THE REVOCABLE TRUST AS BENEFICIARY OF THE ESTATE AND THE EFFECTIVENESS OF “FULL WAIVER” FORMS
This article provides a recommended legal course of action to be followed in administering a probate estate which has an inter-vivos revocable trust as a beneficiary. In these instances, the attorney representing the fiduciary must be aware of the potential conflict of interest issues which arise if the personal representative is also designated to serve as the successor trustee of the decedent’s revocable trust. This article discusses the law and rules addressing these conflict of interest situations. Often, the fiduciary may be inclined to avoid undertaking a formal judicial accounting for the probate administration by closing out the probate administration through the use of full waiver and receipt and consent to discharge forms. This article describes the pitfalls which await the personal representative if the trust beneficiaries are not provided with all material estate administration information.
The following example provides the framework for the ensuing analysis of the beneficiary aspects of administering an estate which has an inter-vivos revocable trust as a beneficiary:
Decedent is an unremarried widow and at her death is survived by her adult daughter ( Daughter ) and her adult son ( Son ). Prior to her demise, Decedent established a revocable trust (trust). Upon Decedent’s death, her longtime friend ( Friend ) is designated as successor trustee. The trust provides for a $100,000 pre-residuary devise to decedent’s sister ( Sister ) and an outright distribution of the residue one-half to Daughter and one-half to Son. The trust was partially funded during Decedent’s lifetime and at her death holds $2,000,000 of marketable securities. Decedent’s will designates Friend as personal representative. The will contains no pre-residuary devises and devises the residue to trust. The probate estate consists of $1,000,000 in vacant land and $500,000 of cash. You have been contacted by Friend to represent her as personal representative and trustee. At the initial meeting, Friend would like for you to provide her with a preliminary analysis of significant issues pertaining to the probate administration. Friend mentioned that she believes that the probate administration should be straightforward since she, as trustee of the trust, is the “sole beneficiary” of the estate. You commence the analysis and initially focus on the beneficiary aspects of the forthcoming administration.
Identifying Interested Parties
in Administration of Estate
Under the Florida Probate Code, who are the beneficiaries and interested persons of the estate? These questions must be answered at the outset of the estate administration in that, among other requirements, beneficiaries must receive a copy of the notice of administration (F.S. §733.212 and Fla. Prob. R. 5.240) and residuary beneficiaries must receive a copy of the inventory (Fla. Prob. R. 5.340). Interested persons must be served with any interim accountings (Fla. Prob. R. 5.345) and the petition for discharge and the final accounting (Fla. Prob. R. 5.400). Importantly, can Friend, as trustee of the trust, act on behalf of trust beneficiaries Sister, Daughter, and Son? Is Friend, as trustee, the estate beneficiary or are Sister, Son, and Daughter, the estate beneficiaries?
F.S. §731.201(2) states that “In the absence of a conflict of interest of the trust, the trustee is a beneficiary of the estate.” (Emphasis added.) There is a conflict of interest under this example in that Friend is serving as both personal representative and trustee.1 The nature of the conflict is that Friend would be in a position to approve her own accounting as personal representative of the estate.2 Under the fiduciary duty of loyalty, Friend, as personal representative, must administer the estate solely in the interests of the beneficiaries.3 The ability to approve her own probate accounting causes Friend to be personally interested in the accounting. It is difficult, if not impossible, for any person to act fairly in the same transaction (here, the submission and approval of the accounting) on behalf of himself or herself and in the interest of the beneficiaries.4 It is only human that the personal representative/trustee will tend to favor his or her individual interests, whether consciously or unconsciously, over that of the beneficiaries.5 Since there is a conflict of interest, F.S. §731.201(2) deems all owners of beneficial interests in the trust to be beneficiaries of the estate. Thus, the beneficiaries of the estate are Sister, Daughter, and Son. Accordingly, Sister, Daughter, and Son should receive service of the notice of administration.6 Pursuant to F.S. §§731.201(31) and 731.201(9), the trust is the residuary devisee of the estate. Since F.S. §731.201(2) causes all of the trust beneficiaries to be estate beneficiaries, pursuant to F.S. §733.212 and Fla. Prob. Rs. 5.240 and 5.340, Sister, Daughter, and Son should be served with copies of the notice of administration and the inventory.
The term “interested person” is defined in F.S. §731.201(21). Under §731.201(21), Friend, as trustee of the trust, is an interested person in all probate proceedings dealing with estate administration expenses and claims against the estate. The phrase “interested person” also is defined as any person who may reasonably be expected to be affected by the outcome of a particular proceeding involved. Breaches of the prudent investor rule, unreasonable commissions and fees paid, and other surchargeable matters would be reflected on interim and final accountings. Proposed improper distributions and unreasonable commissions and fees would also be shown on the petition for discharge. The residuary beneficiaries of the trust (which is, in turn, the residuary beneficiary of the estate), Daughter and Son, will be affected by the accounting and petition for discharge proceedings. Therefore, Daughter and Son are interested persons and, pursuant to Fla. Prob. Rs. 5.345 and 5.400, they should be served with copies of all interim and final accountings as well as the petition for discharge. Once the devise to Sister is satisfied, under F.S. §731.201(21), she would no longer be considered an interested person and would therefore not be entitled to accountings or a copy of the petition for discharge. However, prior to satisfying Sister’s devise, Friend should consider Sister an interested person and Friend therefore should serve all accountings and a copy of the petition for discharge on Sister.7
Now that you have determined the estate beneficiaries and interested persons, you attend your initial meeting with Friend. You inform Friend that Sister, Daughter, and Son are estate beneficiaries and interested persons and that they should receive copies of the notice of administration, inventory, interim and final accountings and the petition for discharge. Friend indicates that she does not desire to prepare and submit judicial accountings and that she would prefer to have the beneficiaries sign full waiver and receipt and consent to discharge forms when the estate is ready to be closed. Friend believes that it will be too costly and time-consuming to prepare judicial accountings.
Fla. Prob. R. 5.400(f) permits an interested person to waive his or her right to a final accounting and any portion of the petition for discharge. Fla. Prob. R.5.180(b) contains certain disclosure and acknowledgment requirements for waiving the amount and manner of determining compensation.8
At the meeting, Friend also indicates that she would like to sign, as trustee of the trust, a waiver of the trust’s right to a final accounting and service of a petition for discharge so that it would be unnecessary to obtain similar waivers from Sister, Daughter, or Son. You point out to Friend that, pursuant to Fla. Prob. R. 5.400(f), only interested persons have the right to waive receipt of a final accounting and any portion of the petition for discharge. You again indicate to Friend that, as to accountings and the petition for discharge, Daughter, Son, and Sister (until her devise is satisfied) are interested persons. You also refer Friend to Fla. Prob. R. 5.180(a)(2) which precludes Friend, due to Friend’s conflict of interest, from signing a waiver on behalf of the trust. Finally, you conclude that, pursuant to F.S. §731.303(1)(b)(2), an order of discharge, based upon Friend’s signing of a waiver on behalf of the trust, would not be binding on Sister, Daughter, or Son.
Ultimately Friend acquiesces to a plan which would involve obtaining full waiver and receipt and consent to discharge forms signed by Sister, Daughter, and Son.
When Does Delivery Produce Finality?
Before the estate is closed, what probate information, other than the notice of administration and inventory, should Friend provide to Sister, Daughter, and Son? F.S. §733.901(2) states that the court’s order discharging a personal representative releases the personal representative and bars any action against personal representative in his, her, or its individual capacity. However, there have been instances in which an order of discharge did not bar a beneficiary from bringing suit against the discharged personal representative for breach of fiduciary duty.9
In Van Dusen v. Southeast First Nat. Bank, 478 So. 2d 82 (Fla. 3d DCA 1985), the beneficiaries signed acknowledgments of full receipt of their shares of the estate and consents to discharge. Almost four years after receipt of the order of discharge the beneficiaries filed suit against the personal representative for breach of fiduciary duty. The beneficiaries alleged that the personal representative failed to disclose to the beneficiaries that the decedent’s manuscript was, with the knowledge and consent of the personal representative, delivered to a third party for use in the third party’s book. The court stated that the personal representative “invites us to hold that a personal representative may escape liability after wrongfully giving away an asset of the estate if it procures a discharge before interested persons discover its wrongful acts.”10 The court reasoned that the price of immunity (based on an order of discharge defense) is disclosure, and that if a personal representative has not disclosed the disposition of an asset of the estate, the personal representative is not entitled to “the sanctuary” provided by F.S. §733.901.11
In the recent case of First Union National Bank v. Turney, 26 Fla. L. Weekly D2776 (Fla. 1st DCA 2001), the court’s analysis of the “crime-fraud” exception to the attorney-client privilege contains a discussion of releases in a fiduciary context. Specifically, in Turney, the trustee sought to obtain a general release from a beneficiary. The First District Court cited the case of Donahue v. Davis, 68 So. 2d 163, 171 (Fla. 1953), for the proposition that breaches of a duty of disclosure have been held to be fraud.12 The court in Turney also cited §173 of the Restatement (Second) of Contracts (1979), which states that a contract between a fiduciary and a beneficiary is voidable by the beneficiary unless it is on fair terms and all parties beneficially interested manifest assent with full understanding of their legal rights and all of the relevant facts the fiduciary knows or should know. (Emphasis added.) The Turney opinion cited the Tennessee case of Richland Country Club, Inc. v. CRC Equities, Inc., 832 S.W. 2d 554, 557 for its conclusion that a release is a form of contract.
Turney further cites the Restatement (Second) of Trusts, which states, in its section on the duty of loyalty, §170(2), that a trustee in dealing with a beneficiary on the trustee’s own account is under a duty to deal fairly and to communicate to the beneficiary all material facts the fiduciary knows or should know in connection with the transaction (emphasis added).13 The rendering of an accounting or the request for beneficiary signatures on full waiver and receipt and consent to discharge forms are both instances in which the principles of Restatement §170(2) should apply. In these instances the personal representative is dealing with the beneficiaries on the personal representative’s own account (i.e., he or she is seeking to be released from personal liability).
Recently, the Florida Legislature amended F.S. §737.307. This statute continues to provide for a six-month statute of limitation. However, under the new legislation, effective for accounting periods beginning on or after January 1, 2003, the six-month bar only applies if the trust beneficiary receives a “trust disclosure document” which adequately discloses a matter, and a “limitation notice.”14 The new statute provides that a matter is “adequately disclosed,” for purposes of the trust disclosure document, if the document provides sufficient information so that a beneficiary knows of a claim or reasonably should have inquired into the existence of a claim (emphasis added).15 The new statute defines a “limitation notice” as
a written statement of the trustee that an action by a beneficiary against the trustee for breach of trust based on any matter adequately disclosed in a trust disclosure document may be barred unless the action is commenced within six months after receipt of the trust disclosure document or receipt of a limitation notice that applies to that trust disclosure document, whichever is later.16
The new statute provides a sample limitation notice which states that if the beneficiary has any questions, the beneficiary should consult his or her attorney.17
Van Dusen, Turney, §170(2) of the Restatement of Trusts, and the amendments to F.S. §737.307 all stand for the broad proposition that a beneficiary should not be barred from seeking redress for a breach of fiduciary duty if the beneficiary did not have sufficient information to know that a breach may have occurred.
“Full Waiver Form” as Alternative to Delivery
Florida Lawyers Support Services, Inc., Form No. P-5.0570, is a model probate “full waiver and receipt and consent to discharge” form (sometimes hereinafter referred to as “full waiver form”). This form is intended to comply with the waiver requirements of Fla. Prob. Rs. 5.400(f) and 5.180(b). The form states that the beneficiary expressly acknowledges that beneficiary is: 1) aware of his or her right to a final or other accounting; 2) waives the service or filing of a final accounting; 3) waives the inclusion of compensation amounts in the petition for discharge; 4) has actual knowledge of the compensation and has agreed to the amount and manner of determining the compensation; 5) waives objection to payment of compensation; 6) waives inclusion of a plan of distribution within the petition for discharge; 7) waives service of the petition for discharge; 8) waives all objections to any accounting and the petition for discharge; 9) acknowledges receipt of complete distribution of the amount which the beneficiary was entitled; and 10) consents to the entry of an order of discharge without notice, hearing, or waiting period and without further accounting.
If all beneficiaries sign full waiver forms without receiving any information regarding the probate proceeding (beyond the notice of administration and the inventory), would Friend’s discharge as personal representative of the estate under F.S. §733.901 protect Friend, as personal representative, from a post-order-of-discharge breach of fiduciary duty proceeding brought by a beneficiary?
For purposes of analysis, assume that, for this example, Friend, as personal representative, violated the prudent investor rule to the detriment of the beneficiaries and that Sister, Daughter, and Son all signed full waiver forms. Also assume that Friend did not provide any trust beneficiary with an accounting or any other statement of account.
Van Dusen, Turney, and §170(2) of the Restatement of Trusts all stand for the proposition that an order of discharge will not serve as a bar since Friend did not disclose sufficient information to apprise the beneficiary of the violation of the prudent investor rule. Additionally, unlike new F.S. §737.307, neither the Florida Probate Rules nor the full waiver form specify that the beneficiary must be informed that, by signing the waiver form, the beneficiary may be barred from bringing a breach of fiduciary duty proceeding, nor does the full waiver form advise beneficiary to consult an attorney should he or she have any questions (as is suggested by the amendments to §737.307). Therefore, in this example, the author does not believe that Friend’s discharge as personal representative will protect Friend from a surcharge action.
Clearly, Friend could point to the fact that the full waiver form does inform the beneficiaries that beneficiaries have, among other legal rights, a right to an accounting. If the beneficiaries had not waived their rights to an accounting they would have received sufficient information to discover the violation of the prudent investor rule. However, the author believes that a court would ultimately rule in favor of the beneficiaries in that Friend had a fiduciary obligation to provide the beneficiaries with all material information pertaining to the administration. Further, it is reasonable to assume that a beneficiary would not be familiar with the legal nature of an accounting. In this regard, a beneficiary would not normally realize that his or her waiver of the right to object to the accounting precludes the beneficiary from suing the personal representative for breach of fiduciary duty.
It is important to note that Friend may, as trustee, in accordance with F.S. §737.307, serve the trust beneficiaries with a trust disclosure document and limitation notice pertaining to amounts received by the trust from the estate. Friend’s actions in this regard may serve to limit her liability as trustee but, under the above analysis, providing these documents to the trust beneficiaries would not preclude Friend from being sued in her capacity as personal representative.
Thus, to ensure that the order of discharge serves as a defense to a post-discharge breach proceeding, Friend, as personal representative, should disclose to Sister, Daughter, and Son all material estate administration information and their full waiver forms should be supplemented with a statement advising each beneficiary that by signing the form beneficiary is waiving beneficiary’s right to bring a proceeding for breach of fiduciary duty. To ensure that the beneficiaries receive all material estate information, Friend should provide Sister, Daughter, and Son with all information about the administration of the estate required to be shown on a judicial accounting.18 This information includes all estate cash and property transactions (all receipts and disbursements and all beneficiary distributions) the carrying value and estimated current value of each asset, and all gains and losses during administration. Friend should also provide Sister, Daughter, and Son with all information required under Fla. Prob. R. 5.400 (distribution and discharge). This information includes information concerning compensation for the personal representative and the personal representative’s attorney and a plan of distribution.19
An attorney advising an individual or entity who is designated to serve both as personal representative of the estate and as successor trustee of the decedent’s revocable trust must be cognizant of the conflict of interest issues surrounding the probate administration. Oftentimes these issues cause the revocable trust beneficiaries to be the legal beneficiaries of the estate. Although a personal representative may desire to avoid undertaking a judicial accounting by obtaining full waivers from the beneficiaries, this does not obviate the personal representative’s obligation to provide beneficiaries with all material estate information. In these instances where the personal representative desires to obtain full waivers from the beneficiaries, the attorney should advise the personal representative to provide the waiving beneficiaries informally with all of the information that is required to be shown in a formal judicial accounting and in a petition for discharge. Failure to do so could expose the personal representative to liability to the trust beneficiaries even after receipt of an order of discharge. q
1 See Lile and McEachern, Florida Probate: A Discussion and Commentary on the Code and Rules, pp. 16 and 17 (Bisel 1994, 1999 Supp.).
2 What if there were in fact two co-trustees instead of one trustee, with one of the co-trustees serving as the sole personal representative of the estate. Is there a conflict of interest in this situation? Yes. Unless the trust indicates otherwise, both co-trustees must act jointly in exercising their powers over the Trust. 55A Fla. Jur. 2d, Powers of Cotrustees §141. Therefore, since the co-trustee who is not serving as a personal representative of the estate has no power to act solely on behalf of the trust, the conflict of interest remains.
3 Restatement (Third) of Trusts (Prudent Investor Rule) §170(1). A personal representative is held to the same fiduciary duties as a trustee. Whitfield v. Whitfield, 172 So. 711 (Fla. 1937).
4 Bogert, The Law of Trusts and Trustees §543 (Rev. 2d ed.).
6 Fla. Stat. §733.212 and Fla. Prob. R. 5.240.
7 For Sister to be considered an interested person she must reasonably be expected to be affected by the outcome of a particular proceeding involved. Since, under this example, the trust held at decedent’s death $2,000,000 of marketable securities, and since her trust pre-residuary devise is only $100,000, it may perhaps be unreasonable to assume that she could be affected by any probate maladministration.
8 Fla. Prob. R. 5.180(b) specifically states that a waiver must be signed by each party bearing the impact of the compensation and must contain language declaring that the waiving party has actual knowledge of the amount and manner of determining the compensation and, in addition, either that the party has agreed to the amount and manner of determining the compensation and waives any objection to payment or that the party has the right to petition the court to decrease the compensation and waives that right.
9 See Van Dusen v. Southeast First Nat. Bank, 478 So. 2d 82 (Fla. 3d D.C.A. 1985); Payette v. Clark, 559 So. 2d 630 (2d D.C.A. 1990); Pressly, Litigation Under Florida Probate Code §9.25 (The Florida Bar 4th ed. 2001).
10 Van Dusen, 478 So. 2d at 91.
11 Id., 478 So. 2d at 91.
12 Turney, 26 Fla. L. Weekly at D2782.
13 §170(2) of Restatement (Second) of Trusts is also set forth in Restatement (Third) of Trusts (Prudent Investor Rule).
14 Fla. Stat. §737.307(1).
15 Fla. Stat. §737.307(2).
16 Fla. Stat. §737.307(3).
17 Specifically, Fla. Stat. §737.307(3)(b) provides the following sample limitation notice: “An action for breach of trust based on matters disclosed in a trust accounting or other written report of the trustee may be subject to a 6-month statute of limitations from the receipt of the trust accounting or other written report. If you have questions, please consult your attorney.”
18 See Fla. Prob. R. 5.346 (fiduciary accounting); see also Altman and Buzby, Practice Under Florida Probate Code §14.5 (The Florida Bar 3d ed. 2002).
19 Under this approach Friend is avoiding the filing of a formal judicial accounting and a petition for discharge (which discloses compensation and provides for a plan of distribution). However, all information required to be contained in a judicial accounting and petition for discharge would be provided to the beneficiaries but would not be filed with the court.
John “Randy” Randolph is a shareholder in Pressly & Pressly, P.A., West Palm Beach, where he devotes his practice exclusively to trust and estate matters. He is a board certified wills, trusts & estates lawyer as well as a board certified tax lawyer. Mr. Randolph is a graduate of the University of Florida College of Law (with honors) and received his LL.M. from the University of Miami in estate planning. He is also a certified public accountant.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Steven L. Hearn, chair, and Richard R. Gans and William P. Sklar, editors.