TRUST ME: PRACTICAL ADVICE FOR DRAFTING FLORIDA TRUSTS
Many Florida residents engage attorneys only rarely, perhaps to administer a family member’s probate estate or to draft the client’s own will or revocable living trust. Thousands of attorneys’ practices focus on matters relating to estate planning and administration, and thousands more attorneys perform this work as part of a more generalized practice. Regardless of whether an attorney is a wills, trusts, and estates specialist or drafts only a few estate planning documents each year, it is important to consider carefully the practical application of the provisions included in a client’s will or trust, as well as their legal validity.
In drafting a client’s testamentary or inter vivos trust, an attorney often creates and defines long-term business relationships among parties the attorney has never met or communicated with, and who sometimes have never met or communicated with each other, namely, the trustee (or successor trustee) and beneficiaries. The trustee and beneficiaries will be legally required to abide by the trust terms established by the grantor and drafting attorney, sometimes long after the grantor has died and the attorney has lost touch with the grantor’s family or has retired. In particular, the trustee must fulfill its fiduciary duty to the beneficiaries according to the terms of the trust instrument, as supplemented by applicable law, even if those terms are not well-suited to the grantor’s assets or family circumstances at the time of grantor’s death, or when the trust otherwise becomes irrevocable.1
Therefore, the drafting attorney should try to foresee issues that could arise with respect to the client’s intended trust provisions, especially in light of the assets available to fund the trust and the characteristics of the intended beneficiaries and trustee(s). The client relies on the attorney to be more than an “order-taker,” dutifully translating the client’s vision into the legalese of a trust instrument. Although the attorney should try to effectuate the client’s intentions, the attorney also should question those intentions in light of his or her professional experience. The attorney should consider whether the client’s wishes are realistic, point out issues that could arise in trust administration, assist the client in considering whether to alter his or her initial intentions, and devise alternate methods to resolve potential issues.
This article considers some pitfalls commonly encountered by attorneys in drafting trusts; how those pitfalls can impact the trust administration; and some ways to avoid or resolve common issues.2 These issues are organized as follows: 1) provisions regarding distribution of trust assets; 2) provisions regarding investment of trust assets; 3) provisions regarding choice of trustee; and 4) miscellaneous trust provisions.
Provisions Regarding Distribution of Trust Assets
1) Give the trustee clear guidance regarding when and to what extent trust assets should be distributed to beneficiaries, but also allow flexibility in case of changed circumstances. Most trust instruments give the trustee fairly broad discretion regarding distribution of trust assets to or for the beneficiary, or direct that the trustee distribute trust income to the beneficiary and allow principal invasion at the trustee’s discretion.3 Florida courts respect this arrangement and review the trustee’s distribution decisions to determine whether the trustee abused the discretion granted in the instrument, not whether the court would have exercised that discretion as the trustee did.4 Granting discretion to the trustee is often wise because it allows the trustee the flexibility to accommodate unforeseen circumstances. However, the language used to define the scope of the trustee’s discretion can be problematic.
One common direction is for the trustee to distribute trust assets to or for the benefit of a beneficiary to the extent necessary “to allow the beneficiary to maintain the lifestyle to which he or she has become accustomed.” This language provides little assistance to a trustee who is unfamiliar with the beneficiary’s lifestyle, such as a corporate trustee. Moreover, even if the trustee is a family member or friend who is familiar with the beneficiary’s lifestyle, this language is ambiguous regarding whether the lifestyle at the time of signing the instrument is to be maintained, or that at the time the trust becomes irrevocable (usually, at grantor’s death), or even afterward, during the term of the trust. Lifestyles can change over time, especially if many years pass between the date of the trust instrument and termination of the trust. The ambiguity inherent in this trust direction can give rise to disputes between the trustee and beneficiaries that may have to be resolved through litigation.5
Another common trust direction is to distribute trust assets to provide for the “health, education, maintenance and support of the beneficiary.” This language also appears indefinite, but many trustees are more comfortable with this language because it is taken directly from both the Internal Revenue Code and the Uniform Trust Code.6 The Uniform Trust Code uses this language as an ascertainable standard requiring the trustee to distribute funds for the beneficiary’s reasonable expenses, and Treas. Reg. §25.2514-1(c )(2) notes that this standard is not limited to the beneficiary’s “bare necessities of life.” The reasonableness of expenses may be determined according to the beneficiary’s need, the purposes expressed in the trust, and the assets and liquidity available in the trust to meet those purposes; it is not measured solely from the personal lifestyle choices that constitute the beneficiary’s accustomed standard of living.
Additionally, the drafting attorney can thoughtfully supplement standard form distribution directions. A trust instrument can include precatory or explanatory language to guide the trustee regarding the grantor’s desires. For example, is the grantor’s primary intent to provide for a first-class education for the beneficiaries? Does the grantor desire the beneficiaries to contribute substantially to their own support after completion of their education, and that interim distributions from the trust not supplant the beneficiaries’ own personal industry? Or does the grantor desire that the beneficiaries be able to travel for educational purposes and to maintain personal contact with distant family members, to the extent that trust assets allow? Does the grantor desire that the trustee exercise discretion conservatively, in order to preserve trust assets for the beneficiaries’ retirement?
Guidance such as this not only assists the trustee in better implementing the grantor’s intent, it also can avoid disputes between the trustee and beneficiaries. However, it does not hamstring the trustee by prohibiting distributions outside certain closely defined circumstances.7 The trustee retains flexibility to make distributions in the event of a beneficiary’s legitimate, if unforeseen, need. Inclusion of additional guidance such as this does require more of the drafting attorney’s time than relying solely on standard form language, but it benefits all parties by providing clarity and flexibility, and by increasing the likelihood that the grantor’s intent will be more fully implemented.
Finally, when the trustee has discretion regarding distribution of assets for a beneficiary’s support, uncertainty can arise regarding whether the trustee should consider other assets and income available to the beneficiary, such as the beneficiary’s own resources, or those of a minor beneficiary’s parents. This uncertainty can be especially problematic for a trustee directed to provide for the support of a beneficiary, such as a surviving spouse, for his or her lifetime, and then to distribute the remaining trust assets to separate beneficiaries, such as step-children of the lifetime beneficiary. If the surviving spouse beneficiary has significant assets of his or her own, a dispute could arise among the beneficiaries as to whether the surviving spouse must resort to his or her own assets, even to the point of exhausting those separate assets, before seeking to invade trust principal for his or her support.8 If the trust is silent as to whether it is intended to be the primary support of the lifetime beneficiary, the trustee can be caught between the competing beneficiaries’ interests. Direction in the trust instrument, as to whether the trustee should consider the lifetime beneficiary’s separate resources in exercising discretion regarding principal invasion, could resolve the issue before it develops into a dispute.9
2) If the grantor intends that one beneficiary’s interests be favored over other beneficiaries’ interests, the trust instrument must clearly direct such partiality. Many trusts provide for the support of the grantor’s surviving spouse for his or her lifetime, then for distribution of the trust’s remaining assets to the grantor’s children and/or designated charities. Often the grantor’s primary concern is to support the surviving spouse, not to grow the trust principal for the remainder beneficiaries at the expense of the spouse’s welfare and comfort. However, if the trust instrument does not direct primary consideration for the surviving spouse, the trustee will be legally required to give due consideration to the interests of the remainder beneficiaries.l0 This means that trust assets must be invested so as to balance the objective of principal growth (for remainder beneficiaries) against the need to produce income for the surviving spouse (or other present beneficiary).11 Moreover, in determining whether to invade principal for the surviving spouse’s support, the trustee must consider the remainder beneficiaries’ interest in preserving principal for ultimate distribution to them, unless the trust instrument directs otherwise.12
Similarly, many trusts benefitting a grantor’s children establish a single common trust fund, from which the trustee distributes assets for the benefit of multiple beneficiary children. The trustee’s discretionary power to distribute assets among multiple beneficiaries is called a sprinkle or spray power. The trust instrument granting a sprinkle power should clarify whether the grantor intends that distributions for the various beneficiaries be equalized, and if unequal distributions are allowed, what should be the basis for making unequal distributions. Without clarification, a trustee with a sprinkle power may be caught between one beneficiary arguing that his or her lower income or greater expenses entitle him or her to larger distributions than other beneficiaries, and other beneficiaries arguing that the trustee’s duty of impartiality prohibits favoring a beneficiary whose difficult financial circumstances may be the result of less responsible employment or lifestyle choices than those made by other beneficiaries.13
3) Consider whether available assets are sufficient to fund a trust, and allow the trustee to terminate an uneconomical trust. Trusts established for younger beneficiaries often direct several interim distributions at specified ages, so that the beneficiaries gain experience in managing funds before they have received their entire inheritance. For example, in addition to discretionary distributions, a trust may direct that its assets be distributed to the beneficiary in 1/3 increments, when the beneficiary attains ages 25, 30, and 35. There are sound reasons for this kind of structure, but the drafting attorney should consider whether the trust corpus will be large enough so that the last 1/3 of the corpus, less anticipated interim distributions, will be sufficient to justify the cost of trust administration for the last five years of the trust term.
If assets remaining near the end of the trust term may be insufficient to justify the cost of administration, the drafting attorney can suggest that interim distributions be reduced, for example, to 1/4 of the then-existing corpus at ages 25 and 30, with final distribution at age 35. The drafting attorney also can suggest a provision allowing the trustee to terminate the trust early, in the event the trustee determines that the remaining corpus no longer justifies the cost of administration and the beneficiary is capable of managing the assets on his or her own. Even if the trust instrument is silent, F.S. §736.0414 allows early termination on this ground if the trust corpus falls below $50,000. However, trust administration can be uneconomical for trust assets greater than that amount, especially if a corporate trustee is in place.
Provisions Regarding Investment of Trust Assets
Be aware of the trustee’s statutory investment responsibilities and alter those responsibilities in the trust instrument if necessary to comply with grantor’s intent, but allow the trustee flexibility to dispose of assets in the event of changed circumstances. The prudent investor rule, as set forth in F.S. §518.11, requires the trustee to review a trust’s investments upon accepting the trust, and periodically during the trust term. The trustee must ensure that trust assets are invested to balance the objectives of reasonable income production and safety of capital, consistent with the purposes and duration of the trust, and the relative interests of the beneficiaries.14 Unless directed otherwise by the trust instrument or based on the other objective grounds, the trustee is statutorily required to diversify the trust’s investments to increase the likelihood of achieving these goals.
The prudent investor rule does not allow a trustee to retain an asset indefinitely merely because the grantor retained the asset while the grantor was trustee of the trust, or during the grantor’s lifetime. Indeed, the trustee can be held liable for breach of its fiduciary duties to invest the trust assets prudently if it fails to diversify the trust assets without a legally sufficient reason. For example, in Estate of Janes, 681 N.E. 2d 332 (N.Y. 1997), a corporate trustee was held liable to the trust’s beneficiary for damages, and forfeited its trustee commissions and attorneys’ fees, because it failed to diversify the trust’s portfolio by retaining a large block of stock in Eastman Kodak Company, as the value of the stock declined. In addition to loss of capital, the income produced by the stock was less than that produced by comparable investments, and was insufficient to meet the needs of the beneficiary. Although the beneficiary was aware of and did not object to retention of the stock as its value declined, that did not absolve the trustee of its fiduciary duties under the prudent investor rule.
F.S. §518.11 (2) allows a trust instrument to expand, restrict, eliminate, or otherwise alter a trustee’s investment responsibilities under the prudent investor rule. The statute relieves a trustee of liability for reasonably relying upon such express provision in the governing instrument. Therefore, if the grantor intends that a particular asset be retained in trust, such as an interest in a closely held business or certain real property, the trust instrument should expressly allow the trustee to retain that asset despite the general duty to diversify.
However, in the course of authorizing the trustee to retain an asset, the drafting attorney should take care not to require that the asset be retained for a significant duration. Recently we all have been made aware of how quickly and drastically economic circumstances can change; what seems like a safe and certain investment at one time may later appear woefully ill-advised. If the grantor has an emotional attachment to an asset, such as a vacation home, the trust instrument may express the grantor’s desire to retain the asset unless the trustee determines retention no longer to be in the best interests of the beneficiaries. But the trustee should be allowed to exercise discretion to dispose of the asset if necessary. Trustees are often selected and compensated based on their investment expertise; the trust instrument should not prevent the trustee from using its expertise for the benefit of the trust beneficiaries. Indeed, F.S. §§736.0806 and 518.11(1)(a) require a trustee possessing special skills or expertise to use them in administering trust assets, so that the trustee’s actions will be judged in light of its special skills or expertise.
Provisions Regarding Choice of Trustee
1) Be aware of potential deadlock and liability issues when designating co-trustees. Designation of multiple co-trustees can benefit a trust by providing more than one viewpoint on decisions regarding investments and discretionary distributions. Additionally, a trust grantor may desire to designate more than one of his or her children as co-trustees, so the co-trustee children can share the work of administering the trust. To avoid the inconvenience of requiring the signatures of all co-trustees for every trust action (e.g., for every check drawn on the trust bank account), the drafting attorney may include a provision allowing any co-trustee to act for the trust without the joinder of the other(s).15 In addition, F.S. §736.0703(3) allows one co-trustee to delegate to the other(s) the performance of one or more trustee functions. For example, if a trust instrument designates both a corporate and an individual trustee, the individual trustee may wish to delegate investment responsibilities to the corporate trustee.
However, in designating multiple co-trustees, the drafting attorney should be aware of issues that can arise when trustee responsibility and authority are shared. First, even if the co-trustees agree on a course of action, making a decision “by committee” is more time-consuming and cumbersome than action by a single trustee. Worse, if co-trustees cannot agree on a course of action, the deadlock may have to be resolved through litigation. If a trustee function, such as investment of trust assets, has been delegated to one co-trustee pursuant to statute, the delegating co-trustees retain the legal responsibility to use reasonable care to ensure that the co-trustee exercising authority does so in accordance with its fiduciary duties.16 In contrast, if the trust instrument places investment authority and responsibility with a particular co-trustee, such as the corporate co-trustee, then the other co-trustees will not be liable for investment decisions beyond the scope of their authority.17
Finally, the drafting attorney should beware of a client designating multiple children as co-trustees for the sole purpose of avoiding hurting the feelings of children not designated. If a child is irresponsible with money or does not work well with his or her siblings, designating him or her as a co-trustee will not improve relations among the siblings, but will increase the potential for conflict among them.
2) Designating one child as the trustee of another child’s trust invites family discord. Sometimes parents are concerned that one child may manage his or her inheritance unwisely, or may lose it to his or her creditors or divorcing spouse, so they direct that the child’s share be held in trust rather than distributed outright to him or her. But the corpus of the child’s trust may be too small to designate a corporate trustee, and no member of the parents’ generation may be an appropriate trustee, so the parents may designate one or more of the child’s siblings to act as his or her trustee. Unless the beneficiary child is disabled or much younger than the trustee child, this arrangement is fraught with peril for all parties involved. The beneficiary child may resent the authority exercised by the trustee child, and the trustee child is placed in an awkward no-win position, especially considering his or her fiduciary duties to the remainder beneficiaries designated in the trust.
A drafting attorney whose client suggests this arrangement should strongly suggest that the client discuss this arrangement with both the intended beneficiary and trustee children before finalizing the trust instrument. Otherwise, after the client’s death, the attorney may have to explain the arrangement to the client’s surprised and resentful children, and either assist with a difficult trust administration or deal with the intended trustee’s refusal to serve.
3) Designating a corporate trustee does not remove the need to designate a successor trustee or a mechanism for selecting a successor trustee. A client who designates a corporate trustee for his or her trust may not consider a successor trustee designation, since the corporate trustee entity will not die or become incapacitated. However, the designated corporate trustee may resign or decline to serve for a variety of reasons, for example, because the trust assets are problematic or have too low a value, or because of concerns regarding unusual trust provisions or litigious beneficiaries. Therefore, the drafting attorney should ensure that the trust instrument includes a designation of successor trustee, or a mechanism for selecting one.18 For instance, the trust instrument could empower a majority of the adult qualified beneficiaries to select a successor trustee. Or a trust protector could be designated to select a successor trustee.19
A provision authorizing a resigning trustee to designate its own successor may not be helpful in the event of a vacancy, since an entity that declines to accept or continue a trusteeship also may decline to undertake responsibility for selecting a successor trustee. Moreover, if a trust instrument requires that the successor trustee be a bank or trust company, rather than an individual, the drafting attorney should confirm that the trust assets and provisions will be acceptable to a corporate trustee.20 Otherwise, if the designated corporate trustee declines to serve, others also may decline to serve, and the trustee vacancy may have to be resolved through judicial modification of the trustee provision or judicial designation of a successor trustee.
In any event, if a corporate trustee is designated, the drafting attorney should consider whether to allow the beneficiaries to remove the corporate trustee and designate a successor corporate trustee. Such a provision ensures administration by a corporate trustee (in the absence of the problems discussed above), but grants the beneficiaries the flexibility to engage a different trustee in the event that investment results are less than expected, fees are greater than expected, or there is a personality conflict with personnel of the designated corporate trustee.21 Of course, there may be reasons in a particular case not to allow the beneficiaries to replace the corporate trustee, or to limit the frequency of such action, but consideration of the issue is recommended.
Miscellaneous Trust Provisions
1) When drafting joint trusts established by more than one grantor, clarify whether revocation or amendment requires the signature of one or both grantors. Often spouses who do not have taxable estates establish a joint revocable living trust and contribute their assets to the single “family” trust. If the drafting attorney uses a standard form document intended for a trust established by a single grantor, the attorney must revise the boilerplate language regarding revocation and amendment. Provisions allowing “the grantor” to revoke or amend the trust will not be helpful in these situations. The trust instrument should make very clear whether revocation and amendment of the trust terms require the signature of both grantors while they are both alive and have capacity, and clarify authority to revoke or amend after either grantor dies or becomes incapacitated.22
2) Consider whether to address the issue of trustee fees in the trust instrument. The issue of trustee compensation will arise in almost every trust administration, either through determining reasonable compensation, or through the trustee waiving compensation. The Florida Trust Code does not set forth a “presumed reasonable” trustee fee, as the Florida Probate Code sets forth for personal representatives. Instead, if the trust instrument does not specify the trustee’s compensation, F.S. §736.0708 provides for “compensation that is reasonable under the circumstances.” Even if the trust instrument does specify the trustee’s compensation, the court may allow more or less compensation, if the amount specified is unreasonably high or low, or the trustee’s duties are substantially different than contemplated at the time the trust was established.
Because much of the litigation between trustees and beneficiaries involves the reasonableness of the trustee’s fee,23 the drafting attorney should consider whether to address the issue in the trust instrument or in a separate memorandum. For a corporate trustee, reference to its published fee schedule may be sufficient. For an individual trustee such as an attorney or CPA, reference to an hourly or percentage-based fee may be appropriate, either in the trust instrument itself or a separate memorandum. For a family member trustee, even a general statement that the grantor intends the trustee to be compensated can be helpful to avoid disputes with beneficiaries who may not understand the extent of a trustee’s work and responsibility and may expect the family member trustee to serve without compensation. In any event, it is wise to discuss the issue of trustee compensation with the trust grantor, so the drafting attorney can address the issue as most appropriate to the grantor’s economic and family situation.
3) Consider who will be entitled to receive trust information and accountings and, if desired, designate a representative to receive such information. F.S. §736.0813 requires the trustee to deliver trust information and accountings to each qualified beneficiary of a trust, or to someone representing the beneficiary’s interest. For example, the trustee of a trust benefitting the grantor’s surviving spouse for his or her lifetime, then the grantor’s children, will be required to deliver trust information to both the surviving spouse and the remainder beneficiary children. Similarly, the trustee of a generation-skipping trust benefitting a grantor’s child for life, then that child’s own children, will be required to deliver trust information to both the child and grandchildren beneficiaries from the date the trust becomes irrevocable.
Grantors establishing trust arrangements like these often desire primarily to benefit the lifetime beneficiary, and intend the remainder beneficiaries to take only those assets not needed by the lifetime beneficiary. In these cases, the grantor may not want the remainder beneficiaries to be privy to trust information before they receive the remainder assets of the trust. Very often, the lifetime beneficiary shares this sentiment.
The trust instrument cannot negate the trustee’s duty to deliver trust information to or for qualified beneficiaries.24 However, F.S. §736.0306 allows the trust instrument to authorize the designation of a representative, other than the trustee itself, to receive any trust information on behalf of a beneficiary. If the designated representative is also a beneficiary of the trust, then that representative must either be named by the trust grantor, or be a relative of the represented beneficiary. Although the designated representative’s responsibilities have not yet been defined through case law, F.S. §736.0306(4) protects the designated representative from liability to the represented beneficiary for actions or omissions made in good faith.
The issue of delivering trust information and accountings to beneficiaries will arise in almost every trust administration. Therefore, the drafting attorney should discuss the issue with the trust grantor to determine the grantor’s desires. Sometimes, family dynamics among grantor’s spouse, children, and other beneficiaries affect the advisability of disclosing trust information directly to all qualified beneficiaries; if the drafting attorney is aware of these issues, he or she can draft the trust instrument accordingly.
4) Ask the trust grantor for contact information for trust beneficiaries and successor trustee(s). If a beneficiary of a revocable living trust is not known to the successor trustee, it can be extremely time-consuming to search for the beneficiary after the death of the trust grantor. This is especially true if the grantor gave the drafting attorney an incorrect spelling of the beneficiary’s name; the beneficiary has a common name; or the trust instrument does not refer to the beneficiary by name. For example, the remainder beneficiaries of a trust may be “grantor’s nieces and nephews surviving grantor.” If the drafting attorney has not obtained the names and contact information of the intended beneficiaries, the trust may incur unnecessary expense in identifying, locating, and contacting the beneficiaries after the grantor’s death. It is easiest to obtain this information while the trust is being drafted, and keep it in the attorney’s file if inclusion in the actual trust agreement is not preferred.
Clearly, the above is not intended to be an exclusive list of the issues that a Florida attorney may encounter in drafting a trust, and not all of the above recommendations will apply in all situations. This article is intended to assist attorneys in drafting clear documents that anticipate and resolve many issues that commonly arise in trust administrations.
1 The Florida Trust Code allows parties interested in a trust to seek judicial or nonjudicial modification of the trust instrument on grounds enumerated in Fla. Stat. §§736.04113 and 736.04115. However, these procedures can be burdensome and expensive, especially if not all interested parties are in agreement. Moreover, the IRS is not legally bound to recognize such later modifications for tax purposes if IRS is not made party to the action.
2 The problems and suggested resolutions discussed in this article are the opinion of the author, based on discussions with experienced individual trustees, members of corporate trustee trust departments, and other estate planning attorneys, as well as personal experience and review of case law involving disputes among trustees and beneficiaries. Because this article discusses the “art” of trust drafting rather than requirements for legal validity, the opinions of other practitioners may differ.
3 An alternative to traditional principal/income trusts is the total return unitrust, which directs that the trustee distribute to the beneficiary(ies) a stated percentage of the trust assets each year, often three to five percent per year. See Fla. Stat. §738.1041. Under a total return unitrust, characterization of investment returns as principal or income does not affect distribution amounts. Total return trust terms can be combined with discretionary principal invasion, i.e., allowing the trustee to distribute more than the unitrust amount in the event of an emergency or other criteria stated in the trust instrument.
4 See, e.g., NCNB Nat’l Bank of Florida v. Shanaberger, 616 So. 2d 96 (Fla. 2d D.C.A. 1993); Sarasota Bank & Trust Co. v. Rietz, 297 So. 2d 91 (Fla. 2d D.C.A. 1974).
5 See, e.g., Barnett Banks Trust Co. v. Herr, 546 So. 2d 755 (Fla. 3d D.C.A. 1989).
6 I.R.C. §§2041 and 2514 endorse “health, education, maintenance and support” as an ascertainable standard in the context of powers of appointment sufficient to limit the grantor’s discretion so that grantor is not deemed to have a general power of appointment. Uniform Trust Code §103, as adopted in Fla. Stat. §736.0103(3), defines the term “ascertainable standard” as “a standard relating to an individual’s health, education, support or maintenance.”
7 But see Nesbitt v. Eisenberg, 139 So. 2d 724 (Fla. 3d D.C.A. 1962), in which the court prohibited the trustee of a trust benefitting the grantor’s minor child from paying the child’s tuition and expenses at boarding school because the trustee could not provide “legal proof” that the child’s surviving parent was unable to pay such expenses, as required by the trust language.
8 This kind of dispute can become especially sharp in second marriages, when the surviving spouse is not the parent of the trust grantor’s children, and has children of his or her own. The surviving spouse’s own estate plan may benefit his or her own children from a prior marriage, and not the deceased spouse’s children, who are often the remainder beneficiaries of the deceased spouse’s trust. In this situation, the determination of how much to require the beneficiary surviving spouse to resort to his or her own assets shifts the ultimate benefit between the surviving spouse’s children and the children of the decedent spouse.
9 In the absence of contrary direction in the trust instrument, many corporate trustees require a beneficiary to disclose his or her most recent income tax return before making a substantial discretionary distribution for the beneficiary’s support. See NCNB Nat’l Bank of Florida v. Shanaberger, 616 So. 2d 96 (Fla. 2d D.C.A. 1993), approving this practice. Thus, as a practical matter, the beneficiary’s own separate resources are often considered in making discretionary distributions. However, many beneficiaries chafe at this requirement, and the tax return may not disclose some relevant information regarding expenses and net worth. General guidance in the trust instrument can help to avoid disputes between the trustee and beneficiaries regarding the types of information that may be considered regarding discretionary distributions for a beneficiary’s support.
10 Fla. Stat. §736.0803.
11 Fla. Stat. §518.11(l)(e).
12 Mesler v. Holly, 318 So. 2d 530 (Fla. 2d D.C.A. 1975). The trustee and income beneficiary may request that remainder beneficiaries waive their interests in trust investment decisions and principal invasions, but some remainder beneficiaries may refuse to waive. Further, the trustee may refuse to rely on such a waiver if the class of remainder beneficiaries could expand, e.g., if the share of a remainder beneficiary child descends to his or her own children if the child predeceases final distribution of trust assets.
13 There can be good reasons for establishing a sprinkle trust, especially when beneficiaries are young and their relative needs are uncertain, or when the total trust assets are too small to justify separate administration of individual trusts for each beneficiary. But without clear drafting, sprinkle trusts have the potential to pit beneficiaries against each other, and to catch the trustee between them. After all, “fair” may or may not be equal, depending on the point of view, and the trustee will have to contend with as many points of view as there are beneficiaries.
14 Fla. Stat. §518.11(1).
15 In the absence of such a provision, Fla. Stat. §736.0703 requires joint action by two co-trustees, or action by a majority of three or more co-trustees.
16 Fla. Stat. §736.0703(7).
17 Note that Fla. Stat. §§736.0807 and 518.112 allow trustees to delegate investment functions to an agent who is not a co-trustee by following the procedures set forth therein, but these statutes also allow the delegating trustee to be held liable for actions of the agent if the delegating trustee did not properly select the agent, monitor the agent’s performance or results, or give proper written notice of the delegation to the trust beneficiaries, as set forth in §518.12.
18 If the trust instrument fails to designate a successor trustee, Fla. Stat. §736.0704 allows the trust’s qualified beneficiaries to select a successor trustee by unanimous agreement. However, without unanimity, the successor trustee would have to be appointed by the court.
19 The trust instrument could designate a trust protector to appoint a successor trustee, to modify or terminate the trust, or to perform other functions defined in the trust instrument, such as to approve or disapprove principal invasion. Fla. Stat. §736.0808. This may allow a family member to be involved in those decisions without having daily administrative responsibility as trustee. However, the drafting attorney should clearly delineate the authority and responsibility of the trust protector.
20 Although not legally required, it is good practice when designating a bank or trust company as the successor trustee of a client’s revocable living trust, and with the client’s permission, to allow personnel at the designated successor trustee to review the draft trust agreement and raise any concerns before the client signs the document.
21 Fla. Stat. §736.0706(2)(d) allows a court to remove a trustee upon the request of all qualified beneficiaries if the court finds that removal will best serve the interests of all beneficiaries, that removal is not inconsistent with a material purpose of the trust, and a suitable successor trustee is available. However, this mechanism requires judicial action and unanimity among qualified beneficiaries; a provision in the trust instrument can allow removal of the trustee without these requirements.
22 Unless the trust instrument directs otherwise, Fla. Stat. §736.0602(2) allows either grantor of a joint trust to revoke or amend the joint trust with respect to noncommunity property attributable to that grantor’s contribution to the trust. However, most assets contributed to a joint trust will have been owned jointly by the spouses before contribution to the trust, and years after funding a trust, it may be difficult to ascertain how the assets were owned before contribution to the trust. Rather than relying on the default statutory rule, the drafting attorney should discuss the issue with the grantors and include a governing provision in the trust instrument.
23 See, e.g., West Coast Hospital Ass’n v. Fla. Nat’l Bank of Jacksonville, 100 So. 2d 807 (Fla. 1958); Osius v. Miami Beach First Nat’l Bank, 74 So. 2d 779 (Fla. 1954); Parker v. Shullman, 906 So. 2d 1236 (Fla. 4th D.C.A. 2005).
24 Fla. Stat. §§736.0105(r), (s), and (t).
Nancy S. Freeman is a shareholder with Winderweedle, Haines, Ward & Woodman, P.A., practicing in the firm’s Winter Park office. She received her J.D. degree from the University of Florida. She is certified by The Florida Bar as a specialist in the area of wills, trusts, and estates. She is a member of The Florida Bar Probate Rules Committee and the Probate Law & Procedure Committee of the Real Property, Probate and Trust Law Section.