth’s death.

Who Is Responsible for Paying the Accelerated Estate Taxes?
F.S. §732.215 provides that “[i]n any case in which the election of the elective share by the surviving spouse shall have the effect of increasing any estate . . . tax, the share of the surviving spouse shall bear the additional tax.” (Emphasis added.) As indicated above, the Robbie probate files reflect that the election by Elizabeth Robbie could result in increasing estate taxes due upon Joseph Robbie’s death by $25 million. Memoranda filed in the probate file state that said amount would exceed the elective share amount otherwise payable to Elizabeth, thereby eliminating her rights to any property under the Joe Robbie estate.

A literal interpretation of F.S. §732.215 could result in totally eliminating a spouse’s elective share rights in a situation similar to the Robbie estate. Such a result is extremely harsh, especially in light of the fact that the election could accelerate the distribution of assets passing to other estate beneficiaries. Furthermore, such an interpretation arguably may be in conflict with F.S. §731.102 which provides that “no part of [the Florida Probate Code] shall be impliedly repealed by subsequent legislation if that construction can reasonably be avoided.” The results under a literal interpretation of F.S. §732.215, as described above, are generally limited to estates where assets pour over into a revocable inter vivos trust that includes a QTIP trust. Legislation permitting QTIP trusts was enacted in 1981 (subsequent to enactment of F.S. §731.102) as part of the Economic Recovery Tax Act. Accordingly, F.S. §731.102 should possibly override a literal interpretation of F.S. §732.215. Otherwise, an argument can be made that in situations similar to the Robbie case, the elective share provisions are effectively repealed.⁽⁸⁾ It should be noted that the effect of filing an elective share in the Robbie case would essentially result in accelerating the payment (not creating the payment) of estate taxes that otherwise would be deferred until Elizabeth Robbie died since assets of a QTIP trust are includable in the estate of the surviving spouse.

Estate of Palmer Holds Electing Spouse Not Responsible for Increased Taxes
One Florida court has already refused to apply the literal construction of F.S. §732.215. In Tarbox v. Palmer, 564 So.2d 1106 (FL 4th DCA 1990), the court addressed facts similar to those of the Robbie case, except the marital QTIP trust was created under the decedent’s last will (rather than through a revocable inter vivos trust). The court in Palmer stated the following in support of its conclusion:

1. Taxes on the estate assets that otherwise would pass into a QTIP trust are not avoided but only deferred by the use of a QTIP trust. The election by the surviving spouse did not increase taxes but merely accelerated the date the taxes become due. For this reason it could be argued that F.S. §732.215 should not be applicable.
   
   

2. Florida’s tax apportionment statute also supports the surviving spouse’s argument that the elective share should not be burdened with the payment of estate taxes. The purpose of Florida’s tax apportionment statute (F.S. §733.817) is to ensure that all estate and inheritance taxes are shared on a ratable basis by the beneficiaries receiving the property subject to such taxes. F.S. §733.817(2)(c) specifically excludes from the measure of tax “any property or interest whether passing under the will or not, to the extent the property or interest is exempt or is initially deductible from the gross estate . . . .”
   
   

3. The 30 percent elective share is fully deductible under the marital deduction provisions and does not generate federal estate tax.
   
   

4. Since the total estate tax is increased only by property passing to persons other than the surviving spouse, only non-marital property should be burdened with the increased estate taxes.
   
   

5. A literal interpretation of F.S. §732.215 would conflict with the intent of F.S. §733.817 because the surviving spouse would be paying tax generated by property received by other beneficiaries.

Avoiding the Problem

Until Florida law is settled or a clarifying statute enacted, attorneys should consider adding a protective provision for all revocable trusts that create QTIP trusts. Such a provision can state that if a surviving spouse files for an elective share, the spouse forfeits rights to income from assets pouring over into the revocable trust.⁽⁹⁾ Private Letter Ruling 8936009 states that a similar provision conditioning a spouse’s right to income from revocable trust assets on not electing against a will did not jeopardize the marital deduction. The inclusion of such a clause in the Joe Robbie Trust may well have avoided at least a portion of the existing litigation. If the Joe Robbie Trust had such a clause and if Elizabeth filed an election, she would receive her 30 percent elective share outright but she would clearly forfeit her right to income from the Joe Robbie Trust. In many cases, it would appear that it is better to receive 100 percent of the income from a revocable trust than a 30 percent outright devise. As a result, such a provision may discourage a spouse from filing an elective share.

Tax and estate planning attorneys, and individuals whose estate plans include revocable inter vivos trusts should consider the need to review their estate plans in light of the lessons learned from the Robbie case. If the case is not settled, some of the uncertainties under Florida law will likely be resolved. However, a final appellate decision may not be available for several years. Until then it is important to focus on these issues and draft documents defensively.

(Notes)

1. For an excellent discussion of the benefits and pitfalls of revocable trusts see Bernard E. Jones, Putting Revocable Trusts in Their Place, 129 Trust & Estates 8 (No. 7 1990).    (go back)
   
   

2. FL Stat. §732.201 provides that a surviving spouse of a person who dies domiciled in Florida shall have the right to a share of the estate of the deceased spouse, designated the elective share. FL Stat. §§732.206 and 732.207 provide that the elective share is an amount equal to 30 percent of: i) the fair market value, on the date of death of all property of the decedent wherever located that is subject to administration except real property not located in Florida, reduced by ii) all valid claims against the estate paid or payable from the estate and all mortgages, liens, or security interests on the assets.    (go back)
   
   

3. Tarbox v. Palmer, 564 So.2d 1106 (FL 4th D.C.A. 1990).    (go back)
   
   
4. Carnahan v. Stallman, 29 Ohio App. 3d 293, 504 N.E 2d 1218, at 1221 (1986).    (go back)
   
   

5. The Kentucky statute describes a surviving spouse’s right to take his or her statutory share in an election against a will as follows: “(1) When a husband or wife dies testate, the surviving spouse may, though under full age, release what is given to him or her by will, if any, and receive his or her share under KRS [Ky. Rev. Stat.] 392.020 as if no will had been made . . . . (2) Subsection (1) does not preclude the surviving spouse from receiving his or her share under KRS 392.020, in addition to any bequest or devise to him or her by will, if such is the intention of the testator, plainly expressed in the will or necessarily inferable from the will . . . . [Ky. Rev. Stat. §392.080 (1984)].”    (go back)
   
   

6. It should be noted that subsequent to In re Estate of Katz, 528 So.2d 422 (FL 4^th DCA 1988), the Florida Supreme Court ruled that the mortmain statute violated the Florida and U.S. constitutions. See Shriners Hospitals v. Zrillic, 563 So.2d 64 (FL 1990).    (go back)
   
   

7. See Estate of Norem, 561 So.2d 434 (FL 4th DCA 1990), in which the court in determining whether the petitioner/appellant was a pretermitted spouse under FL Stat. §732.301, stated: “There is an issue of whether or not the will (which incorporated the trust) made provisions for Mrs. Norem.”    (go back)
   
   

8. See Hanley, Elective Share, Basic Practice Under Florida Probate Code, §7.31 (3d ed. 1987).    (go back)
   
   

9. An argument may be made that FL Stat. §732.517 could be applied to a trust forfeiture provision similar to that suggested herein. However, it would appear that FL Stat. §732.517 should be limited to wills rather than revocable trusts based upon Katz.    (go back)

Editor’s Note:

Joe Robbie’s widow, Elizabeth Robbie, died on November 5, 1991, which may have effectively terminated the litigation described in Mr. Nelson’s article. The issues raised in the Robbie estate are of significance to estate planners and probate litigators.

This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Jerry E. Aron, chair, and James P. McDonald and Charles D. Brecker, editors.

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