The Internal Revenue Service (IRS) has issued final regulations that may increase the amount of the gift tax exemption available to a surviving spouse.  Specifically, the IRS issued final regulations governing portability of a Deceased Spousal Unused Exclusion (DSUE) amount.  Generally, the tax code allows an exemption to the gift tax for a decedent’s estate.  The exemption amount is indexed for inflation and varies by year.  For example, for 2015, the exemption is $5,430,000 per person.  The new portability rules allow the estate of decedent to pass the unused portion of the decedent’s exclusion to a surviving spouse.  This election is made on the decedent’s estate’s tax return.

The practical impact of the new portability rules are that, if the first decedent spouse passes along a Deceased Spousal Unused Exclusion to the surviving spouse, then the surviving spouse will be able to claim a larger estate tax exemption when he or she dies.  The surviving spouse’s estate tax exemption will be his or her personal estate tax exemption, plus the transferred Deceased Spousal Unused Exclusion.  A Fox Rothschild LLP attorney may be able to help you decide whether or not these new rules apply to you and whether they should be factored into your estate plan.

The key provisions are located at 26 U.S.C. § 2010 and 26 U.S.C. § 2505.  The new regulations were enacted pursuant to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and were made permanent through the American Taxpayer Relief Act of 2012.  The new rules apply to the estates of married decedents who die on or after January 1, 2011.

Eric A. Bevan is an attorney with the law firm of Fox Rothschild LLP and a member of the firm’s Litigation, Financial Services Industry and Construction practice groups.  He represents clients in the resolution and litigation of complex commercial disputes, including federal and state court litigation as well as alternative dispute resolution methods such as private arbitration and mediation.  You can contact Eric at 561-804-4470 or ebevan@foxrothschild.com.

Hocus pocusEarlier this month, Florida’s Fourth District Court of Appeal released its opinion in the matter of Zelman v. Zelman, Case No. 4D14-1858 (4th DCA September 2, 2015).  This opinion is noteworthy because it holds that family members have the right to participate fully in guardianship proceedings, even if they are not the petitioner.  This ruling may make guardianship litigation more contentious and complicated, because more people will be able to participate in the litigation, but should also help ensure that guardianship proceedings are fair and comport with traditional notions of due process.

This issue arose in the Zelman case because of competing interests advanced by Martin Zelman’s wife and his children from a prior marriage.  Martin’s son, Robert, filed petitions with the probate court asking that Martin be ruled incapacitated and a guardian be appointed.  Robert and his two sisters contended that Martin’s wife of 13 years, Lois, was “trying to control Martin and his assets through mental abuse, neglect and isolating him from his children.”  An emergency guardian was appointed, who promptly sought and received an order from the trial court requiring Lois to move out of Martin’s apartment.

The trial court then held hearings regarding the issue of Martin’s capacity and the appointment of a permanent guardian.  However, the trial court ruled that Lois was not a party to the proceedings but merely an “interested person.”  Lois was not allowed to call witnesses, introduce evidence, or present rebuttal testimony.  One of the main issues during the incapacity and guardianship hearings was whether Martin had the capacity to divorce Lois, or if he even wanted to do so.  This issue was important because Martin and Lois had a prenuptial agreement that granted Lois $6 million dollars upon Martin’s death if they were married, but nothing if they were divorced.  But, the prenuptial agreement further provided that a divorce proceeding instituted by a guardian, rather than Martin in his own capacity, did not negate Lois’s gift.  This created a thorny legal problem for Martin’s emergency guardian and Robert:  while they sought a determination that Martin was incapacitated and the appointment of a guardian to protect him from what they alleged was Lois’s undue influence and abuse, such a finding would essentially guarantee that Lois would receive $6 million dollars from Martin’s estate because Martin would lack the capacity to seek a divorce.  In order to traverse this issue, Martin’s guardian argued that Martin should be declared incompetent but his ability to file a dissolution action should be preserved.  Consequently, the trial court ordered a limited guardianship which removed, among other things, Martin’s rights to marry, drive, work, or manage property, but preserved his rights to vote, contract, sue and defend lawsuits.  (The trial court also ordered that $3 million dollars that had been transferred from Martin’s account to Lois’s account be reversed.  This particular transfer was reversed in a separate ruling by the Fourth District Court of Appeal in an earlier opinion, Zelman v. Zelman, Case No. 4D14-1858 (4th DCA July 1, 2015).  In that case, the Fourth District Court of Appeal reversed the trial court’s transfer order because (1) none of the parties had actually requested in their pleadings that the money be returned, and (2) Lois was denied due process because she was not given notice or an opportunity to be heard on the issue during the guardianship proceedings.)

Lois appealed the trial court’s ruling in the guardianship proceeding.  The main issue on appeal was whether the trial court erred by not allowing Lois to participate fully in the guardianship proceedings, i.e., to present evidence and legal arguments.  The appellate court determined that Lois was an interested person with standing and the right to participate fully in the guardianship proceedings because she was Martin’s next of kin and the outcome of the proceedings would substantially impact her marriage and her finances.  The appellate court specifically cited to Section 731.201(21) of the Florida Probate Code (2014), which defines “interested person” as a person who may reasonably be expected to be affected by the outcome of the particular proceeding involved.  (The 2015 version of the statute is located here; the subsection defining “interested person” has been renumbered as subsection (23).)

The appellate court determined that Lois’s due process rights were violated when she was not allowed to participate fully in the proceedings.  Her due process rights extended beyond “simply being allowed to be present and to speak.”  The appellate court characterized the trial court’s ruling as “infected by legal hocus pocus” and containing “clearly erroneous” findings, in particular because the trial court found that Martin was incompetent  to marry, manage property or make gifts, yet, in contrast, found that he was competent to handle a complex lawsuit involving financial issues.  The trial court’s rulings were reversed and the case remanded for a new trial.

Takeaways

The Fourth District Court of Appeal’s holding in this case means that, going forward, family members will have a strong argument that they are “interested persons” with full rights to participate in guardianship hearings, because they will be affected by the outcome of the proceedings.  This interest will be particularly strong in the case of next of kin and spouses.  This holding should lead to greater participation in guardianship proceedings, but also, perhaps, more contentious litigation as more parties are able to assert their interests in the proceedings.

Eric A. Bevan is an attorney with the law firm of Fox Rothschild LLP and a member of the firm’s Litigation, Financial Services Industry and Construction practice groups.  He represents clients in the resolution and litigation of complex commercial disputes, including federal and state court litigation as well as alternative dispute resolution methods such as private arbitration and mediation.  You can contact Eric at 561-804-4470 or ebevan@foxrothschild.com.