AFTER DEATH DOES US PART: SURVIVING SPOUSE AS FIDUCIARY AND BENEFICIARY
Spouses commonly name each other as fiduciaries in their estate planning documents. Even in intestate estates, Florida law recognizes a preference for the surviving spouse to be a fiduciary.1 This statutory preference exists even when the deceased spouse leaves adult children not of the marriage. When a surviving spouse serves as a fiduciary, some conflict of interest is inevitable because he or she is almost certainly also a beneficiary. In blended families,2 This conflict may very well be exacerbated, and a great deal of tension between a surviving spouse and the decedent’s children may exist, particularly after the “glue” that kept the family united is gone. Thus, it may be preferable in blended families to appoint an independent fiduciary (such as a bank or trust company) to serve with the surviving spouse. Although naming an independent fiduciary can be costly, it may ultimately save familial relationships and avoid possible litigation throughout the initial estate administration and ensuing trust administration.
This article examines some situations in which a surviving spouse’s dual role as fiduciary and beneficiary can be particularly tricky, such as electing portability of the decedent’s unused applicable exclusion amount, the use of disclaimers post-mortem, tax elections (such as QTIP elections), and the petition for certain statutory entitlements under Florida law.
Basic Fiduciary Duties and Functions of a Personal Representative and Trustee
A personal representative (PR) is the legal representative of a decedent’s estate. The PR marshals the estate assets, obtains values for the assets and reports them on an inventory for the court and estate beneficiaries, pays the debts of the decedent, prepares and files an estate tax return (and any other related tax filings), if necessary, and handles the ultimate distribution of the estate property. Once the estate’s debts have been paid, the estate tax closing letter has been received (if an estate tax return was filed), and the assets have been distributed properly, the PR is discharged by the probate court and released from liability.3
When a surviving spouse is PR, several fiduciary duties can create additional tension with beneficiaries. First, the PR must be represented by counsel.4 The choice of attorney and other advisors may be questioned by beneficiaries. Second, the PR may need to sell estate assets to raise cash to pay debts and taxes of the decedent and expenses incurred during estate administration. Apart from statutory restrictions on sales involving real property5 or when a PR has a conflict of interest,6 a PR has broad discretion to sell estate assets. Exercise of this discretion may cause discord with beneficiaries, particularly if the PR wants to sell family heirlooms with sentimental value to other beneficiaries. Finally, the ultimate distribution of estate assets may create tension, as the PR has no duty to distribute assets on a pro rata basis (subject to the duty of impartiality).7
The fiduciary duties of a trustee are similar. In fact, the Florida Probate Code provides that a “personal representative is a fiduciary who shall observe the standards of care applicable to trustees.”8 A trustee’s duties and responsibilities exist for as long as the individual is serving as trustee (and considering the fact that Florida’s rule against perpetuities period is 360 years, an individual can be a trustee for many years). A trustee has concurrent duties to administer the trust in good faith and with loyalty (which involves administering the trust in the interest of the beneficiaries) and impartiality.9 This can be particularly tricky when the surviving spouse is both a trustee and beneficiary because of the natural propensity to act in one’s own interest. The themes of loyalty and impartiality are emphasized throughout the Florida Trust Code.10
The dichotomy that exists when a surviving spouse is also a beneficiary is illustrated in the use of a credit shelter trust, which is designed to receive a decedent’s unused applicable exclusion amount so that the decedent’s estate (and, possibly, generation-skipping transfer tax) exemption is used. These trusts generally exist during the life of a surviving spouse and are often administered as one trust for multiple beneficiaries (generally, the surviving spouse and the decedent’s children). They may include provisions that the surviving spouse’s needs shall be paramount. Upon the death of the surviving spouse, the trust is typically divided into shares for the children of the decedent. If a surviving spouse is the trustee of this trust, the other beneficiaries may question the surviving spouse’s investment strategy and discretion over distributions, particularly because the surviving spouse is also a beneficiary.
One way to address this issue during the estate planning phase is to give the surviving spouse a limited power of appointment to leave the assets remaining at his or her death to charity or a limited class of persons. Generally, if the power is not exercised, the assets in the trust at the surviving spouse’s death will be divided into shares for the decedent’s descendants. Including a limited power of appointment alerts those descendants that they may not receive the assets upon the death of the surviving spouse and may serve as a “hammer” to ensure that the descendants don’t attempt to thwart the decedent’s intentions. In addition, if the surviving spouse is not the sole trustee, he or she may represent and bind persons whose interests are subject to the power for purposes of notices and accountings pertaining to the trust.11
Electing Portability to Utilize a Deceased Spouse’s Unused Applicable Exclusion Amount
The gift and estate tax exclusion amount is $5.25 million,12 meaning that $5.25 million of taxable lifetime gifts and transfers occurring upon a decedent’s death can avoid taxation. Before 2011, if a decedent died without utilizing his or her exclusion amount, the amount was lost forever. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 201013 introduced the concept of portability, whereby a surviving spouse can port his or her deceased spouse’s “deceased spousal unused exclusion amount” (DSUE amount) and add it to his or her own applicable exclusion amount.14
A PR must file an estate tax return if the sum of the decedent’s gross estate and taxable gifts made by the decedent during his or her life exceeds the applicable exclusion amount. Even when not required, it may be desirable to file a return so the surviving spouse can elect portability. In blended families, electing portability on the death of the first spouse may primarily (or only) benefit the surviving spouse (especially if the deceased spouse’s descendants will not otherwise be inheriting from the surviving spouse), which can cause tension regarding whether the return should be prepared for this purpose, and if so, who should bear those costs.
The preparation of an estate tax return can be a complex and expensive process. Florida law provides for a presumptively reasonable fee for the preparation of a return if prepared by an attorney. The presumptively reasonable fee is 0.5 percent for gross estates up to $10 million, and 0.25 percent for gross estates in excess of $10 million.15 For example, for an estate where the decedent has used $4 million of his or her exclusion amount (and thus the surviving spouse may want to elect portability to utilize the $1.25 million DSUE amount), a fee of $20,000 for an attorney to prepare the estate tax return is presumed reasonable. A surviving spouse may consider that a reasonable price to pay to be able to utilize the unused exemption, but the deceased spouse’s children (who will otherwise see no benefit from filing a return) may disagree, especially if the surviving spouse wants the estate to pay the preparation fee (and other costs for the legal and tax analysis to advise the surviving spouse to elect portability).
Electing portability can have additional consequences for a decedent’s estate. The statute of limitations for a timely filed estate tax return is three years, but if portability is elected, the IRS may examine the deceased spouse’s return to determine the DSUE amount until the statute of limitations runs on the surviving spouse’s return.16 If the surviving spouse is significantly younger than the deceased spouse, this could be a considerable period of time.
Ideally, in blended family situations, portability issues, including whether the surviving spouse may elect portability, whether an independent executor will be appointed to make the election,17 and who should bear the cost of preparing an estate tax return if the sole reason for filing is to take advantage of portability, will be addressed in a nuptial agreement.18 In the absence of such an agreement, drafting attorneys may consider including mandatory or precatory language in an individual spouse’s will, which expresses the decedent’s desire to have the estate pay (or not pay) for the costs of estate tax return preparation if portability is elected.
The Use of Disclaimers as a Post-mortem Planning Technique
Disclaimers allow a recipient of property to refuse such property, so that it passes to other beneficiaries. When a devisee of inherited property makes a disclaimer, the disclaimed property passes as if the devisee predeceased the decedent and, if the disclaimer is “qualified” (as defined in the Internal Revenue Code), the transfer will result in no transfer tax consequences to the devisee. For a disclaimer to be considered qualified, it must be in writing, received by the PR within nine months after the transfer (or within nine months after the transferee turns 18), the transferee must not accept the interest or any of its benefits, and as a result of the disclaimer, the property must pass without any direction on the part of the person making the disclaimer and must pass either to the spouse of the decedent or to a person other than the person making the disclaimer.19 It also must meet the requirements of both local and federal law.
One exception to the disclaimer rule is that as a result of surviving spouse’s disclaimer, property may pass to a trust of which he or she is a beneficiary.20 The surviving spouse may not retain the right to direct the beneficial enjoyment of the disclaimed property (as trustee or otherwise) unless that power is limited by an ascertainable standard.21 Disclaimer wills and trusts generally provide that upon the death of the first spouse, the surviving spouse receives property outright. If the surviving spouse makes a disclaimer, the disclaimed property passes to a trust of which the surviving spouse is a beneficiary. A “disclaimer trust” is very similar to the credit shelter type trust explained above. While the surviving spouse’s needs should take priority, these trusts often permit distributions to other beneficiaries so the surviving spouse may be under pressure from those beneficiaries to disclaim into the trust. If the surviving spouse takes property outright, the decedent’s children may never benefit from it (and there may be gift tax consequences if the surviving spouse later gives these children money during his or her life). If the surviving spouse instead disclaims the property and it goes into a family trust, the decedent’s children may benefit from it as permissible beneficiaries during the surviving spouse’s lifetime and as remainder beneficiaries upon his or her death.
Although a disclaimer may be tax efficient upon the death of the first spouse, he or she may have little incentive to disclaim the assets he or she would otherwise receive outright. Unlike a credit shelter type trust, a disclaimer trust cannot give the surviving spouse a limited power of appointment (so that the spouse cannot control the distribution of the disclaimed assets). Once assets are disclaimed, the surviving spouse loses whatever power he or she may have had over them (other than being able to receive distributions as a beneficiary of the trust).22
QTIP Elections and Other Tax Considerations
QTIP (qualified terminable interest property) trusts are commonly used to avoid estate tax on the death of the first spouse. QTIP property is not taxed on the death of the first spouse; instead, any property passing to a surviving spouse for which a QTIP election has been made will be included in the gross estate of the surviving spouse (and thus subject to estate tax then).23 Property eligible for a QTIP election must pass from the decedent to his or her surviving spouse (and that spouse must be a U.S. citizen); the surviving spouse must have a qualifying income interest for life (meaning he or she must receive the income of the trust at least annually); and the surviving spouse can be the only lifetime beneficiary of the trust assets during his or her lifetime.24 The QTIP election is made by the PR and, once made, is irrevocable.25
Like credit shelter or disclaimer trusts, QTIP trusts can create tension, because the interests of multiple beneficiaries must be considered. First, a surviving spouse may resent not having unlimited access to the trust principal. Second, although the surviving spouse is the only beneficiary during his or her lifetime, the remainder beneficiaries may challenge decisions regarding trust distributions (in the case of a QTIP trust when principal may also be distributed to the surviving spouse) and investments. If a QTIP trust allows for distributions of principal and the surviving spouse is a trustee, his or her discretion to distribute principal will be limited to an ascertainable standard (such as for health, maintenance, and support), but conflicts may arise regarding what is considered to fall within the standard. As previously discussed, drafting attorneys may want to suggest giving the surviving spouse a limited power of appointment, which would diminish the expectation of the decedent’s descendants in receiving the assets upon the death of the surviving spouse. The trust instrument can also address whether the surviving spouse’s other resources should be considered when making distributions.
In estates in which an estate tax return will be filed, the PR should consider filing an extension for the time to file the return if assets are passing into a QTIP trust. If the surviving spouse dies before the return is filed, the combined estate taxes of the decedent and the surviving spouse may be reduced by making a partial QTIP election or no QTIP election at all in order to utilize all or a portion of the decedent’s applicable exclusion amount. Of course, this puts the surviving spouse in the somewhat awkward position of planning in favor of his or her own demise. He or she may also want to consider whether his or her estate would be able to take advantage of the credit for tax on prior transfers (TPT credit).26 He or she should also consider whether certain administration expenses should be deducted on the estate tax return or the estate’s income tax return in order to produce the greatest tax savings. These fiduciary decisions can cause tension, as they may ultimately affect the amounts passing to other beneficiaries.
Conversion of Income Interest Trust to Total Return Unitrust
The Florida Trust Code authorizes the trustee of a trust with mandatory income distributions to convert the trust to a total return unitrust, so that “income” is defined as a fixed percentage of the principal of the trust. This may be done without court approval, but requires the trustee to send written notice of the intention to convert the trust to the grantor of the trust, if living, the qualified beneficiaries of the trust,27 and any advisors or protectors of the trust.28 The trustee must adopt a written statement providing that future distributions from the trust will be unitrust amounts and indicating how the unitrust amount will be calculated and how trust assets will be valued.29 The unitrust amount may be no less than 3 percent and no greater than 5 percent; the statute also provides a safe harbor equal to 50 percent of the §7520 rate.30
The statute requires a disinterested trustee, or if none, a disinterested person, who, acting in a fiduciary capacity, will make the determinations related to the calculation of the unitrust amount and the valuation of trust assets. For this purpose, the statute uses the same definition as a person who is not “related or subordinate” under the I.R.C. with respect to the person acting as the trustee of the trust, and excludes the grantor and any interested trustee.31 The requirement of a disinterested fiduciary indicates that the statute’s drafters had some concern about the conflict of interest of a surviving spouse making the decision to convert to a unitrust.
Although conversion to a total return unitrust means that the surviving spouse is ensured a steadier distribution amount, this may be at odds with the interests of the remainder beneficiaries, and even at odds with the intent of the decedent. This should be addressed in the estate planning phase. If the client wants the surviving spouse to receive a steady distribution amount, drafting a unitrust into an existing trust instrument allows the client to determine the unitrust amount, as well as determining the type of property used to fund the unitrust.
Elective Share, Homestead, and Statutory Entitlements under Florida Law
In Florida, spouses are able to claim certain statutory entitlements that may ultimately affect the amount and nature of property passing to other estate beneficiaries. These include the elective share, homestead property, exempt personal property, and a family allowance. The claim of these statutory entitlements is made in a surviving spouse’s individual, rather than fiduciary, capacity, but can further complicate his or her dual role as fiduciary and beneficiary.
If dissatisfied with the amount passing to him or her under a deceased spouse’s estate plan, a surviving spouse may elect to take a statutorily determined share of the estate,32 which is known as the elective share and comprises 30 percent of the elective estate. The elective share includes all property subject to probate, and also includes certain property not subject to probate (such as property passing by right of survivorship, property in revocable trusts, the decedent’s interest in the cash surrender value of life insurance on the decedent’s life, and retirement benefits).33
Homestead property in Florida is subject to strict rules governing its devise. Specifically, homestead may not be subject to devise if the owner is survived by a spouse or minor children, except that the homestead may be devised to the surviving spouse if there are no minor children.34 If the homestead property is not devised in accordance with the law, it descends as if the decedent died intestate. If the decedent is survived by both a spouse and one or more descendants, the surviving spouse will receive a life estate in the homestead with a vested remainder to the descendants.35 Instead of receiving a life estate, a surviving spouse may elect to take an undivided one-half interest in the homestead as a tenant-in-common with the remaining one-half interest vesting in the decedent’s descendants.36 This may be an attractive alternative for a surviving spouse who does not want the responsibilities of a life tenant and wishes to sever ties with the decedent’s descendants so the property can then be sold (with each tenant receiving its pro rata interest of the proceeds, assuming the property is sold as one unit).
A surviving spouse may also be entitled to exempt property and a family allowance during the administration of a decedent’s estate (even in addition to the elective share, if it is elected). Exempt property may include household furniture and furnishings,37 as well as two automobiles titled in the decedent’s name and regularly used by the decedent. This can be significant, for example, if the decedent regularly drove luxury cars. If there is a surviving spouse, then only the surviving spouse, and not children of the decedent, is entitled to exempt property. The decedent’s lineal descendants may be able to take part in an award of family allowance, which is available to a surviving spouse (and lineal descendants) if the decedent was supporting or obligated to support the individuals.38 Awards of exempt property and family allowance will decrease the amount otherwise passing from a decedent’s estate and may ultimately reduce the amount other beneficiaries receive. The court is not obligated to consider other means of support available to a surviving spouse in determining these entitlements,39 which may anger other beneficiaries who feel that these awards allow the surviving spouse to get more than his or her “fair share.”
Electing against the estate or petitioning for statutory entitlements puts the surviving spouse in an awkward position if he or she is also PR. While “holding or acquiring conflicting or adverse interests against the estate that will or may interfere with the administration as a whole” is grounds for removal, it does not apply to the surviving spouse in this situation.40 Likewise, an attorney for the surviving spouse/personal representative may consider himself or herself to be in an ethical dilemma, but this is not considered a conflict of interest by The Florida Bar.41 Although there is no prohibition on a surviving spouse continuing to act as fiduciary, beneficiaries may question whether he or she can continue to effectively administer the estate.
An important part of estate planning is designating fiduciaries. In blended family situations, careful consideration should be given to naming a surviving spouse as a fiduciary. When a surviving spouse is both a fiduciary and a beneficiary, his or her dual role may strain already precarious familial relationships between stepparents and stepchildren. When a surviving spouse will be faced with difficult fiduciary decisions, such as electing portability, making certain tax elections or petitioning for statutory entitlements under Florida law, it may be desirable to name an independent fiduciary or co-fiduciary to alleviate some of the conflict of interest inherent in being both beneficiary and fiduciary. This should be given careful thought during the estate planning process, and, as many wills and trusts allow a fiduciary to name a co-fiduciary, may also be revisited after the death of a spouse.
1 See Fla. Stat. §733.301(b)(1).
2 This term is used in this article to refer to second marriages, third marriages, and so on.
3 Fla. Stat. §733.901.
4 See Fla. Prob. R. 5.030(a). There is an exception if the PR remains the sole interested person.
5 Fla. Stat. §733.613.
6 Fla. Stat. §733.610.
7 Fla. Stat. §733.810(5).
8 Fla. Stat. §733.602(1).
9 Fla. Stat. §736.0801; Fla. Stat. §736.0802; Fla. Stat. §736.0803.
10 For example, the trustee’s power to adjust is subject to consideration of the circumstances of the beneficiaries, which includes both current income beneficiaries and remainder beneficiaries.
11 Fla. Stat. §736.0302.
12 I. R.C. §2010(c)(3)(A). This amount is indexed for inflation.
13 Public Law No. 111-312.
14 Portability was made permanent by the American Taxpayer Relief Act of 2012, Public Law No. 112-240 (ATRA), which became law on January 2, 2012.
15 Fla. Stat. §733.6171(4)(e).
16 I. R.C. §2010(c)(5)(B).
17 Most practitioners recommend an independent executor make the election to avoid arguments that the spouse’s ability to make the election should cause inclusion in his or her estate.
18 For more discussion addressing portability in nuptial agreements, see George D. Karibjanian & Lester B. Law, Portability and Prenuptials — A Plethora of Preventative, Progressive and Precautionary Provisions, 53 ( BNA Bloomberg) Tax Management Memorandum 443 (Dec. 3, 2012).
19 I. R.C. §2518(b). The requirements for a disclaimer under Florida law generally mirror the requirements for a qualified disclaimer under federal tax law. See Fla. Stat. §739.201.
20 I. R.C. §2518(b)(4)(A).
21 Treas. Reg. §25.2518-2(e)(2).
23 I. R.C. §2056(b)(7)(A).
24 I. R.C. §2056(b)(7).
25 I. R.C. §2056(b)(7)(B)(v).
26 I. R.C. §2013. For more information on the PTP credit, see Robert J. Stommel & Lester B. Law, Planning to Maximize the §2013 Credit, 72 Fla. B. J. 66 (Jan. 1998).
27 The term “qualified beneficiary” is defined in Fla. Stat. §736.0103(14).
28 Fla. Stat. §738.1041(2)(c).
29 Fla. Stat. §738.1041(2)(a).
30 Fla. Stat. §738.1041(2)(b); “7520 rate” refers to the rate calculated under I.R.C. §7520.
31 Fla. Stat. §738.1041(1)(b); Fla. Stat. §738.1041(1)(g); I.R.C. §672(c).
32 Fla. Stat. §732.201. The elective share statutes were held to be constitutional in In re Estate of Magee, 988 So. 2d 1 (Fla. 2d DCA 2007).
33 See Fla. Stat. §732.2035 for a complete list of property entering into the elective estate.
34 Fla. Stat. §732.4015; Fla. Const. art. X, §4 (c).
35 Fla. Stat. §732.401(1).
36 Fla. Stat. §732.401(2).
37 Fla. Stat. §732.402(1).
38 Fla. Stat. §732.403.
39 Valdes v. Estate of Valdes, 913 So. 2d 1229 (Fla. 3d DCA 2005).
40 Fla. Stat. §733.504.
41 Professional Ethics Committee Opinion 76-16 (April 4, 1977).
Catrina A. Sveum is an attorney at Proskauer Rose, LLP, in Boca Raton practicing estate planning. She received her J.D. from Syracuse University College of Law and her LL.M. (taxation) from University of Florida Levin College of Law, where she was a graduate assistant editor of the Florida Tax Review.
This column is submitted on behalf of the Tax Law Section, Joel David Maser, chair, and Michael D. Miller and Benjamin Jablow, editors.