A trustee's duties and responsibilities under discretionary invasion provisions.

Most trusts provide the trustee with some degree of discretionary authority over the making of distributions of income and/or principal to beneficiaries. The usual reason for giving a trustee such discretion is to provide flexibility in meeting the needs of the beneficiaries that might not have been anticipated by the grantor of the trust. The underlying problem, however, with most discretionary invasion provisions is that it is difficult to figure out just how much authority the trustee actually has in any given situation. As a result, discretionary invasion provisions can be some of the most confusing and misunderstood provisions that appear in trusts.

Florida Jurisprudence contains the following statement about when a court will not interfere with the exercise of discretion by a trustee: "Provided a trustee acts in good faith and within the limits of the sound execution of the trust placed in him, equity will not substitute its discretion for that of the trustee, or interfere with that discretion without cause." (1) In Re Zeigler's Trust, 157 So. 2d 549 (Fla. 3d DCA 1963), goes one step further by providing that trustees are presumed to exercise their powers in good faith and within the bounds of sound discretion. (2)

Just what are the limits of "the sound execution of the trust" placed in a trustee? Or, rephrasing the question in the context of this article, what is the extent of a trustee's authority whenever a trust grants a trustee either "simple" or "absolute" discretion over distributions to a beneficiary? In this respect, the treatise Scott on Trusts states that "there is a field, often a wide field, within which the trustee may determine whether to act or not and when and how to act." (3) Scott, however, is careful also to state "how wide that field is depends upon the terms of the trust, the nature of the power, and all the circumstances." (4)

This article will examine the Florida law pertaining to a trustee's discretionary powers. The article seeks to discover what rules Florida courts have promulgated regarding the exercise of discretionary powers, and to put these rules into some sort of order and thereby to gain a better understanding of the extent of the "wide field" to which Scott refers. Also, this article will examine how Florida law compares to the approach taken in the recently published Restatement (Third) of Trusts. Finally, it will point out the differences between a trust including discretionary powers versus a pure discretionary trust, a distinction that even some Florida courts have a hard time making. Except for one instance, this article will not discuss the Uniform Trust Code since, even if the UTC is adopted in Florida, substantial revisions are likely to be made.

Prior to exploring the above issues, it is helpful to gain a basic understanding of the extent or degree of the discretion that a trustee might possess. This article treats a trustee's discretion as either "simple" or "absolute." Simple discretion, as the term implies, is the least degree of discretion that a settlor may provide to a trustee and is the type of discretion that is indicated by the term "may" or the phrase "may in his discretion." A more extended type of discretion is "absolute" discretion. A trustee's absolute discretion is indicated by the inclusion of adjectives such as "absolute," "unlimited," "uncontrolled," or "full" modifying the term "discretion." The language that a settlor chooses to use indicates the extent of the discretion the settlor intends to provide. However, since it is not possible to place a trustee's discretion entirely beyond the control of a Florida court, (5) it must be understood that the terms "absolute" and "uncontrolled" are not accorded their literal meanings. Also, the use of the adjective "sole" in most cases is not the equivalent of absolute discretion since it does not define the degree of the discretion granted. A trustee granted sole discretion might only possess simple discretion.

Significance of Absolute Discretion in Florida

The case of Hoppe v. Hoppe, 370 So. 2d at 375 (1978), sets forth the following rule relative to a trustee's absolute discretion: "Even though a grant of absolute and uncontrolled discretion to a trustee is very broad, such a grant does not relieve a trustee from the exercise of good faith in the administration of his obligations under that agreement."

There should be no disagreement that a trustee in Florida must exhibit good faith in exercising its discretion. Rather, this author takes exception with any assertion that, under Florida law, a grant of absolute and uncontrolled discretion necessarily gives a trustee broad authority over whether to act, when to act, and how to act.

What significance does absolute discretion have under Florida law? Whenever simple discretion is granted to a trustee, the recognized rule is that a trustee must act reasonably. (6) It therefore seems logical that absolute discretion should provide the trustee somewhat broader, and perhaps even unrestricted authority. But what in practice is the extent of a trustee's authority in a trust containing absolute discretion? The Restatement (Second) of Trusts indicates that the correct test for determining whether an abuse of discretion has occurred when a trustee has absolute discretion is the "good faith" test. (7) Under the "good faith" test, even if there is a definite standard provided in the trust instrument (i.e., support) by which the reasonableness of the trustee's actions can be measured, the trustee's action will not be overturned "as long as the trustee acts in a state of mind in which it was contemplated by the settlor that he would act." (8) Therefore, under the Restatement (Second), even if a trustee acts beyond the bounds of reasonable judgment (i.e., he clearly acts unreasonably), this by itself might not be sufficient grounds to allow a court to overrule the trustee as long as he acts in "good faith." (9) However, even under the "good faith" test the trustee's failure to act at all would be sufficient grounds for court intervention, (10) as would be the trustee's acting in bad faith, dishonestly or arbitrarily, or if the trustee's conduct were undertaken with some motive other than the accomplishment of the purposes of the trust. (11)

Florida does not follow the Restatement (Second) approach. The Florida Supreme Court, sitting en banc in Wallace v. Julier, 3 So. 2d 711 (1941), stated that the rule, when absolute discretion is granted, is that a trustee must act reasonably. (12) Interestingly, the Florida Supreme Court never even mentioned the Restatement (Second) in its opinion. In reaching its conclusion, the court set forth the following rule of construction: "The will shall not be construed to allow the power vested in the trustees to defeat the paramount intent of the testator." (13) Because Florida law places so much emphasis on carrying out the intent of the settlor, if the trust has been set up with a specific purpose in mind, Wallace v. Julier stands for the proposition that even absolute discretion can not be exercised in any way that would serve to undermine or alter that intent or purpose.

Even though it has not been adopted in Florida, it might be helpful to consider the approach taken by the Restatement (Third) of Trusts regarding absolute discretion. The Restatement (Third) states that if any type of extended discretion is granted to a trustee, "it is a matter of interpretation by the court as to the 'degree' to which a grant of absolute or uncontrolled discretion manifests the settlor's intention to relieve the trustee of his normal supervision and control over the exercise of discretionary power over trust distributions." (14) Consequently, under the Restatement (Third), a trustee having absolute discretion can act unreasonably only in those very few instances where it is unquestionably clear from the trust instrument that the settlor intended to permit such type of conduct. Regarding the Restatement (Third) on this point, it should be clearly understood that the Restatement is nothing more than an influential treatise of the law and is not binding on a Florida court (unless it has been adopted by Florida's highest court, which in this case it has not). (15)

Trustee's Authority When Trust Created for Specific Purpose

In Florida there are certain defined limits to a trustee's authority when the trust agreement provides discretion to the trustee over distributions but also is created for a specific purpose. Assume, for example, that the trust in question is created to support a particular beneficiary (i.e., a support trust). Under Florida law, a support trust has been defined as "one where trustee is directed to pay to beneficiary only so much in-come or principal as is necessary for a beneficiary's support and education." (16) Based on this definition, what is the extent of a trustee's authority when either simple or absolute discretion is conferred in a trust created for a specific purpose?

* Simple Discretion

Consider the following provision: The trustee may pay to my son such amounts of the income and/or principal of the trust estate from time to time as the trustee, in its discretion, deems necessary for my son's support, taking into account his income from all sources known to the trustee. Any undistributed income shall be added to the principal of the trust estate.

Since the trust containing the above provision would be a support trust, the actual extent of a trustee's responsibilities under the above simple discretion invasion provision can be stated as follows:

The trustee shall consider the needs of my son and if an objective determination indicates that my son's income is not sufficient to completely provide for his support taking into account his station in life in that case, then the trustee shall pay to him an amount which is between the minimum and maximum amount that is reasonably necessary to meet those needs based on his station in life at the creation of the trust, less his current income. Regardless, the trustee has the discretion to determine the exact amount of the distribution within the above parameters. The conduct of a trustee who pays too little or too much is subject to review by a court. (17)

When simple discretion is granted, the law in Florida is that a trustee must act in good faith (18) and within the bounds of reasonable judgment. (19) At a minimum, one aspect of acting reasonably and in good faith would be to fully and properly consider the circumstances of the beneficiary in the context of the settlor's purposes for creating the trust. (20)

Whenever a beneficiary has unmet support needs, a trustee of a support trust granted simple discretion arguably has very little discretion over whether to act or when to act. The only authority a trustee would have under such circumstances is authority over how to act (i.e., authority over the amount and the manner of the distribution). If the settlor intended to create a support trust, only the amount to be distributed is left to the reasonable discretion of the trustee.

The trustee in such a situation has the discretion to distribute an amount between the minimum and maximum amount necessary to adequately support the beneficiary, where it can be said that reasonable men might differ. It is only within this rather narrow range that the power rests solely with the trustee and a court should not substitute its judgment. (21) This is the actual extent of the trustee's authority, or to put it another way, this is the "limit of the sound execution of the trust placed in the trustee" that was mentioned at the beginning of this article.

* Absolute Discretion

If absolute discretion is granted to a trustee, will the result be different from the previous example? Consider the following invasion provision:

The trustee may pay to my son, such amounts of the income and/or principal of the trust estate from time to time as the trustee, in its sole and absolute discretion deems necessary for my son's support. Any undistributed income shall be added to the principal of the trust estate. The trustee may pay to my son, such amounts of the income and/or principal of the trust estate from time to time as the trustee, in its sole and absolute discretion deems necessary for my son's support. Any undistributed income shall be added to the principal of the trust estate.

Since Florida follows neither the Restatement (Second) nor the Restatement (Third) approach on absolute discretion, a trustee granted absolute discretion has the duty to act within the bounds of reasonable judgment. (22) The trustee also has the duty under Florida case law to act judiciously and in good faith. (23) As a result, when a beneficiary has unmet support needs, the actual extent of the trustee's authority is essentially the same as when only simple discretion is involved. The trustee still has no significant authority over whether to act or when to act. The only authority a trustee would appear to have under these circumstances would be the rather limited authority, as indicated previously, over the amount of the distribution. (24)

The question must therefore be asked: Is there any real advantage to granting absolute discretion to a trustee of a Florida trust created for a specific purpose (e.g., a support trust)? In addressing this question, some commentators indicate that the principal reason for granting a trustee absolute discretion is because the attitude of the courts under these circumstances is one of degree rather than of kind. (25) They note that courts appear to be more inclined to find an abuse of discretion when simple discretion and not absolute discretion is involved. (26) Professor Halbach indicates that if there are any other practical consequences that flow from a grant of absolute discretion, they lie with the trustee's apparent ability to make unreasonably generous distributions so long as the basic purposes of the discretion is not violated. (27) Admittedly, this might be the case with moderately over-generous distributions, or in situations in which the clear purpose of the trust is to favor this beneficiary. Considering the duty a trustee owes to remainder beneficiaries under Florida law, (28) any distributions outside the boundaries of the standards set forth could violate the purposes of the trust and would expose both the trustee (and the trustee's attorney) to liability. Therefore, it is suggested that generous or borderline distributions only be made with either prior court approval or with the prior consent of all remainder beneficiaries.

"True Discretionary Trust"

This article has dealt with the law that applies when a trust includes a simple or absolute discretionary invasion provision and the trust was set up with a specific purpose in mind, such as the beneficiary's "support" or his or her "health." These kinds of trusts are commonly referred to as "discretionary trusts" but this author suggests that such reference is a misnomer. Such trusts are in reality either "support trusts," "health trusts," "education trusts," or a combination thereof, which provide a trustee some degree of discretion only as to the amount of distributions, but not as to the making or withholding of distributions. Under the common law, a true "discretionary trust" is something entirely different. The Restatement (Second) of Trusts defines a "discretionary trust" as "a trust which, by its terms, provides that the trustee shall pay to or apply for a beneficiary only so much of the income and principal or either as the trustee in his uncontrolled discretion shall see fit to pay or apply." (29) Bogert's treatise describes a "discretionary trust" as one in which

The trustee shall have absolute and uncontrolled discretion whether to pay or apply trust income or principal to or for the benefit of a named beneficiary, without fixing any standard or guide which the trustee is to consider, and that income which the trustee does not elect to use for the beneficiary shall be accumulated or paid to another or to a class of other persons. (30)

The case of Philip v. Trainor, 100 So. 2d 181, 184 (Fla. 2d DCA 1958), appears to be the only Florida case that explores the concept of a "discretionary trust" under Florida law. In that case the court defines a "discretionary trust" using the Restatement (Second) definition quoted above.

Because of the dearth of Florida case law involving discretionary trusts, there are certain questions that remain unanswered regarding a beneficiary's rights, and a trustee's duties under such a trust. One of these unanswered questions is whether the current beneficiary of a true discretionary trust can force the trustee to make a distribution and whether the trustee has a duty to make a distribution? It has previously been indicated that under Florida law a trustee has the duty to act reasonably, judiciously, and in good faith, even when absolute discretion is involved. (31) Compare this with the approach taken by the Restatement (Third) which requires "reasonable" conduct on behalf of a trustee of a true discretionary trust, (32) or the UTC which uses a "good faith" standard to evaluate a trustee's conduct under such a trust. (33) Because of these standards of conduct, certain creditors are deemed to have enforceable rights against discretionary trusts under both the Restatement (Third) and the UTC. (34) If a creditor has no greater rights under a trust than the beneficiary, a beneficiary must therefore have at least the right to force a distribution from a pure discretionary trust under either the Restatement (Third) or the UTC. If under Florida law a trustee also has a duty to act in good faith and reasonably, consider whether the trustee of a Florida discretionary trust has a duty similar to that imposed by both the Restatement (Third) and the UTC to make distributions for at least the basic needs of a beneficiary?

Notwithstanding a trustee's duty to act reasonably and in good faith under Florida law, this author believes Florida courts would still decide that all a beneficiary of a discretionary trust has under Florida law is a mere expectancy (as opposed to a proper interest). Therefor, such beneficiary would have no right to demand any distributions from the trustee. Conversely the trustee would have no duty to make distributions for a beneficiary's basic needs. Considering the purely discretionary trust's absence of a standard for making or withholding trust distributions, it appears that the trustee's subjective opinion would control. Consequently, as long as the trustee gives due and proper consideration to the beneficiary's request, (i.e., the trustee uses his judgment), and he does not act in bad faith, dishonestly or from an improper motive, no distribution should be required.

It is well settled in Florida that a trustor cannot place the exercise of a fiduciary's discretion entirely beyond the control of the courts. (35) Put differently, it is not possible for a settlor to relieve a trustee from all accountability for his or her actions no matter how clearly the settlor's intent to do so be manifested unless, of course, the power is drafted as a "personal" power (36) or as a power of appointment. However, having stated this, the circumstances under which a court will intervene when a true discretionary trust is involved should be substantially narrower than with a trust set up for a specific purpose. (37)

Assuming that a trustee does not have a duty to make minimum distributions from a true discretionary trust under Florida law, the trustee of such a trust should have complete authority over 1) whether to act; 2) when to act; and 3) how to act. This, at last, is the proverbial "wide field" that Professor Scott referred to in his treatise.

Reconciling a True Discretionary Trust with Mesler

As indicated above, a trustee of a true discretionary trust has virtually complete authority over trust distributions. But what if the trustee of such a trust exercises its authority to distribute the entire trust corpus to the current beneficiary? If a trustee intends to take this action, there arises a question as to the trustee's fiduciary duty to remainder beneficiaries in light of cases such as Mesler v. Holly, 318 So. 2d 330 (Fla. 2d DCA 1975). In this respect, the court in Mesler reasoned, "Even unlimited power of invasion is subject to implied limitations to protect remaindermen." (38)

It is true that Mesler involved a situation in which the trustee was also the beneficiary entitled to current distributions from the trust, and, therefore, there was a clear conflict of interest involved. However, the statement in Mesler about the trustee's duty to remaindermen has been repeated by another Florida court in NCNB National Bank of Florida v. Schanaberger, 616 So. 2d 96 (Fla. 2d DCA 1993). In this later case an independent trustee had discretion over trust distributions, which implies that an independent trustee likewise owes a duty to remaindermen. Thus, even with a true discretionary trust, it would be advisable, if the trustee desires to distribute all of the trust corpus, first get a court order or get the consent of all remainder beneficiaries.

From a planning standpoint, in light of Mesler, it may be preferable either to include in a discretionary trust an inter vivos power of appointment or define the trustee's powers over distributions as "personal" powers similar to the following in any true discretionary trust:

It is my intention to create hereunder a true discretionary trust and to rely completely upon the wisdom and judgement of my trustee as to whether or not to make a distribution, when to make a distribution and how to make a distribution. In exercising its discretion, the trustee shall not concern itself with what, if any, amount of the trust estate remains for the remaindermen. To the extent permitted by law, the powers given to my trustee over distributions shall be deemed to be personal powers and shall not be subject to question by anyone, including the current beneficiary, the remaindermen and any courts.

Conclusion

Under Florida law there is very little difference between a trustee possessing simple discretion and a trustee granted absolute discretion, at least when a trust is set up for a specific purpose. If it is the intention of the settlor to give his trustee unrestricted authority over distributions, then the settlor should consider creating a pure discretionary trust. Even with a pure discretionary trust, however, there is a duty owed to remaindermen under Florida law that might limit the trustee's actions.

(1) 55A FLA. JUR. 2d, Trusts, [section] 137.

(2) In re Zeigler's Trust, 157 So 2d at 550(Fla. 3d D.C.A. 1963).

(3) SCOTT, THE LAW OF TRUSTS, [section] 187 (4th ed. 1988).

(4) Id.

(5) Hoppe v. Hoppe, 370 S.2d 374 (1978); Mesler v. Holly, 318 So 2d 330 (Fla. 2d D.C.A. 1975); Stix v. Commr., 152 F.2d 562, 563 (2d Cir. 1945); BOGERT, TRUSTS AND TRUSTEES, [section] 560 (2d ed. 1992); SCOTT, THE LAW OF TRUSTS, [section] 187 (4th ed. 1988); Halbach, Problems of Discretion in Discretionary Trusts, 61 COLUM. L. REV. 1425, 1430-31 (1961),

(6) See SCOTT, THE LAW OF TRUSTS, [section] 187 (4th ed. 1988); Trustee's Absolute and Uncontrolled Discretionary Powers, TRUSTS AND ESTATES MAGAZINE, 1062, (October 1965); In re Trust Under Will of Julia Crawford True v. Maxwell, deceased, 158 So 2d 571 (Fla. 3d D.C.A. 1954).

(7) Trustee's Absolute and Uncontrolled Discretionary Powers, TRUSTS AND ESTATES MAGAZINE, 1062, 1062-1063, (October 1965).

(8) RESTATEMENT (SECOND) OF TRUSTS, [section] 187, comment j.

(9) Id.

(10) Id.

(11) Id.

(12) See also Dunkley v. Peoples Bank & Trust Co, 728 F. Supp, 547 (W.D. Ark, 1989).

(13) Wallace v. Julier, 3 So. 2d at 717 (1941).

(14) RESTATEMENT (THIRD) OF TRUSTS, [section] 50, C.

(15) BLACK'S LAW DICTIONARY, 1339 (8th ed. 2004).

(16) In re Brown, 303 F. 3d 1261, 1270 (11th Cir. 2002).

(17) In re Trust Under Will of Julia Crawford True, 158 So 2d 571; Dunkley, 728 F. Supp 547; Eaton v. Eaton, 132 A. 10, 11 (1926).

(18) Voorhies v. Blood, 173 So. 705 (1937); Barnett v. Barnett, 424 So. 2d 896 (Fla. 1st D.C.A. 1982).

(19) Wallace, 3 So. 2d 711; In re Trust Under Will of Julia Crawford True, 158 So 2d 571; Dunkley, 728 F. Supp, at 557; In re Ziegler's Trust, 157 So. 2d 549 (Fla. 3d D.C.A. 1963).

(20) See SCOTT, THE LAW OF TRUSTS, [section] 187.3 (4th ed. 1988); RESTATEMENT (SECOND) OF TRUSTS, [section] 187, comment h.

(21) See Eaton v. Eaton, 132 A. 10, 11 (1926).

(22) Wallace, 3 So. 2d 711 (1941); Mesler, 318 So. 2d 330.

(23) Mesler, 318 So 2d at 533; Griffin, 463 So. 2d at 574; Friedman v. Friedman, 844 So. 2d 719 (Fla. 4th D.C.A. 2003).

(24) See In re Sullivan's Will, 144 Neb. 36, 12 N.W. 2d 148 (1943); see also In re Estate of Herskowitz, 338 So. 2d. 210 (Fla. 3d D.C.A. 1976).

(25) See Halbach, Problems of Discretion in Discretionary Trusts, 61 COLUM. L. REV. at 1433 (1961), and Trustee's Absolute and Uncontrolled Discretionary Powers, TRUSTS AND ESTATES MAGAZINE, at 1063 (October 1965)..

(26) BOGERT, TRUSTS AND TRUSTEES, [section] 560 (2d ed. 1992).

(27) Halbach, Problems of Discretion in Discretionary Trusts, 61 COLUM. L. REV. at 1433 (1961); Lees v. Howarth, 85 R.I 321, 131 A.2d 229 (1957).

(28) Mesler, 318 So 2d at 533.

(29) RESTATEMENT (SECOND) OF TRUSTS,, [section] 155.

(30) BOGERT, TRUSTS AND TRUSTEES, [section] 228 (2d ed. 1992).

(31) Mesler, 318 So. 2d 330; Griffin, 463 So. 2d 569; Friedman, 844 So. 2d 719.

(32) RESTATEMENT (THIRD) OF TRUSTS, [section] 50, comment c.

(33) U.T.C. [section] 814(a)

(34) See Merric and Oshins, Effect of the UTC on the Assets Protection of Spendthrift Trusts, 31 ESTATE PLANNING 375 (August 2004).

(35) Hoppe, 370 So. 2d 374; Mesler, 318 So. 2d at 533. See In re Wickman's Will, 289 So. 2d 788, 790 (Fla. App. 1974).

(36) A "personal" power calls for the judgment and discretion of a particular trustee and cannot be exercised by a court. See FLA. JUR. 2d, Trusts, [section] 44.

(37) See, e.g., Rowe v. Rowe, 219 Ore. 599, 347 P.2d 968 (1959), involving a true discretionary trust where the court stated: "We are permitted to control the trustee only if we can say that no reasonable person vested with the power which was conferred upon the trustee in this case could have exercised that power in the manner in which it was exercised."

(38) Mesler, 318 So 2d at 533.

Peter B. Tiernan practices in Margate with a focus on estate planning, probate, and taxation. He received his J.D. from the University of Florida College of Law and his masters of law in taxation from the University of Miami School of Law. He is former chair of the Trust and Probate Section of the Broward County Bar Association.

This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Julius J. Zschau, chair, and William P. Sklar and Richard R. Gans, editors.