USING A WILL TO FORGIVE DEBT

Florida law allows a decedent to forgive certain debt upon his or her death.  For example, a holder of a promissory note who wishes to forgive the outstanding debt that has not been paid upon his or her death may do so through his will.  Problems arise, however, when the estate is insolvent.

In Lauritsen v. Wallace, 67 So. 3d 285 (Fla. 5th DCA 2011), William Wallace issued a promissory note to his son.  Eleven days before his death, Mr. Wallace signed a will clearly and unambiguously forgiving his son’s debt.  Upon his death, Mr. Wallace’s estate had significant debt and insufficient assets to pay off that debt.  The court found that because Mr. Wallace’s estate was insolvent, he could not forgive his son’s debt.

To understand this outcome, one must first understand a few concepts of Florida law.  First, a promissory note is an asset of the holder.  Thus, when a decedent holds a promissory note that has not been paid, that promissory note will be considered an asset in the decedent’s estate.  Second, when a decedent attempts to forgive a debt in his will, that forgiveness is considered a bequest.  Finally, the estate’s assets must be used to pay the estate’s costs and other expenses before the assets are devised to beneficiaries according to the decedent’s will.

The Lauritsen case applied these concepts to come to its conclusion.  The only asset that Mr. Wallace had upon his death that could pay his estate’s administrative costs, debts, and expenses was Mr. Wallace’s interest in the promissory note issued to his son.  Because, a will’s forgiveness of debt is considered a bequest, such bequest can only be given effect after the estate’s debts are paid off.  Thus, because Mr. Wallace’s estate was insolvent, his will’s attempt to forgive his son’s debt could not be given effect.

Mr. Wallace’s son argued that the debt forgiveness should be given effect because Mr. Wallace’s will was a “signed writing.”  Under Florida law, the holder of a promissory note can lawfully renounce his rights against the debtor in a signed writing.  The court disagreed.  A will depends on the Probate Code for its authority.  A will therefore is not an isolated “signed writing” but must be admitted to probate to be given effect.  Mr. Wallace’s attempt to forgive his son’s debt was a bequest, not an isolated signed writing.  As a bequest, it cannot be given effect until the estate’s debt is paid.

Lauritsen demonstrates the problems that could arise when an estate is insolvent.  If one intends to forgive a debt upon his or her death, the better approach would be to include such wording in the debt instrument itself.  A clause in a promissory note forgiving the debt upon death of the holder might have avoided the issue in Lauritsen.

Probate attorney Peter T. Mavrick represents clients in probate, trust, and guardianship litigation.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.