Many people familiar with litigation probably think of pretrial discovery in the context of traditional and often heated litigation—perhaps a contentious divorce, a complex contractual or real estate dispute or a contested personal injury or medical malpractice lawsuit.  While pretrial discovery in Florida is certainly very common in these types of cases, the Florida Probate Rules allow for discovery even in non-contested, routine estate administrations where there are no adverse parties or claims, i.e., matters where no one is suing anyone else.

Rule 5.080 the Florida Probate Rules provides as follows:

(a)     Adoption of Civil Rules. The following Florida Rules of Civil Procedure shall apply in all probate and guardianship proceedings:

(1)     Rule 1.280, general provisions governing discovery.

(2)     Rule 1.290, depositions before action or pending appeal.

(3)     Rule 1.300, persons before whom depositions may be taken.

(4)     Rule 1.310, depositions upon oral examination.

(5)     Rule 1.320, depositions upon written questions.

(6)     Rule 1.330, use of depositions in court proceedings.

(7)     Rule 1.340, interrogatories to parties.

(8)     Rule 1.350, production of documents and things and entry upon land for inspection and other purposes.

(9)     Rule 1.351, production of documents and things without deposition.

(10)   Rule 1.360, examination of persons.

(11)   Rule 1.370, requests for admission.

(12)   Rule 1.380, failure to make discovery; sanctions.

(13)   Rule 1.390, depositions of expert witnesses.

(14)   Rule 1.410, subpoena.

(15)   Rule 1.451, taking testimony.

All of the regular tools for discovery—interrogatories, requests for production of documents, depositions, requests for admissions and subpoenas—that are available in conventional and contested litigation is, pursuant to the above rule, also available in ordinary estate administration matters, as well as adversarial probate and guardianship cases.  A beneficiary of an estate, for example, who has not filed any type of adversary proceeding in probate but who wants more information with respect to transfers of property or money made by a decedent in the three years before he passed away is entitled to serve interrogatories and a request for production of documents on the personal representative of the estate and can even set the deposition of that personal representative if that beneficiary believes that a deposition is necessary.

The 2017 Tax Act added a new tax on US shareholders of controlled foreign corporations (“CFCs”), the tax on Global Intangible Low-Taxed Income (“GILTI”).  GILTI often includes active business income and thus has a widespread impact.

For US C corporations, the regular 21% tax is reduced by a 50% deduction, which lowers the tax rate on GILTI to 10.5%.  Corporations also can claim a foreign tax credit (“FTC”) for 80% of the foreign taxes paid by the CFC, which further reduces or eliminates the GILTI tax.  By contrast, US individuals (including shareholders of S corporations) received no similar tax breaks, and must pay tax at regular rates (maximum 37% rate).

The IRS recently released proposed regulations that open up a planning option for individuals to similarly reduce the tax rate on GILTI by making a Code §962 election.

Code §962 allows a US individual shareholder of a CFC to make an annual election to pay tax on its related Subpart F income at corporate rates.  This section has been a longstanding part of the Code, but was largely ignored until adoption of the 2017 Tax Act.  The 2017 Tax Act reduced corporate tax rates to be significantly below individual tax rates.  The 2017 Tax Act left unanswered whether this election can yield the same tax benefits as a C corporation gets for GILTI.

The IRS proposed regulations state that an individual making the Section 962 election is subject to the 21% corporate tax rate and can get the special 50% deduction for GILTI income, which lowers its tax on GILTI to 10.5%.  The IRS has not yet specifically confirmed that an individual can get a FTC for 80% of foreign taxes paid by the CFC although the IRS’s recent announcement bodes well for confirmation of such position.

The §962 election is made on a year-by-year basis with the tax return filed for that year.  As a result, US individual shareholders facing a significant tax on GILTI may wish to consider making this election to lower the taxes due.  However, an individual making this election will also be subject to US tax when it receives a dividend from the CFC.  If the individual paid tax on GILTI without making this election, then no tax would be imposed on the dividend.

Dividends from a foreign corporation are generally taxed at regular tax rates unless the dividend is from a “qualified foreign corporation” which is taxed at the long term capital gains tax rate of 20%.  A qualified dividend is a dividend from a foreign corporation that is eligible for benefits under an income tax treaty between the US and their home country.  The US has income tax treaties with many nations (e.g., England, France, Germany), but not with all nations.  The US does not have income tax treaties with most “tax haven” countries (eg, BVI, Cayman Islands).

In brief, the ability to make a Code §962 election to reduce the GILTI tax rate is a planning option that individual taxpayers should consider.

On April 17, the IRS issued a second round of proposed regulations addressing qualification as a Qualified Opportunity Zone (QOZ) Fund and related issues. This latest guidance addresses several unanswered questions and creates added flexibility, which should expand the ability to form QOZ Funds.

The regulations clarified that a QOZ Fund can be an operating business such as a start-up company operating out of a QOZ.  A tech company can be formed in a QOZ and qualify even if its customers span the world as long as it is principally operated in the zone as determined under certain guidelines in the regulations.  The regulations also clarified that QOZ fund status is maintained even if the space occupied by the fund straddles over into a non-zone as long as the majority of the property is in the zone.

The regulations also made real estate development more viable with a QOZ Fund.  Under prior guidance, the purchase of an existing building in the zone required the fund to make “substantial improvements” to the property.  Substantial improvements required the fund to invest more than the purchase price of the building into improvements to the property, which must be completed within 30 months.  This latest guidance relaxes that rule and provides that the purchase of abandoned, dilapidated or run-down property in the zone that has been vacant or unused for at least five years should not be subject to this substantial improvement requirement.  The rules were also relaxed for purchases of land.

The IRS also clarified that the ownership and operation, including leasing of real property, can be an eligible active trade or business.  However, the IRS indicated that the ownership and leasing of property pursuant to a triple net lease is likely problematic because such activities generally are not considered an active trade or business eligible for QOZ Fund status.  Properly structuring leases and real estate activities will be important to insure qualification as a QOZ Fund.

From the investor’s perspective, a QOZ Fund passing at death raised many issues that were unclear under prior guidance. The IRS addressed these concerns and indicated a transfer at death will not trigger gain inclusion nor will a transfer by the estate to a beneficiary. The IRS also indicated the next generation can step in the shoes of the decedent and get QOZ tax benefits.  Furthermore, the recipient of the QOZ interest can tack the holding period of the decedent, which will make it easier to exclude gain on a sale of the QOZ interest held for at least ten years at the time of sale.  However, the normal step-up in tax basis for property received from a decedent does not apply to eliminate any deferred gain from being taxable.

The regulations allow a taxpayer who has a capital gain to buy an eligible interest in the fund from an existing investor or the fund itself.  The regulations recognize that a partner may contribute property rather than cash to a QOZ Fund.  In that case, the regulations provide that tax-free roll-over of capital gain is generally limited to the tax-basis of the contributed property.  Also, the original legislation allowed the investor to elect to not be subject to tax if they sold their QOZ investment after holding it for 10 years or more.  The latest guidance extends this exclusion to sales by the QOZ Fund of property held for at least 10 years.

The regulations recognized that a sale of QOZ property by the fund itself may cause loss of QOZ Fund status.  In response, the regulations allow the fund to sell QOZ business assets and then reinvest in new QOZ business assets within 12 months and still retain QOZ Fund status.  However, any taxable gain on the sale is still recognized at the time of sale and the partners of the fund will have to pay tax on their share of that taxable gain.  The regulations also give a QOZ fund more time to invest cash contributed by its investors without jeopardizing QOZ fund status.

Finally, distribution of refinancing proceeds may be allowed to be made tax-free up to the partner’s basis for their partnership interest, though there are potential concerns under the regulations that it could be treated as a disguised sale.  As a result, care in structuring debt financed distributions is needed, which may require waiting two years from the capital contribution to the fund.

The bottom line is that the IRS was very responsive in making a QOZ Fund a more viable planning option.  Let us know how we can help your creation of a fund or investment in a fund.

On April 12, 2019, New Jersey enacted the “Aid in Dying for the Terminally Ill Act.”  (P.L. 2019, Ch. 59).  The bill authorizes an adult resident of New Jersey, who has capacity and whose attending physician has determined to be “terminally ill,” to obtain self-administered medication to terminate his or her own life.  The new law will go into effect on August 1, 2019.  It makes New Jersey the eighth state, plus the District of Columbia, to allow for the prescription of medication to end one’s own life.

The capacity required to make such requests is the capacity to make health care decisions and communicate them to a health care provider.  The law requires such patients that are determined to be “terminally ill” to make two oral and one written request to his or her attending physician for medication that can be self-administered to end his or her own life.  The oral requests must be at least 15 days apart, while the written request may be made at any time after the initial oral request.  The written request must be signed by the patient and at least two witnesses, one of whom is not either (a) related to the patient by blood or marriage, (b) entitled to any portion of the patient’s estate, or (c) an owner, operator or employee at the health care facility where the patient is being treated.  Forty-eight hours must elapse after such written request before the attending physician can write the prescription.

Upon receipt of the oral and written requests, the attending physician is required to consult with a second physician who has both examined the patient and reviewed the patient’s medical records. The attending physician must also (a) allow the patient the opportunity to rescind the request, (b) inform the patient of the risks and alternatives to the medication, (c) refer the patient for counseling, if appropriate, and (d) recommend that the patient notify his or her next of kin of the request.  Any rescission by the patient can be made regardless of his or her mental state.

If the attending or consulting physician believes that the patient may not be capable, the physician must refer the patient to a mental health care professional (i.e. psychiatrist, psychologist or licensed clinical social worker) to determine whether the patient is capable.  If such a referral is made, no medication can be prescribed to the patient until the attending physician has been notified in writing from the mental health care professional that the patient is capable.

It is important to note that the patient’s guardian, conservator or health care representative is not authorized to make or rescind the request for such self-administered medication, other than to communicate the patient’s decisions if requested by the patient.  In addition, the law specifically states that such a request by a patient is not grounds, in and of itself, to bring a proceeding for the appointment of a guardian of such patient.

Annuities are a common tool for investment, financial and estate planning and asset protection.  An annuity is simply a contract between a person and an insurance company in which the person makes a lump sum payment to the insurance company in exchange for regular disbursements of money that start either immediately or at some definite time in the future.    At its core, an annuity is really a form of investment or insurance that entitles the investor to a series of annual payments.

Closely related to annuities are life insurance policies.   Like annuities, life insurance policies are contracts of insurance but, unlike annuities, life insurance is specifically intended to pay death benefits to designated beneficiaries.   The policyholder pays premiums to an insurance company which issues a life insurance policy guaranteeing payment of the purchased death benefit to the named beneficiaries once the insured passes away.

Since I have long represented persons and companies with respect to debt collection and judgment enforcement, I have been asked numerous times through the years whether a judgment creditor, i.e., one who has a monetary judgment in her favor against someone, can collect on that judgment from either an annuity or the cash surrender or proceeds of a life insurance policy purchased by the judgment debtor.  The answer, at least in Florida, is a pretty emphatic “no.”

Florida Statutes Sec. 222.13(1) provides:

(1) Whenever any person residing in the state shall die leaving insurance on his or her life, the said insurance shall inure exclusively to the benefit of the person for whose use and benefit such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured unless the insurance policy or a valid assignment thereof provides otherwise. Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured’s estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured’s estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured’s.

Similarly, Florida Statutes Sec. 222.14 states

The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.

The above law is very clear.  Someone holding a judgment that remains outstanding must look to sources other than annuities or the cash surrender or proceeds of life insurance policies—unless the life insurance policy specifically provides otherwise—in order to enforce that judgment.