With the popularity of “avoiding probate” seminars, books and do-it-yourself guides that flooded the State of Florida over the past decades it is little wonder that our state has seen a dramatic increase in Trust Litigation. Trusts can be great estate planning tools. This article is meant to provide a basic overview for those brave trustees who have agreed to take on (hopefully knowingly) all the responsibilities to beneficiaries as outlined in Florida’s Trust Code.
A Fiduciary Responsibility
A Trustee under the Florida Trust code is a fiduciary, which literally means “trust” in latin. The fiduciary relationship is the highest standard of care owed under Florida law. This is the level of responsibility and care of attorney-client and doctor patient. A trustee owes a fiduciary duty to the beneficiaries of a trust, meaning that he or she must act for the best interests of the beneficiaries and handle the affairs of the Trust in a prudent and reasonable manner at all times. The interests of the beneficiaries are paramount and should direct or underly the actions of a trustee at all times. Self-dealing, negligence or simply laziness in the administration of a trust can all give rise to a breach of this high fiduciary duty and subsequent litigation.
Statutory Duties Under the Florida Trust Code
In an effort to further inform Trustees, the Florida Trust Code, Chapter 736, contains numerous statutory duties providing warnings/guidance for a Florida Trustee. Here are the major obligations of a Trustee:
736.0801. Duty to administer trust
Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this code.
The Trustee has a tough job. Sometimes beneficiaries are demanding and unruly. Sometimes there will be pressure placed on the Trustee to make early and potentially improper distributions. While it may seem obvious, the Trustee needs to read and understand the Trust agreement. The Trust agreement sets forth the rules for Trust administration and if in doubt a legal action to obtain a judicial determination regarding ambiguous provisions can be initiated. That being said, for the vast majority of Trustees, competent legal counsel will be able to explain your obligations with clear references to the appropriate Trust provisions. The Florida Trust Code specifically identifies and warns the Trustee that their powers and their obligations must follow the provisions of the Trust agreement.
736.0802. Duty of loyalty
(1) As between a trustee and the beneficiaries, a trustee shall administer the trust solely in the interests of the beneficiaries.
This is the bedrock concept of Trust administration and the fiduciary obligation standard codified. As a Trustee under the Florida Trust code you always must act in the interests of the beneficiaries during your administration. Examples of a breach of trust administration – a Trustee residing in Trust property and not paying rent to the Trust, a Trustee providing a loan to his/her family member from the Trust assets with favorable terms, a Trustee investing trust assets for his/her own personal financial gain. Despite the ultra-high standard of care in the Florida Trust code I frequently encounter Trustees who have engaged in self-dealing transactions. Make sure to avoid self-dealing transactions or even the appearance of self-dealing transactions to avoid the cost/stress and time of a breach of trust lawsuit. A breach in the duty of loyalty can create personal liability for the Trustee and subject him/her to attorney fees. This means that under Florida law the Trustee who engages in self-dealing or a breach of the duty of loyalty may personally owe the damages to the trust, plus the reasonable attorney fees and costs incurred to establish the wrongdoing.
Fla. Stat. 736.0803. Impartiality:
If a trust has two or more beneficiaries, the trustee shall act impartially in administering the trust property, giving due regard to the beneficiaries’ respective interests.
Pretty self-explanatory but this is often breached in family situations where the Trustee is more closely aligned with some family member beneficiaries than more distant family member beneficiaries. As Trustee you have to act fairly and impartially to all. Don’t even think about distributions to one set of beneficiaries without considering the equality and impartiality obligations owed to all.
736.0804. Prudent administration
A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
This prudent administration statute crosses into another concept known generally as the “prudent investor rule.” As the name implies, Florida law requires a Trustee to be prudent, that is to invest or manage the Trust assets during administration in line with the purpose of the Trust. For example, a Trust designed to provide cash flow to an elderly beneficiary would require the Trustee to invest the Trust assets in an investment vehicle to promote the spirit and purpose of the Trust. The Trustee if he or she has specialized skills must use them. Otherwise, for most Trustees, retain a team of professionals to assist you! You will want to retain an attorney experienced with Trust Administration and litigation and an accountant. Finally, if your Trust requires ongoing investment you should also consult with a financial planner. Fla. Stat. 736.0807. Delegation by Trustee specifically allows/provides for a Trustee to delegate duties and powers for trust administration and investment. One final note on the Prudent Administration, the ultimate test under Florida law is prudence of conduct, not of result. So you may have a Trustee who delegates or otherwise makes an appropriate investment choice but the market or fund tanks and the Trustee has lost the Trust significant resources. That negative result, if the underlying conduct was prudent, is not enough to establish a breach of trust or liability against the Trustee. So act prudently and you will be protected, even if things don’t work out as planned.
736.0813. Duty to inform and account
The trustee shall keep the qualified beneficiaries of the trust reasonably informed of the trust and its administration.
(1) The trustee’s duty to inform and account includes, but is not limited to, the following:
(a) Within 60 days after acceptance of the trust, the trustee shall give notice to the qualified beneficiaries of the acceptance of the trust, the full name and address of the trustee, and that the fiduciary lawyer-client privilege in s. 90.5021 applies with respect to the trustee and any attorney employed by the trustee.
(b) Within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust, or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, the trustee shall give notice to the qualified beneficiaries of the trust’s existence, the identity of the settlor or settlors, the right to request a copy of the trust instrument, the right to accountings under this section, and that the fiduciary lawyer-client privilege in s. 90.5021 applies with respect to the trustee and any attorney employed by the trustee.
(c) Upon reasonable request, the trustee shall provide a qualified beneficiary with a complete copy of the trust instrument.
(d) A trustee of an irrevocable trust shall provide a trust accounting, as set forth in s. 736.08135, from the date of the last accounting or, if none, from the date on which the trustee became accountable, to each qualified beneficiary at least annually and on termination of the trust or on change of the trustee.
A trustee has a duty to provide information to the beneficiaries upon request. This includes providing an accounting at least annually or upon the termination of the Trust. The duty to inform and account means that you must update the beneficiaries as to the material aspects and occurrences during your Trust administration and you must provide a beneficiary who requests material and relevant information with updates. This duty also requires a successor trustee to provide a Notice of Trust, setting forth the rights of beneficiaries as to an accounting, and naming the successor Trustee. As someone who litigates trust disputes, this is the duty that is most often disregarded by a Trustees. The failure to timely respond to a request for information or an accounting is a serious breach of trust that can lead to liability and even the removal of Trustees under Florida law. Also if you’re a beneficiary who suspects the Trustee has mismanaged a Trust asset, retain an experienced trust litigation attorney to demand an accounting immediately.
TRUSTEE OBLIGATIONS AS TO PAYMENT OF DEBTS AND TAXES
Avoiding Probate in Florida is a goal many folks have gotten behind in order to try to avoid attorney fees and attempt to get a quick distribution of assets to their beneficiaries upon death. While Trust administration can sometimes allow for a faster and more cost efficient distribution, many folks are unaware of the fact that a decedent’s revocable living trust (which becomes revocable on their death) is a payor of last resort to any creditor in the decedent’s probate proceedings:
733.707(3) . Order of payment of expenses and obligations:
(3) Any portion of a trust with respect to which a decedent who is the grantor has at the decedent’s death a right of revocation, as defined in paragraph (e), either alone or in conjunction with any other person, is liable for the expenses of the administration and obligations of the decedent’s estate to the extent the decedent’s estate is insufficient to pay them as provided in ss. 733.607(2) and 736.05053.
So for example if I have a revocable living trust during my lifetime and I transfer all my assets into the trust, those assets are subject to my Probate (estate) creditor claims. Meaning any debts that I owed personally must be satisfied by my Trust assets. What this means for the faithful Trustee who succeeds the Settlor after death in a revocable Trust is that he or she will be responsible to inquire into the debts of the decedent in order to make sure they are all satisfied and paid prior to making distribution to the beneficiaries. We recommend our Clients open probate even if there are no assets in the Estate, simply to use the creditor claim process (3 month publication period) and other applicable probate time bars so that they can close the door on potential claims and facilitate the Trust administration. If there are Probate assets and Trust assets the Probate assets will be used to pay the estate debts prior to the Trust becoming responsible to do so. Fla. Stat. 733.707.
In order to actually provide notice to a decedent’s creditors a Trustee is obligated pursuant to Fla. Stat. 733.707 to file a notice of trust with the Court of the county where the original settlor (creator of the trust) resided. See Fla. Stat. 736.05055. This way creditors will be able to search the official records and via the Notice of Trust will find the Trustee in the event that there exist unpaid debts and no probate estate has been initiated. The clerk of Court will also file the Notice of Trust in the probate proceeding if one has been opened or will do so after one is opened.
The Trustee will have an obligation in most administrations to file a Federal Income Tax Return for the Trust. The tax implications/responsibilities of a Trustee are beyond the scope of this blog and of course dependent on the assets in the Trust but suffice to say that the Trustee is obligated to file any necessary returns to the extent that the Trust assets have generated taxable income. Unless the Trustee is a certified public accountant the Trustee should absolutely retain a tax professional, preferably a CPA with estate/trust experience to aid in the filing of any final returns. We work with a range of incredibly sharp accountants for our Clients. If you need referral to a tax professional for a Florida Trust or Estate Administration just give us a call.
LIMITATION PERIOD FOR ACTIONS AGAINST A TRUSTEE
An action against a Trustee for a claim of breach of trust can be limited if the Trustee provides notice and the required disclosures and a final accounting of trust assets pursuant to Fla. Stat. 736.1008. If these disclosures are made appropriately than an action regarding the materials disclosure in the final accounting will be limited to a six-month period from service. Alternatively, if there are no objections to the final trust accounting beneficiaries should be encouraged to waive the right to contest the Trust so that the Trustee can make distribution. The six-month limitation will only apply to actions/matters that were addressed in the final accounting. If the Trustee has engaged in fraud/self-dealing, negligence that is not apparent in the final accounting a longer statute of limitations pursuant to Fla. Stat. 95.11 may apply.
ADVICE FOR TRUSTEES FROM A TRUST LITIGATOR
The Florida Trust code imposes duties that can create serious risks for even well-meaning trustees. We have litigated many trust actions and obtained judgments against trustees who simply didn’t know any better and had not taken the opportunity to understand the responsibility and obligations contained in the Florida Trust code. Make sure to be cautious throughout the administration of your Trust and rely on the advice of a team of professionals. If you have any questions about Trust administration or any of the provisions in the Florida Trust Code, give our office a call for a consultation.