In Gaughn v. Edward Dittlof Revocable Trust (In Re Costas) 06-16520, the 9th Circuit Court determined that property disclaimed prior to the filing of the bankruptcy would not be included in the bankruptcy estate. In October 2001 Mr. Dittlof created a revocable trust under Arizona law which provided that his property would be distributed to his children including his daughter, Rochelle.

Mr. Ditloff died in 2002 and Rochelle executed a disclaimer relinquishing her claim to the trust property and thereafter filed for bankruptcy under Chapter 7. Under Arizona law, as in Florida law, the disclaimer “relates back” to the date of death of the decedent and the disclaimant neither transfers or possesses the disclaimed property. The bankruptcy trustee, however voided the disclaimer as a “transfer” prior to the date of filing and argued that under Drye v. United States, 528 U.S. 49 (1999) the disclaimer was not effective to exclude the property from the bankruptcy estate. The court determined the disclaimer was not a “transfer” of an interest of property. Although this case was decided in Arizona, Florida courts (depending on the bankruptcy judge) should analyze these facts in the same manner.

The court distinguished the Drye case because the tax lien had already been in place prior to the bankruptcy and under the Guaghn case the disclaimer occurred prior to the petition for bankruptcy. Further the court pointed out that the Drye case was a tax lien case and did not necessarily translate to bankruptcy. Anytime a client finds bankruptcy a possibility and they are anticipating an inheritance carefully review this case. It is a favorable case for such situations. However, prior to the disclaimer be sure you know where the property will be transferred. If the property will be distributed to the disclaimant’s children or siblings, then their receipt of property may be better than to subject the property to the bankruptcy trustee.

As the estate tax exemption has increased to $3.5 million from $2 million you may have clients with documents which have unintended consequences. As you know most credit shelter trust agreements provide that the maximum amount of exemption is distributed into the credit shelter amount with the balance being distributed outright to the spouse or in a QTIP trust. Because the exemption amount has increased a spouse may be receiving less than she anticipated. Will she make an elective share election and/or file a malpractice action against the attorney because the attorney did not advise their clients? Further a credit shelter amount may also be structured as a dynasty trust to fully utilize a generation skipping transfer (“GSTT”) exemption. As the GSTT exemption amount has also increased to $3.5 million the funding of a dynasty trust may be greater than the client anticipated and the children and spouse may receive less than anticipated. Further, retirement plan and life insurance beneficiary designations must be reviewed to determine whether the beneficiaries, if a credit shelter trust or dynasty trust, are receiving too much. Advise your estate planning clients that their documents must be reviewed and evaluated in light of the increased exemption. Of course the exemption amount for 2010 and 2011 is unclear so the clients need to be advised of that exposure also.

As most of you know Florida has the portability of the “save our home cap”. The calculation of what is portable is mind boggling but it can be done! An interesting twist, however is that if a married couple divorce each party can take their portability exemption with them in the percentage that they own the property. For example, if husband and wife own their homestead and both move from the home, then each of them receive 50% of the portability amount. The divorce decree cannot change that portability percentage. Also, as this author learned from a speech given by Will Shepherd, General Counsel , Hillsborough County Property Appraiser, Section 193.155(8(d) of the Florida statutes provides that if only one party moves from the home, then that party can obtain the 50% portability BUT both parties have to first abandon the current save our home cap. The party remaining in the house would have to reclaim his or her cap. The save our home cap exemption and its portability should be considered in all marital settlement agreements and both parties need to agree to take the necessary steps to use the portability.

A subcommittee of the Probate Law Committee of the RPPTL section of Florida is reviewing Chapter 28 of the Florida Statutes regarding recording documents in probate court. The goal is uniformity throughout Florida. Should you have any suggestions then please forward same to the author. Look for this upcoming statute. The author knows how frustrating it is to find that different clerks across the state record different documents. Ken Burke’s office has been very helpful on this matter.