In the recent case of Fintak v. Fintak, (No 2D12-3407 2nd DCA, August 23, 2013), the Second District Court of Appeals issued a ruling which excited legal nerds (like me) by discussing the Renunciation Rule as applied to self-settled trusts. It’s a technical case with some convoluted facts, but if you bear with me, I think it’s fairly interesting.
- Edmund P. Fintak – the decedent.
- Shirley Fintak – Edmund’s wife, and the personal representative of his estate.
- Thomas Fintak and John Fintak – two of Edmund’s children (of course, children of a prior relationship and not Shirley’s children)
- The Edmund P. Fintak Irrevocable Trust – a self-settled irrevocable trust created by Edmund during his lifetime. Thomas and John are the co-Trustees.
When the first sentence of an opinion is, “This is a particularly contentious case involving the dangerous amalgam of family and money,” you know it’s going to be good. I’ll try to summarize, but for the full details you have to read the case. In September 2006, Thomas Fintak took his father Edmund to an estate planning attorney, where Edmund executed a self-settled irrevocable trust with most of his assets.
A self-settled trust is one where a person contributes their own assets to the trust for their own benefit. This is opposed to a third-party trust, in which someone else creates a trust for a beneficiary – think parents creating a trust for their children. Traditionally, a self-settled trust for the benefit of the Settlor is revocable and a third-party trust created for a beneficiary is irrevocable. While this isn’t always true when it comes to asset protection, for “every day” estate planning, it is. People generally transfer their assets to a revocable trust for probate and incapacity planning, and transfer assets to a third party irrevocable trust to make gifts to others.
Here, Edmund created a self-settled irrevocable trust where he, Thomas, and John (two of his sons) were all co-Trustees. He transferred almost all of his assets to it. The trust provided that he was the beneficiary during his lifetime. If he became incapacitated, then he was still the beneficiary, and the co-trustees would continue to apply trust assets for his benefit. This is all standard stuff for a revocable trust. Why did his son take him to an estate planning attorney to execute an irrevocable trust – that once established, Edmund couldn’t change the provisions of?
Per the court, “following Edmund’s death … the remaining income and principal of the Trust should be divided in six equal shares and distributed to Edmund’s children. The Trust makes no provision for, and no mention of Shirley.”
Oh. That’s why.
Long story short, yadda yadda yadda, after receiving benefits from the Trust, Edmund, either directly or through Shirley, challenged its validity (undue influence, coercion, lack of capacity, etc.). At some point Edmund died and Shirley kept up the challenge.
The Trial Court’s Ruling
The trial court, in granting a summary judgment motion against Shirley (as Personal Representative of the Estate), ruled that “Shirley, substituted for Edmund, was barred from bringing actions for undue influence and lack of testamentary capacity becaue Edmund failed to renounce benefits received under the Trust and because Shirley took inconsistent legal positions.”
The Second DCA to the Trial Court: Shirley You Can’t Be Serious
The District Court reversed the trial court’s decision. In its decision, it explained that usually under the renunciation rule, “one who receives and retains a gift under a will or other instrument is estopped to contest the validity of the instrument under which he derives his interest.” In other words, if you want to challenge a will or trust, you can’t take the property in it. However, the renunciation rule has always applied to dispositions and bequests made by a third party. It makes sense.
[pullquote1 quotes=”true” align=”right” cite=”Fintak v. Fintak, 2nd DCA, August 23, 2013″ citeLink=”http://caselaw.findlaw.com/fl-district-court-of-appeal/1642690.html”]It is axiomatic that one who funds a trust with his or her own assets does not have to renounce any benefits received as a condition precedent to instituting a challenge to the validity of the trust.[/pullquote1]
Here, in what is apparently case of first impression, Edmund (and then Shirley) was challenging the validity of an instrument that Edmund created. The court ruled that the “renunciation rule is inapplicable in this scenario because there can be no gift or devise to a settlor/beneficiary of a self-settled trust because his or her interest does not derive from the trust itself. This is especially true when the settlor has simply transferred what he or she already legally owns into a trust in which he or she is the sole beneficiary during his or her life.
Conclusion – Renunciation Rule Does not Apply to Self-Settled Trusts
It seems pretty obvious. If you establish a self-settled trust – or, if someone forces you to establish a self-settled trust – that fact that you received benefits from the trust doesn’t stop you (or your representatives) from challenging the validity of the trust later on.