A Sermon on the Mount (Sinai): Enforceability of Charitable Pledges Against an Estate and Guidance for the Estate Planner and Benevolent Personal Representative.
The comment to subsection (4) acknowledges that charitable pledges are, from a contractual standpoint, somewhat of an enigma. It is for this reason that the UPC sidesteps the contractual issue and simply provides the personal representative the authority to pay the pledge "where he believes the decedent would have wanted him to do so without exposing himself to surcharge." The rub is that when Florida adopted the UPC and, specifically when it adopted [section]3-715, subsection (4) was one of the only powers it did not adopt. (1)
The question, then, is what does Florida law provide regarding the enforceability of charitable pledges against a decedent's estate? What should the personal representative consider before honoring the pledge? Part I of this article explores the issue as framed by Mount Sinai v. Jordan, 290 So. 2d 484 (Fla. 1974), the only Florida case to address the issue. Part II highlights practical considerations and provides guidance when personal representatives are confronted with a charitable pledge of questionable enforceability. Part III offers a drafting suggestion to estate planners to facilitate the enforceability and payment of charitable pledges.
Mount Sinai's Twin Peaks
Somewhat surprisingly, it was not until 1973 that a Florida court addressed the issue of the enforceability of a charitable pledge in the absence of reliance. Perhaps more surprising is that in the nearly five decades following the Florida Supreme Court's decision in Mount Sinai, there has not been a single other published case in Florida addressing the question.
The Mount Sinai facts are straightforward. Harry Burt executed two pledges of $50,000 each in 1968. (2) The pledges provided, in pertinent part: "In consideration of and to induce the subscription of others, I (We) promise to pay to Mount Sinai Hospital of Greater Miami, Inc. or order the sum of[f]ifty [t]housand and no/100 dollars $5,000.00 payable herewith: Balance in [n]ine equal annual installments commencing on January (sic) 1 of...." (3)
The question before the court was whether, in the absence of reliance on the promise, the pledge was binding against Mr. Burt's estate when the only evidence of consideration was to induce the subscription of others. (4)
The trial court ruled in the charity's favor, holding there was sufficient consideration. On appeal, the Third District Court of Appeal noted a dearth of Florida law on the issue and accordingly turned to other jurisdictions when it found two competing views. (5) In several jurisdictions, courts held that this "promise for a promise" was enforceable if additional contributions were made by reason of the inducement. (6) The Third District did, however, find a 'connecting thread' of reliance in many of these cases. (7) By contrast, courts in other jurisdictions held that mutual promises to subscribe lacked sufficient consideration. (8) In these cases, the promises could not be consideration for other subscriptions because that would constitute "past consideration." (9) The Third District sided with the latter viewpoint holding that pledges whose only consideration is the inducement of others are a "mere gratuitous promise of a future gift lacking consideration and, hence, unenforceable as a nudum pactum." (10) The Third District further held that "[w]e would still adhere to this proposition even if there had been evidence, which there was not, that the decedent's pledge were used to induce others to subscribe." (11) It certified the question to the Florida Supreme Court.
The Florida Supreme Court affirmed, and in so doing, created a two-prong test to determine the enforceability of charitable pledges against a decedent's estate.
* The First Prong: Specificity--As for the first prong, the Florida Supreme Court held that:
... in order for a pledge to survive the death of the donor and be considered a valid claim against the estate.the document stating the conditions of the pledge must recite with particularity the specific purpose for which the funds are to be used. It would, for example, be insufficient if the pledge designated the general operating fund.... Therefore, the donative intent as to the specific material plan ... must be made an integral part of the pledge instrument, limiting the exercise of discretion by the donee within the boundaries set forth by the instrument. (12)
The Florida Supreme Court explained that the reason for the first prong was that "unless the donor has made specific provision for the maintenance of a fund or source of funds for the continued payment of the pledge, this debt if enforceable could be a material burden upon the decedent's estate. Clearly, then, by requiring the donor to recite with particularity the specific purpose for which the funds are intended, he should then consider from which source he intends to meet this obligation in the event of his premature death." (13)
* The Second Prong: Detrimental Reliance--As to the second prong, the Florida Supreme Court required that "the donee must affirmatively show actual reliance of a substantial character in furtherance of the specified purpose set forth in the pledge instrument before the claim may be honored by the estate." (14) Until such time, the pledge is only an offer and is revocable by death, insanity, or otherwise. (15)
In applying the test, the Florida Supreme Court determined that the charity could not enforce the pledges against Mr. Burt's estate. (16) The pledges failed both prongs: Mr. Burt did not make them for any specified purpose nor did the hospital undertake any work in reliance on the pledges. (17)
* Limited Scope--The test may appear to be straightforward: Is there a written pledge agreement that specifies the purpose of the pledge, and did the charity show actual reliance of a substantial character on the pledge? It is important to note, however, the narrow scope of the ruling. The Mount Sinai decision was limited to answering the specific question of whether a pledge is binding when there is no actual reliance and the only evidence of consideration is the inducement of other subscriptions. The Florida Supreme Court emphasized that "certainly there is no attempt by this
[c]ourt to draw guidelines encompassing the breadth of creativity but rather to answer the specific question raised." (18)
Accordingly, the test does not apply to every charitable pledge sought to be enforced against a decedent's estate. It only applies to those pledges whose only consideration is the inducement of others to subscribe. As to that limited group of pledges, the Florida Supreme Court has provided the test. For example, the test does not necessarily apply to pledges that exhibit forms of consideration beyond the inducement of others to subscribe.
What About That First Prong?
In addition, although the Florida Supreme Court clearly adopted a two-prong test, it also introduced two interrelated variables that potentially complicate the analysis. First, although Mr. Burt's pledge agreements did not satisfy the first prong, the Florida Supreme Court proceeded to discuss the issue of reliance. In doing so, it implied that the doctrine of promissory estoppel could apply even in situations in which the pledge specificity is lacking and the only consideration for the pledge agreement is the inducement of other pledges.
The Florida Supreme Court's holding in this regard may represent a significant departure from that of the Third District. The Third District, as explained above, canvassed the law around the country regarding the enforceability of charitable pledges when the only consideration is the inducement of others to subscribe. It held that such inducement is not sufficient consideration. It included in its review cases in which there was actual inducement and in which others did subscribe based upon the pledge at issue. The Third District held that even those pledges failed for lack of consideration. It regarded them as a nudum pactum and unenforceable, even if there was evidence that the pledge was used for and did induce others to subscribe. (19)
The Florida Supreme Court, however, held that "when the gratuitous promise is coupled with an inducement for others to subscribe, the promise is no longer void on its face.'" (20) Moreover, it found that "the pledge in question was not made for any specified purpose, clearly was not used to induce others to subscribe and the [h]ospital undertook no work in reliance upon [the] subscription." (21) There appear to be at least two possible explanations for the holding. On the one hand, the Florida Supreme Court did not draw attention to its divergence from the Third District and, therefore, the two cases should not be read as in conflict with each other. Nowhere does the Florida Supreme Court indicate a disagreement with the Third District's holding or reasoning and often praises it. On the other hand, a contract that is nudum pactum is a void contract. It could be argued, then, that regardless of whether the Florida Supreme Court specifically acknowledged its disagreement with the Third District, it did, in fact, overrule the Third District's holding sub silencio. It held the contract was not void on its face, and it cited the lack of inducement as a basis for its holding.
This is not esoteric. If the Florida Supreme Court's holding effectively overrules the Third District's decision, then pledges that do, in fact, induce others to subscribe to the charity may not be susceptible to the two-prong analysis. The pledge agreements may not need to state with specificity the purpose of the pledge and the donee may not be required to demonstrate reliance on the pledge. If that is the case, then it is perhaps fortuitous (or a tragedy, depending on where you stand) that five years after the Mount Sinai decision, the American Law Institute officially adopted Restatement (Second) of Contracts [section]90(2). Subsection (1) provides that:
[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding, if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.
Subsection (2) provides that "[a] charitable subscription or a marriage settlement is binding under [subsection (1) without proof that the promise induced action or forbearance." A Florida court could be justified in applying 90(2) to these types of pledges.
* What About the Second Prong? --Most broadly stated, Mount Sinai suggests that "work done" or "liability incurred" constitutes the requisite reliance. It also approvingly cited the Third District's holding that reliance could be the foregoing of any material right. It would be impossible to analyze the myriad ways a charity might sufficiently rely upon a pledge, but two common examples would include
1) the expenditure of funds for building, the performance of services, or some other detriment incurred by the charity; (22) and 2) the award of naming rights. (23)
As with the first prong, though, the second prong is not entirely stable, especially in light of the above-cited Restatement (Second) of Contracts [section]90(2). According to the restatement, actual reliance by the promisee is not necessary. The only question is whether the promisor should have reasonably expected the promise to induce reliance. The restatement is essentially affording a type of protection to charitable pledges that the Third District and the Florida Supreme Court expressly denied.
Advising the Benevolent Personal Representative in the Shadows of Mount Sinai
Until Florida courts offer clarity on the issue, attorneys who are advising Florida personal representatives in the practice of paying charitable pledges will struggle with the uncertainty created by Mount Sinai. In Mount Sinai, the Florida Supreme Court has established a two-criteria test for charitable pledge enforceability with little guidance to the personal representative, who has the responsibility of determining whether a pledge legally satisfies the criteria imposed. In particular, the personal representative who is met with a pledge agreement of questionable enforceability will be confounded by the meaning of the second prong of the Mount Sinai test and what constitutes "actual reliance of a substantial character in furtherance of the specified purpose set forth in the pledge agreement." Such a measure is susceptible to being applied inconsistently by the courts.
It is easy to advise the personal representative who is opposed to the estate's payment of a charitable pledge agreement of questionable enforceability. The personal representative of that mindset will object to the statement of claim filed by the donee and assert that the donee's pledge fails to satisfy the Mount Sinai criteria. Likewise, it is easy to advise the personal representative in situations in which the estate beneficiaries unequivocally share the personal representative's desire to honor the decedent's charitable pledge even though the pledge may not be legally enforceable, and are willing to release and indemnify the personal representative for payment of the pledge, for example, when the personal representative and beneficiaries are members of the same close-knit family. The personal representative in that scenario will pay the pledge without hesitation or exposure to liability. Even in instances in which the personal representative is ambivalent about the payment of a charitable pledge of questionable enforceability, the appropriate legal advice is fairly clear. The personal representative of that mindset may petition the probate court for instructions with notice to the donee and all interested persons of the estate, thereby placing the onus on the beneficiaries to assert their position on the payment of the pledge and placing the onus on the donee to bring factual support for its pledge's enforceability under Mount Sinai. The petition for instructions would shelter the ambivalent personal representative from potential surcharge liability, and in the case of a taxable estate, the evidence produced by the donee may support the pledge's deductibility on the estate tax return. (24)
However, how does the Florida attorney advise the benevolent personal representative who has a deep personal desire to pay the decedent's pledge of questionable enforceability but for whom it is impracticable to determine a unified position in favor of payment of the pledge among the estate beneficiaries, or the benevolent personal representative who is otherwise uneasy about potential liability for payment of a pledge that is later determined to be legally unenforceable? In many cases (particularly when the personal representative is the surviving spouse), the personal representative desires that the decedent's charitable pledge be honored by the estate as a result of 1) the personal representative's own relationship with the donee; (25) 2) the personal representative's certainty that the decedent would have wanted the estate to honor the pledge to the donee based on the decedent's affinity for and support of the donee during the decedent's life; 3) the personal representative's concern that the decedent's legacy would be tarnished by welching on a promise to a charity; or 4) a combination thereof.
Given Mount Sinai's relatively strict test for pledge enforceability, benevolent personal representatives in Florida are encountered with a dilemma not faced by their counterparts in most other jurisdictions. The fact is that the vast majority of charitable pledge agreements signed by Florida donor decedents likely do not meet the Mount Sinai criteria for enforceability. The clear concern of the benevolent Florida personal representative is an adverse surcharge judgment arising from the payment of a charitable pledge that is rendered unenforceable under Mount Sinai. In one recent case from the Alabama Supreme Court, an executor was sued for surcharge and disgorgement of fees for paying a charitable pledge that the estate beneficiaries alleged was legally unenforceable. (26)
The liability concern is amplified when the estate-tax implications of paying an unenforceable charitable pledge are considered. If the pledgor's estate pays an enforceable charitable pledge, the payment qualifies as a [section]2053 debt deduction for the estate (not a [section]2055 charitable deduction). (27) However, a pledgor's estate is permitted no deduction for paying an unenforceable charitable pledge, (28) even if all interested persons of the estate agree with the estate's payment of the pledge. (29) Because state law determines the enforceability of a charitable pledge, the Florida personal representative of a taxable estate is saddled with Mount Sinai's enforcement criteria in deciding whether to take a deduction for a dubious charitable pledge on the estate tax return. The unwitting benevolent personal representative could be whipsawed, incurring surcharge liability for paying an unenforceable pledge that doesn't qualify for an estate tax deduction. In one Florida estate administration, the risk-averse personal representative sought a private letter ruling to determine the deductibility of a charitable pledge to a state university under facts that seemed to clearly satisfy both prongs of Mount Sinai. The pledge agreement at issue in the private letter ruling expressly established that the pledged funds would be used to construct a university building, and prior to the donor decedent's death, the university had relied upon the pledge by obtaining matching funds from the state and commencing construction of the building. The service applied the Mount Sinai analysis in awarding the deduction to the estate. (30)
Three alternative paths appear before the benevolent personal representative who is traveling in the shadowy darkness of Mount Sinai. These options for payment of a charitable pledge of questionable enforceability are listed in order from most aggressive (risky) to most cautious.
1) The personal representative (ostensibly under the authority of F.S. [section]733.612(2)) pays the pledge without requiring the charity donee to file a statement of claim and includes the pledge on the personal representative's proof of claim as already paid. Under this alternative, the personal representative will remain on the hook for potential surcharge liability through the stage of final accounting and discharge.
2) The personal representative includes the pledge on the proof of claim as a "debt to be paid," attaches a copy of the pledge agreement to the proof of claim, serves the proof of claim on all interested persons, and waits to see if an interested person objects to the proof of claim before paying the pledge. Under this alternative, the personal representative can theoretically proceed with payment of the pledge if an interested person fails to timely object to the proof of claim. However, there is a danger that an interested person could later bring a surcharge claim against the personal representative at any time prior to the personal representative's discharge (even if no objection to the proof of claim was timely filed) on the basis that there was inadequate disclosure on the proof of claim of the unenforceability of the pledge under the law of Mount Sinai and of the possibility that the payment of the pledge would not be deductible on the estate tax return (in the case of a taxable estate).
Under both alternatives, the personal representative should consider requiring the charity donee to enter into a receipt and refunding agreement prior to payment to allow the personal representative to pursue reimbursement on behalf of the estate if an interested person later successfully asserts an objection to the payment of the pledge. The personal representative may also rely upon reimbursement under the authority of F.S. [section]733.812, however, that would be far riskier than securing a receipt and refunding agreement from the charity donee.
3) The personal representative requires the charity donee to file a statement of claim and to attach the pledge agreement to the claim. The personal representative could then file a customized notice of intent to pay the pledge claim and serve it on all interested persons by formal notice. In the notice of intent, the personal representative would inform interested persons of their right to object to the charity donee's claim under F.S. [section]733.705(2) and Fla. Prob. R. 5.496; expressly disclose the uncertainty of the pledge's legal enforceability under Mount Sinai; list the personal representative's reasons for wanting the pledge honored; list any facts in support of legal enforceability under Mount Sinai; and, if it is a taxable estate, disclose that the pledge payment may not be deductible on the estate tax return. Under this alternative, if no objection was timely filed by an interested person, then the personal representative could safely pay the pledge. If a timely objection was filed by an interested person, then the personal representative could seek probate court relief from the obligation to defend the estate in the independent action brought by the charity donee to enforce its claim and to delegate the estate's defense to the objecting interested person or to an administrator ad litem under F.S. [section]733.705(3).
Cautionary note: Whether the benevolent personal representative proceeds under alternatives one, two, or three, in a taxable estate situation, the estate could still be faced with an IRS challenge with the service asserting nondeductibility on the basis that the pledge agreement failed to meet the Mount Sinai criteria.
Summiting Mount Sinai with the Help of the Estate Planner
What can the Florida estate planner do to simplify the decision-making for the benevolent personal representative and to safeguard the charitable intentions of the donor client? Because the estate planner is often not involved in the drafting of the charitable pledge agreement and cannot control the degree of subsequent reliance on the pledge on the part of the charity donee, the thoughtful planner can most effectively resolve the challenges of Mount Sinai by specifically addressing the payment of the charitable pledge in drafting the donor's will.
An example of effective will language would be: "I direct my personal representative to pay the pledge to charity X under agreement dated (identify date of pledge agreement), which shall constitute a bequest to charity X." By essentially elevating the nature of the charitable pledge from a creditor claim to a charitable bequest, the planner will have ensured the pledge's payment, secured the deductibility of the pledge on the estate tax return, and shielded the personal representative from criticism and liability for payment of the pledge.
It is difficult to counsel the benevolent personal representative who is faced with a charitable pledge of dubious enforceability under Mount Sinai. Which path the benevolent personal representative takes to pledge payment will be dictated by a number of factors--the language of the pledge agreement, the degree of the donee's reliance upon the pledge, the nature of the donor decedent's relationship with the donee, the size of the pledge balance, the projected costs of litigating the enforceability of the pledge, the likelihood of beneficiary objections to pledge payment, the personal representative's appetite for risk, whether the estate is taxable, etc. The greater the exposure to potential surcharge liability, the more the benevolent personal representative should be reminded that "charity begins at home."
(1) See FLA. STAT. [section]732.612
(2) Mount Sinai, 290 So. 2d at 485.
(3) Id. at 485-86.
(4) Id. at 486.
(5) Jordan v. Mount Sinai Hospital of Greater Miami, Inc., 276 So. 2d 102 (Fla. 3d DCA 1973).
(6) Id. at 104.
(7) Id. at 105.
(8) Id. at 105-107.
(9) Id. at 106.
(10) Id. at 108.
(11) Id. at 108.
(12) Mount Sinai, 290 So. 2d at 486.
(13) Id. at 486-87.
(14) Id. at 487.
(18) Id. at 486.
(19) Jordan, 290 So. 2d at 107.
(20) Mount Sinai, 276 So. 2d at 486 (emphasis added).
(21) Id. at 487 (emphasis added).
(22) 83 C.J.S. Subscriptions 13 (2008); see also Danby v. Osteopathic Hospital Ass'n of Delaware, 104 A.2d 903 (Del. Supr. 1954) (execution of contracts for construction of hospital, binding the charity, was sufficient detrimental reliance).
(23) In re Eckel's Will, 124 N.Y.S. 2d 448, 451 (N.Y. Sur. 1953) (sufficient consideration where hospital agreed to name a restaurant and lounge to "memorialize" the decedent's spouse, and where the restaurant and lounge had been constructed and the hospital representative testified that upon funding of the pledge "appropriate steps would be taken" to memorialize the decedent's spouse. See also Woodmere Academy v. Steinberg, 395 N.Y.S. 2d 434, 436 (N.Y. 1977) (where donee fulfilled promise to name library after donor's wife in exchange for pledge, donee's obligation "having already been performed, defendant's obligation became absolute")).
(24) See In re Field's Estate, 172 N.Y.S. 2d 740 (N.Y. Sur. 1958); see also 1 Harris N.Y. Estates: Probate Admin. & Litigation [section]13:135 (6th ed.).
(25) Certainly, if the personal representative's own relationship with the donee rises to the level of a conflict of interest the personal representative should be advised to petition for the appointment of an administrator ad litem to handle all aspects of a charitable pledge that is of questionable legal enforceability. See Fla. Stat. [section]733.308 and Fla. Prob. R. 5.120.
(26) Ruttenberg v. Friedman, 97 So. 3d 114 (Ala. 2012).
(27) Treas. Reg. [section][section]20-2053-5(a).
(28) No [section]2053 estate tax debt deduction is allowed because the pledge is not an obligation of the decedent's estate because it is legally unenforceable. No estate tax charitable deduction is allowed under [section]2055 because such payment would be considered voluntary by the personal representative and not made by the donor decedent.
(29) See IRS Letter Ruling 7816001; see also Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).
(30) See IRS Letter Ruling 9718031.
Thornton B. Henry is an associate at Barner & Barner, P.A., in Palm Beach Gardens, where he concentrates his practice in trusts and estates.
J. Grier Pressly III is a shareholder of Pressly, Pressly, Randolph & Pressly, P.A., in Palm Beach, where he concentrates his practice in trusts and estates.
The authors dedicate this article to the memory of Benjamin P. Brown (19642015). They also express their gratitude to
John W. ("Randy") Randolph for his careful attention to the article's drafts and his invaluable suggestions for its improvement.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Andrew M. O'Malley, chair, and Douglas G. Christy and Jeff Goethe, editors.
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|Author:||Henry, Thornton B.; Pressly, J. Grier, III|
|Publication:||Florida Bar Journal|
|Date:||Feb 1, 2018|
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