The new Florida Trust Code.
As its title suggests, Part VIII of the New Florida Trust Code covers the duties and powers of a trustee. The following discussion tracks the Code, beginning with duties, moving on to powers, and winding up with a few miscellaneous matters.
Duties of a trustee
In a series of separate sections, the Code codifies all of the fundamental common law duties of a trustee, as well as several other more specifically targeted duties relating to the collection, management, and distribution of trust property. A comprehensive list of statutory duties, all of which are consistent with existing Florida decisional and statutory law, includes:
* A mandatory duty to administer in good faith (1) and to inform and account. (2)
* With some important exceptions discussed further below, the duty to redress breaches of former trustees. (3)
* The duty of loyalty (i.e., to administer the trust solely in the interests of the beneficiaries) (4) and of impartiality (i.e., to administer the trust impartially giving due regard to the respective interests of the beneficiaries). (5)
* The duty to administer prudently (i.e., as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by exercising reasonable care, skill, and caution). (6)
* The duty to incur only reasonable expenses; (7) use special skills; (8) control and protect trust property; (9) keep accurate records; (10) enforce and defend claims; (11) and administer pending the outcome of a contest or other proceeding. (12)
* The duty not to commingle and to earmark (i.e., to cause the interest of the trust to appear in any records maintained by third parties); (13) ascertain marketable title (but only when it is required for a specific sale or conveyance); (14) and expeditiously distribute trust property on termination (subject to the right to retain a reasonable reserve for the payment of debts, expenses, and taxes). (15)
Three of the duties on this list--the duty to inform and account, the duty to redress former breaches, and the duty of loyalty--merit further elucidation. Turning first to the duty to inform and account, [section] 736.0813 of the Code requires that a trustee must keep the qualified beneficiaries of an irrevocable trust reasonably informed of the trust and its administration. Note this duty extends only to qualified beneficiaries. It includes, but is not limited to, a mandatory duty to:
* Notify them of the trustee's acceptance of the trust and the full name and address of the trustee within 60 days after the trustee's acceptance;
* Notify them of the existence of the trust, the identity of the settlor, the right to request a copy of the trust instrument, and the right to accountings within 60 days after the trustee acquires knowledge of the creation of an irrevocable trust or that a formerly revocable trust has become irrevocable;
* Upon reasonable request, furnish them with a complete copy of the trust instrument;
* Once a trust becomes irrevocable, furnish a trust accounting to them annually as well as on termination of the trust or on a change of trustee; and
* Upon reasonable request, provide them with relevant information about the trust's assets and liabilities and the particulars of the trust administration.
With respect to the duty to redress former breaches, [section] 736.0812 states generally that a trustee must take reasonable steps to redress a breach of trust known to the trustee to have been committed by a former trustee. This duty is qualified, however, by [section] 736.08125, which details several instances where a successor trustee has no personal liability for actions (16) of a prior trustee. As the section is substantively similar to F.S. [section] 737.306(3)-(6), it will not be further detailed here, except to note that the section speaks only to the personal liability of successor trustees. Nothing in the section affects the liability of a prior trustee or the right of a successor trustee or any beneficiary to proceed against the prior trustee.
Last, with respect to the duty of loyalty, Code [section] 736.0802 provides that as between the trustee and the beneficiaries, a trustee has a duty to administer the trust solely in the interests of the beneficiaries. As is detailed further in the section, this means, among other things, that in the absence of a contrary provision in the trust instrument, a court order, or a specific statutory exception, a trustee may not engage in any sale, encumbrance, or transaction for its own personal account that involves a conflict between the trustee's personal and fiduciary interests. Nor may a trustee usurp an opportunity properly belonging to the trust. And, in voting shares of stock or in exercising powers of control over interests in other enterprises, the trustee must act in the best interest of the beneficiaries.
In general, an offending transaction entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's personal and fiduciary interests is voidable per se by an affected beneficiary. (17) This is a change in Florida law, as similar transactions have been held to be void rather than voidable in at least one Florida case. (18) The significance of the change is that under the Code, the right of an affected beneficiary to void a transaction is subservient to the protection the Code affords persons dealing with the trustee in good faith. (19) Further, a beneficiary's action can be precluded by an effective consent, ratification, or release, (20) or by a failure to commence the action within the applicable limitations period. (21)
In contrast to transactions involving the trustee personally, transactions between the trustee and persons who have close business or personal ties to the trustee are only presumed to be affected by a conflict between the personal and fiduciary interests of the trustee. (22) As such, they are voidable only if the presumption is not rebutted. Factors relevant to this determination include the fairness of any consideration involved and whether the other terms of the transaction are similar to those that would be found in a transaction involving an independent party.
Assuming an investment otherwise complies with the requirements of F.S. Ch. 518, (23) the Code provides two important exceptions to the presumptively voidable rule that apply exclusively to corporate trustees. First, the Code continues the existing provision permitting corporate trustees to invest in a mutual fund to which the trustee or its affiliate provides services in a capacity other than as trustee. (24) If the trustee receives compensation from the mutual fund for its services, it must fully disclose the compensation to all qualified beneficiaries in writing.
The second exception appears in [section] 736.0802(5). By any standard, this subsection is long, detailed, and complex. A full examination of its provisions would require a separate article. At its core, however, subsection (5) provides that no presumption of a conflict between the personal and fiduciary interests of a corporate trustee arises when a corporate trustee invests in investment instruments as defined in F.S. [section] 660.25(6) (25) that are owned or controlled by the trustee or its affiliate, or from which the trustee or its affiliate receives compensation for providing services in a capacity other than as trustee. In each case, however, the trustee must comply with certain notice and disclosure requirements set out in the subsection. (26)
The investment authority granted by subsection (5) is new to Florida law. Under Ch. 737, similar investments would constitute a breach of the trustee's duty of loyalty. The new subsection applies to irrevocable trusts created on or after the effective date of the Code if the trust instrument expressly authorizes the investments by specific reference to the subsection. (27) Importantly, it also applies by default to all other irrevocable trusts, including those created before the effective date of the Code, unless the qualified beneficiaries make an effective election to opt out of the subsection. In most cases, the opt-out election will require a written objection by a two-thirds majority of either those qualified beneficiaries who are current permissible distributees of trust property or those qualified beneficiaries who are firstline remainder beneficiaries. (28)
The two exceptions discussed above are directed at regulated trustees. In the interests of a fair, effective, and efficient trust administration, the Code also includes several more broadly applicable exceptions to the basic duty of loyalty. Notwithstanding the potential presence of a conflict between the personal and fiduciary interests of a trustee, the trustee's duty of loyalty does not preclude any of the following:
* Payment of reasonable compensation to the trustee or an agreement between a trustee and beneficiary relating to the appointment or compensation of the trustee; (29)
* Transactions between the trust and another trust, a decedent's estate, or a guardian of the property of which the trustee is a fiduciary or in which a beneficiary has an interest; (30)
* A deposit of trust money in a regulated financial-service institution operated by the trustee; (31)
* An advance by the trustee of money for the protection of the trust; (32) or
* The employment of persons, including attorneys, accountants, investment advisers, or agents, even if they are the trustees or are associated with the trustee, to advise or assist the trustee in the performance of its administrative duties, (33) or the employment of agents to perform any act of administration, whether or not discretionary. (34)
Part VIII of the Code also contains several provisions dealing with the powers of a trustee. Section 736.0815 provides generally that a trustee's powers include any that are appropriate to achieve the proper investment, management, and distribution of the trust property, as well as all powers that an unmarried, competent owner has over individually owned property. Augmenting this general statement are three more targeted Code sections. Section 736.08163 incorporates almost verbatim the provisions of current F.S. [section] 737.4025 dealing with a trustee's rights and powers (and the concomitant protection from personal liability) when a trust includes or might include environmentally contaminated property. Section 736.0807 authorizes a trustee to delegate duties and powers that a prudent trustee of comparable skill could properly delegate under the circumstances, provided the trustee exercises reasonable care, skill, and caution in selecting the agent, in defining the scope and terms of the delegation, and in supervising the agent. And [section] 736.0801(1) provides that, while a trust is revocable, a trustee may follow a direction of the settlor whether or not that authority is explicitly stated in the terms of the trust.
Practically speaking, the most important Code section covering trustee's powers is [section] 736.0816. This section serves the same purpose as F.S. [section] 737.402. That is, it contains a detailed list of powers that a trustee automatically has in the absence of a contrary provision in the trust instrument. The powers enumerated in [section] 736.0816 include all those specified in F.S. [section] 737.402. In addition, the new section gives a trustee authority to exercise federal, state, and local tax elections; to select payment options with respect to retirement plans, annuities, and insurance contracts; to make loans, including to a beneficiary, with terms and conditions that are fair and reasonable; and, on termination of a trust, to exercise powers appropriate to the winding up of the trust and the distribution of the trust property.
Finally, no discussion of the trustee power provisions of the Code would be complete without mention of [section] 736.0814. This section serves two purposes. The initial subsection provides a trustee must exercise all discretionary powers, regardless of the breadth of discretion expressed in the instrument, in good faith and in accordance with the terms and purposes of the trust and the interest of the beneficiaries. The remainder of the section protects trustees who are also beneficiaries of the trust from having adverse gift or estate tax consequences because of their distribution and administration powers with respect to the trust. This portion of the section is based on and serves an identical purpose to current F.S. [section] 737.402(4). In the absence of an express provision in the terms of a trust, a trustee may not directly or indirectly make distributions of income or principal to or for its own benefit other than distributions for the trustee's health, education, maintenance, or support. Exceptions are provided for trustees (whether the settlor or other person) of revocable or amendable trusts, for a power held by the trust settlor, and for trusts where application of the restrictions could jeopardize an intended tax benefit such as the marital deduction or the gift tax annual exclusion.
Part X: Liability of Trustees and Rights of Persons Dealing with Trustee
In the order discussed below, Part X of the Code deals with the liability of trustees for a breach of trust; the validity and enforceability of exculpatory clauses; the remedies and damages available for a breach of trust; the liability of trustees to nonbeneficiaries; the entitlement, assessment, and recovery of costs and fees; limitations on actions against a trustee; and the protection of persons dealing with the trustee, including those relying on a certification of trust furnished by the trustee.
Liability of Trustees for Breach of Trust
In general, a trustee is liable for a breach of trust, including a violation (intentional or not) of any of the duties discussed previously. (35) There are, however, several exceptions. Thus, [section] 736.1009 protects a trustee from liability when the trustee acts in reasonable reliance on the terms of the trust. Similarly, [section] 736.1010 offers protection to trustees for breaches resulting from a reasonable lack of knowledge of the happening of certain external events such as the marriage, divorce, educational status, or death of a beneficiary. (36) Last, under Code [section] 736.1012, a trustee is not liable to a beneficiary who has consented to the conduct that constitutes a breach or who has released the trustee from liability or ratified the offending transaction. This protective principle does not extend, however, to consents, releases, or ratifications that were induced by the trustee's improper conduct or that were made by a beneficiary who did not know of its rights and the material facts relating to the breach.
Code [section] 736.1011 places restrictions on the enforceability of a term in a trust that attempts to relieve a trustee of liability for a breach of trust. Under the section, an exculpatory term may not relieve a trustee of liability for breaches committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. In addition, an exculpatory term is unenforceable if it was inserted as a result of an abuse of a fiduciary or confidential relationship between the trustee and settlor. This latter restriction applies to terms that were drafted or caused to be drafted by the trustee, unless the trustee proves that the term is fair and that its existence and contents were adequately communicated directly to the settlor. Corporate trust companies in particular should be mindful of the requirement of direct communication. It is not satisfied by disclosure to the settlor's attorney. (37)
Remedies and Damages for Breach of Trust
Section 736.1001(2) contains a nonexclusive list of actions a court may take with respect to a breach of trust. According to the section, a court may suspend or remove the trustee; enjoin, void, or compel actions by the trustee; reduce or deny the trustee's compensation; compel the trustee to pay money or to restore trust property; impose a lien or a constructive trust on trust property; and recover wrongfully disposed of trust property or its proceeds.
In choosing among the available remedies, Code [section] 736.1001(3) suggests a court's focus in fashioning a remedy for a breach of trust normally should be the redress of the damage caused by the breach and not the punishment of the trustee. Where, because of extenuating circumstances such as bad faith, gross negligence, or recurring breaches, the court finds it is appropriate for a trustee to respond in damages for a breach of trust, [section] 736.1002 provides that the trustee's liability is the greater of any profit the trustee made from the breach and the amount required to restore the trust to what it would have been but for the breach. The measure of damages includes lost income, capital gain, or appreciation that would have resulted from a proper administration. (38)
Costs and Fees
The Code contains several sections covering the burden of fees and costs. With the usual caveat relating to minor revisions and restructuring, these provisions track corresponding provisions in F.S. Ch. 737. The provisions include:
* Section 736.1004 relating to costs (including attorneys' and guardian ad litem's fees) incurred in actions for breach of a fiduciary duty or challenging an exercise or nonexercise of a trustee's power and in proceedings to modify, combine, or sever a trust. The section is derived from a combination of F.S. [subsection] 737.188 and 737.4033;
* Section 736.10043 relating to compensation of attorneys (e.g., of the beneficiaries) who have rendered services that benefit the trust. The section is substantively identical to that portion of F.S. [section] 737.2035 relating to attorneys' fees;
* Section 736.10045 dealing with costs other than attorneys' fees. This section is substantively identical to that portion of F.S. [section] 737.2035 that relates to costs other than attorneys' fees; and
* Section 736.10047 relating to the compensation of attorneys for ordinary and extraordinary services rendered in conjunction with the administration of a revocable trust after the settlor's death. This section is substantively identical to F.S. [section] 737.2041.
Liability of Trustees to Third Parties
Code [subsection] 736.1013 and 736.1015 address a trustee's liability to third parties. The former deals with liability for contracts entered into and torts committed by a trustee during the administration of the trust. Except for the elimination of an exception for contracts for attorneys' fees, [section] 736.1013 is substantively identical to current F.S. [section] 737.306(1) and (2). Section 736.1015, by contrast, is new. It provides a trustee with protection against personal liability for contracts and torts entered into by a partnership when the trustee holds an interest as general partner.
Limitations on Actions Against Trustees
Reference has already been made to new [section] 736.0604, which provides for a six-month limitations period for actions against a trustee of a revocable trust after the settlor's death. Two other limitations provisions appear in Part X of the Code. Section 736.10133 prohibits direct actions predicated on the individual liability of the settlor against a trust described in F.S. [section] 733.707(3) (e.g., the settlor's revocable living trust) after the settlor's death. The section is identical to F.S. [section] 737.3061. Section 736.1008 is a reorganized version of F.S. [section] 737.307 under which the applicable limitations period for a breach of trust action can depend on a variety of factors, including whether the trustee has filed an interim or final accounting and, if so, whether the matter is disclosed on the accounting. Of particular importance, the section retains the existing six-month limitations period for actions on matters the trustee has adequately disclosed on a trust accounting or other trust disclosure document when the trustee has provided the beneficiary with a related limitation notice.
Protection of Persons Other Than Beneficiaries Dealing with the Trustee
Finally, Part X of the Code contains two sections of interest to third parties who deal with trustees. Section 736.1016 provides protection against liability for persons who deal with a trustee in good faith. The section is slightly more expansive than current F.S. [section] 737.405 in that it provides protection to persons who in good faith deal with or assist a former trustee whose trusteeship has terminated.
The second section, [section] 736.1017, is new. Except when required by law or a judicial proceeding concerning the trust, instead of furnishing a complete copy of a trust instrument to a person (other than a beneficiary) who requests it, [section] 736.1017 provides that the trustee may furnish a certification of trust and that persons who rely in good faith on it are protected from liability. Among other things, a certificate of trust must contain the identity of the settlor; the identity, address, and powers of the trustee; the revocability or irrevocability of the trust and the identity of any person holding a power to revoke. Other requirements for what an effective certificate of trust must contain are also specified in the section.
Part XI: Rules of Construction
Part XI of the Code contains a series of default rules of construction that apply in the absence of a contrary indication in the terms of a trust. Each has an identical counterpart in F.S. Ch. 737. The Code provisions include [section] 736.1102 dealing with the construction of generic terms such as children and descendants; [section] 736.1103 providing that gifts to multigeneration classes (such as descendants, heirs, etc.) are per stirpes; [section] 736.1104 covering the effect of unlawful and intentional killings; [section] 736.1105 covering the effect of a dissolution of marriage on a revocable trust; [section] 736.1107 addressing commonly occurring constructional issues that arise when a trust beneficiary is entitled to a distribution of specific securities (as opposed to their equivalent value); and [section] 736.1108, which invalidates trust contest penalty clauses. (39)
In addition to the above, Part XI includes new [section] 736.1106. This section, together with conforming changes that have been made to the Probate Code antilapse statute (F.S. [section] 732.603), constitutes a new, coordinated, and more comprehensive default regime covering antilapse and descendibility issues in both testamentary and non-testamentary contexts.
Turning first to F.S. [section] 732.603, changes to this provision now restrict its applicability to outright testamentary transfers. (40) This includes transfers made by the exercise of either a general or a special testamentary power of appointment, provided in either case that the donor of the power and the predeceasing appointee meet the relationship test specified in the section. As a further clarification, F.S. [section] 732.603 also explicitly incorporates existing Florida case law to the effect that the section does not apply if words of survivorship such as "if he survives me" are attached to a testamentary disposition. (41)
With the restriction of F.S. [section] 732.603 to outright testamentary dispositions, all trust dispositions fall under new Code [section] 736.1106. With some exceptions discussed below, this section applies when a beneficiary of a future interest in either a testamentary or an inter vivos trust dies before the point at which the beneficiary's interest becomes possessory. (42) In such situations, [section] 736.1106 does two things. First, it provides that the deceased beneficiary's future interest in the trust is contingent on the beneficiary surviving the point at which the interest takes in possession. Secondly, unless a contrary intent appears in the trust instrument, [section] 736.1106 creates a per stirptual alternate gift in such of the deceased beneficiary's descendants as are living at that time. (43)
The effect of the section may be illustrated with a brief example. Assume D dies testate with a will in which he devises property to a testamentary trust to pay "income to W for life; remainder in corpus to C." C dies after D, survived by W and by two children GC-1 and GC-2. Some time later, W dies survived by C's two children. On these facts, assuming no contrary intent appears in the trust instrument, [section] 736.1106 creates a per stirptual alternate gift of C's interest in favor of GC-1 and GC-2. The section, therefore, has the salutary effect of avoiding needless administration and taxation at C's death.
Unlike much of the Code, [section] 736.1106 is prospective only; it does not apply to any trust that became irrevocable before the effective date of the Code. Other than that, it applies to a broad array of situations where the beneficiary of a future interest in a trust dies before the time the interest becomes possessory. Thus, in the illustrative context of the above example, the section would apply whether the predeceasing beneficiary is an individual or a member of a class; whether the trust in which C holds his interest is created by standard transfer or by an exercise of a general or special power of appointment; whether the transfer (or appointment) is an inter vivos or testamentary one; with respect to the inter vivos trusts, whether the trust is revocable or irrevocable; with respect to a testamentary trust, whether or not C survived the testator; and with respect to either, whether or not the trust settlor and predeceasing beneficiary are related. That is, unlike [section] 732.603 of the Probate Code, there is no relationship test under [section] 736.1106.
It was mentioned previously that [section] 736.1106 yields to an expression of a contrary intent in the trust instrument. Thus, no alternate gift in favor of a deceased beneficiary's descendants will arise under the section if the instrument expresses a different alternate taker, or if it states that the designated beneficiary's descendants not share in the gift, or if words of survivorship are attached to the remainder beneficiary's gift. (44)
Part XII: Charitable Trusts
Part XII of the Code incorporates most of the sections currently found in Part V of F.S. Ch. 737 dealing with charitable trusts. These provisions help to preserve favorable tax treatment under the Internal Revenue Code for charitable trusts that are less than perfectly drafted. The Code versions are substantively identical to the prior statutes, although some have been updated and two current sections (F.S. [subsection] 737.510 and 737.512) were omitted. The former because it is duplicative of other Code provisions and the latter because it is obsolete.
Part XIII: Miscellaneous
Part XIII of the Code contains three miscellaneous sections. Section 736.1302 is a standard severability provision. Section 736.1301 is a standard provision dealing with electronic signatures. A similar provision appears in all uniform acts of recent vintage. Last, [section] 736.1303 specifies rules relating to the application of the Code to existing trusts and legal proceedings. As noted, except as otherwise provided in a particular section, the Code applies to all trusts whether created before, on, or after its effective date of July 1, 2007. With respect to existing trusts and legal proceedings, [section] 736.1303 provides that the Code does not affect any act done prior to its effective date. Nor does it affect the running of any limitations period that began before the effective date of the Code, even if the statute specifying the period is repealed or superseded by the Code.
As for judicial proceedings, the Code applies to all proceedings concerning trusts commenced on or after its effective date. It also applies to judicial proceedings commenced before that date unless the court finds its application would substantially interfere with the effective conduct of the judicial proceeding or prejudice the rights of the parties.
As might be expected, enactment of the Code was accompanied by a number of conforming and other changes to various sections of the Probate Code and other portions of the Florida Statutes. Many of these are just updates to statutory cross references and will not be detailed here. Some of the more important substantive changes are listed below:
* F.S. [section] 689.175: New. This section abolishes the doctrine of worthier title as both a rule of law and a rule of construction.
* F.S. [section] 731.103: Revised. This section is made applicable to new Ch. 736; the provision specifying the applicability of the rules of evidence in civil actions is moved to new [section] 731.1035 (below); subsection (4) permitting proof of death by direct or circumstantial evidence before expiration of five-year time period is added to conform this section to F.S. [section] 737.626(4).
* F.S. [section] 731.1035: New. This new section is separated out from F.S. [section] 731.103 (see above). It specifies that the rules of evidence in civil action apply to proceedings under Probate Code.
* F.S. [section] 731.201(2) and (9): Revised. In both of these subsections, a reference to "beneficiaries described in F.S. [section] 737.303(4)(b)" is changed to qualified beneficiary as defined in the new Code.
* F.S. [section] 731.201(27): New. This section adds a new definition of "power of appointment."
* F.S. [section] 731.303: Revised. This section is amended to limit its application to proceedings involving estates and not those involving trusts. In addition, the portions of the section dealing with representation by holders of powers of appointment are modified to include the same restrictions that appear in Code [section] 736.0302.
* F.S. [section] 732.513: Revised. Subsection (c) of the section is deleted to remove the implication that a pour-over to a revocable trust that is not executed in the manner required for wills is effective.
* F.S. [section] 732.611: Clarified. The wording of this section was changed to better reflect its intended purpose.
* F.S. [section] 732.212: Revised. A reference in this section to "beneficiaries described in F.S. [section] 737.303(4)(b)" is changed to qualified beneficiary as defined in the new Code.
* F.S. [section] 738.104: Revised. This section is amended in several places to change references to the previously defined term "beneficiaries" to a newly defined term "eligible beneficiaries." Under the new version, it is the eligible beneficiaries of a trust that have standing to object to the use of a trustee's power to adjust with respect to trusts in existence on January 1, 2003. The new term excludes from the class of beneficiaries with standing the middle-tier qualified beneficiaries described in Code [section] 736.0103(14)(b) unless there is no third-tier qualified beneficiary described in [section] 736.0103(14)(c). The practical effect of the revisions is two-fold. First, for most trusts the term eligible beneficiaries will have a meaning very similar to the term "beneficiaries" under the current version of the section. For those trusts where the term differs, the revisions are intended to ensure there will always be two categories of qualified beneficiaries with standing to object to an exercise of the trustee's adjustment power.
* F.S. [section] 744.331(6)(b) and (f): Revised. These are companion revisions to the change made in Code [section] 736.0207 permitting court-approved contests of a revocable trust by a settlor's guardian prior to the settlor's death. Paragraph (b) requires that a court determine whether a sufficient alternative to guardianship exists for a person the court finds to be incapable of exercising delegable rights. If so, the court is precluded from appointing a guardian. If not, the court is required to appoint a guardian for the incapacitated person. Paragraph (f) provides that an incapacitated person's trust, trust amendment, or durable power of attorney is not to be considered a sufficient alternative to guardianship if an interested person files a verified statement that he or she has a reasonable factual basis for believing in good faith that the trust, trust amendment, or durable power is invalid.
* F.S. [section] 744.441(11): Revised. The new language added to this subsection is also related to new Code [section] 736.0207. Subsection (11) directs that before authorizing a guardian to bring an action under [section] 736.0207, the court must find that the action appears to be in the ward's best interest during the ward's probable lifetime.
* F.S. [section] 744.462: New. This new section provides for the reporting of a court's finding as to the validity of a ward's trust, trust amendment, and power of attorney, and for the continued review by the court of the sufficiency of guardianship alternatives, the continued need for a guardian, and the extent of the need for delegation of the ward's rights.
Even before the enactment of new Ch. 736, Florida already had an extensive body of statutory trust law, virtually all of which is found in F.S. Ch. 737. Nevertheless, enactment of the Code should prove beneficial because the Code is more structured, comprehensive, understandable, modern, accessible, and uniform than existing Ch. 737. Indeed, a major benefit of the Code is that it provides answers to a host of questions for which Florida's law was previously not definitively settled. The added certainty the Code offers should promote efficiency and fairness to beneficiaries and trustees alike. At the same time, it should minimize the need for costly litigation.
Considering its scope and breadth, and that most of the Code will be retroactive, it is somewhat surprising how little an impact the Code can be expected to have on our existing trusts. The list of what we should do in anticipation of the Code becoming effective is a short one. We should take steps now to ensure that any certificates of trust we have created for clients comply with the requirements of [section] 736.1017. And if we represent beneficiaries of trusts with a regulated trustee, we should discuss with the beneficiaries the new authority the Code will give the trustee to invest in investment instruments with which the trustee or its affiliate is otherwise involved. In particular, we should advise the beneficiaries of their ability to opt out of [section] 736.0802(5).
The list of things we need to consider once the Code becomes effective is longer. Explicitly now, if not implicitly before, an income beneficiary of a trust (such as a QTIP trust) who has a special testamentary power of appointment may not represent the objects and takers in default of that power if the beneficiary is the sole trustee of the trust. If the objective is to cut off the flow of information to other beneficiaries, either there must be a cotrustee to serve along with the income beneficiary, or settlors must avail themselves of their new ability to designate a representative to receive notices, information, and accountings on behalf of the other beneficiaries.
Assuming, as seems appropriate, that no one reading this article would draft a trust that does not explicitly state whether it is revocable or irrevocable, the change in the default rule on revocability is of academic interest only. On the other hand, the new, short, six-month limitations period available to trustees of revocable trusts at the death of the settlor is a matter of considerable practical significance.
With respect to creditor's rights, we should review our forms to ensure that our spendthrift provisions disable both voluntary and involuntary transfers as the Code now requires. If we draft trusts with Crummey withdrawal powers, particularly hanging Crummey powers, we must recognize that until the power lapses, some of the trust will be subject to the reach of the power holder's creditors. For those who draft grantor trusts, we can now give the trustee the discretion to pay the taxes on trust income without concern that the authority would subject the trust to the reach of the settlor's creditors.
For corporate trustees, there are new risks and opportunities. As mentioned, corporate trust companies need to be aware of the direct communication requirement of [section] 736.1011 relating to the enforceability of an exculpatory clause drafted or caused to be drafted by the trustee. On the investment side, in some cases, the expanded ability of regulated trust companies to invest in services and products with which the trustee or an affiliate is involved can be a win-win situation for trustee and beneficiaries. But it may not always be appropriate. Attorneys need to discuss this with clients. And having done so, we should consider whether that authority should be explicitly affirmed or denied in the trust instrument. A factor to keep in mind is that the ability of qualified beneficiaries to opt out does not apply if the instrument explicitly authorizes the investments.
Finally, we should be mindful of the many innovations the Code makes to prior law. This includes the ability of a guardian of an incompetent settlor with court approval to contest the validity of the settlor's revocable trust prior to the settlor's death; the elimination of the requirement for recurring compliance with the "last resort" principle, as in Bacardi v. White, 463 So. 2d 218 (Fla. 1985); the expanded ability to reform trusts to achieve a settlor's tax objectives or to cure a mistake of law or fact; the standing the Code gives settlors to enforce charitable trusts or to petition for removal of a trustee; the ability qualified beneficiaries have to request removal of a trustee either upon their unanimous agreement or when there has been a substantial change in circumstance; and the authority the Code gives to qualified beneficiaries to nominate a successor trustee when the instrument does not do so.
Lest readers be mislead, this article touches on only some of the provisions of the new Code, albeit the provisions that it does cover are those that are the most important. As a final "homework assignment" for the interim period before the Code takes effect, we should all at least skim the Code itself. It is available online at the Florida Senate Web site (www.flsenate.gov) as S.B. 1107 ER. Before doing so, it would probably be beneficial to read the official scrivener's summary. This document contains a comprehensive discussion of all Code provisions. It has been reviewed for accuracy by the committee and it served as the basis for the legislative whitepaper for the enacting legislation. The appendixes of the scrivener's summary contain tables that can be used to correlate the provisions of the Code with those of Ch. 737, and vice versa. As one committee member put it, these tables make the scrivener's summary the "Rosetta Stone" of the Code. The summary may be obtained from the RPPT&L section Web site at: www. FlaBarRPPTL.org/FloridaTrustCode/ summary.pdf.
(1) Fla. Stat. [section] 736.0801.
(2) Fla. Stat. [section] 736.0813.
(3) See Fla. Stat. [section] 736.0812.
(4) Fla. Stat. [section] 736.0802.
(5) Fla. Stat. [section] 736.0803.
(6) Fla. Stat. [section] 736.0804. This is a more generalized statement of the duty relating to trust investments that appears in Florida's Prudent Investor Act. See Fla. Stat. [section] 518.11(a).
(7) Fla. Stat. [section] 736.0805.
(8) Fla. Stat. [section] 736.0806.
(9) See Fla. Stat. [subsection] 736.0809 and 736.0812.
(10) Fla. Stat. [section] 736.0810(1).
(11) Fla. Stat. [section] 736.0811.
(12) See Fla. Stat. [section] 736.08165.
(13) Fla. Stat. [section] 736.0810. There is an exception permitting investments in common trust funds.
(14) Fla. Stat. [section] 736.08105.
(15) Fla. Stat. [section] 736.0817.
(16) The term "actions" includes a failure to act. Fla. Stat. [section] 736.0103(1).
(17) Fla. Stat. [section] 736.0802(2).
(18) See Barnhart v. Hovde, 490 So. 2d 1271 (Fla. 3d D.C.A. 1986).
(19) See Fla. Stat. [section] 736.1016.
(20) On the effectiveness of consents, ratifications, and releases, see Fla. Stat. [section] 736.1012.
(21) On the statute of limitations on proceedings against trustees, see Fla. Stat. [section] 736.1008.
(22) See Fla. Stat. [section] 736.0802(3).
(23) See in particular Fla. Stat. [section] 518.11 (Florida's prudent investor rule).
(24) See Fla. Stat. [section] 736.0816(3).
(25) New Fla. Stat. [section] 660.25(6) defines investment instrument to be "any security as defined in s. 2(a)(1) of the Securities Act of 1933; any security of an open-end or closed-end management investment company or investment trust registered under the Investment Company Act of 1940, 15 U.S.C. ss. 80a-1 et seq., as amended; any contract of sale of a commodity for future delivery within the meaning of s. 2(i) of the Commodity Exchange Act; or any other interest in securities, including, but not limited to, shares or interests in a private investment fund, including, but not limited to, a private investment fund organized as a limited partnership, a limited liability company, a statutory or common law business trust, a statutory trust, or a real estate investment trust, a joint venture, or any other general or limited partnership; derivatives or other interests of any nature in securities such as options, options on futures, and variable forward contracts; mutual funds; common trust funds; money market funds; hedge funds; private equity or venture capital funds; insurance contracts; and other entities or vehicles investing in securities or interests in securities whether registered or otherwise."
(26) With respect to investment instruments owned or controlled by the trustee or its affiliate, the trustee must disclose to qualified beneficiaries the fact of the investment, the identity of the investment instrument, and the identity and relationship to the trustee or its affiliate. Fla. Stat. [section] 736.0806(5)(b). With respect to investment instruments for which the trustee or its affiliate receives compensation for services in a capacity other than as trustee, the trustee must disclose to the qualified beneficiaries the nature of the services and all fees, commissions, or other compensation received. Fla. Stat. [section] 736.0806(5)(c). In both cases, disclosure must be made annually unless there has been no change in the method or increase in the rate at which the compensation is calculated since the most recent disclosure. Fla. Stat. [section] 736.0806(5)(d). In general, the notice, disclosure requirements, and other provisions of Fla. Stat. [section] 736.0802(5) do not apply to qualified investment instruments (i.e., mutual funds, common trust funds, or money market funds investment in which is authorized by Code [section] 736.0816(3).
(27) See Fla. Stat. [section] 736.0802(5)(e)2.
(28) See Fla. Stat. [section] 736.0802(5)(e)3.
(29) Fla. Stat. [section] 736.0802(7)(a) and (b).
(30) Fla. Stat. [section] 736.0802(7)(c).
(31) Fla. Stat. [section] 736.0802(7)(d).
(32) Fla. Stat. [section] 736.0802(7)(e).
(33) Fla. Stat. [section] 736.0802(8). The trustee may act without independent investigation on their recommendations.
(35) See Fla. Stat. [section] 736.1001(1).
(36) See Fla. Stat. [section] 736.1010.
(37) In a known "glitch," the direct communication requirement in [section] 736.1011 was not made prospective only. The expectation is this oversight will be remedied in a "glitch bill" prior to the date on which the Code takes effect.
(38) Generally, if more than one person is liable, each liable person is entitled to pro rata contribution from the others. No contribution is available, however, for breaches committed in bad faith or to the extent a liable person benefits from the breach. See Fla. Stat. [section] 736.1002(2).
(39) Section 736.1108 is a mandatory provision.
(40) Compare existing Fla. Stat. [section] 732.603 which applies to testamentary trusts.
(41) See Williams v. Williams, 152 Fla. 255, 9 So. 2d 798 (Fla. 1942) (dealing with former Fla. Stat. [section] 731.20); In re Estate of Wagner, 423 So. 2d 400 (Fla. 2d D.C.A. 1982).
(42) The section refers to this as the "distribution date." See Fla. Stat. [section] 736.1106(1)(b).
(43) Fla. Stat. [section] 736.1106(2).
(44) By contrast, the mere presence of a residuary clause in a settlor's will is not a sufficient indication of a contrary intent. And this is true even if the will specifically provides that lapsed or failed gifts are to pass under the residuary clause. See Fla. Stat. [section] 736.1106(3)(b).
Editor's Note: When F.S. Ch. 736 takes effect on July 7, 2007, Florida will have a new trust code.
The Code consists of the 13 parts of new Ch. 736. In the interest of uniformity, these parts correspond in title and content to the 11 articles that make up the Uniform Code, plus two additional parts covering rules of construction and charitable trusts.
Parts I through VII were covered in the July/August issue of the Bar Journal and discussion of Parts VIII through XIII and some of the conforming amendments is provided in this issue.
The Ad Hoc Trust Code Revision Committee spent five years codifying Florida trust law. The committee was comprised of members of the Real Property, Probate & Trust Law, Elder Law, and Tax Law sections of the Bar. It also included liaisons to the Probate and Trust Litigation Committee, the Probate Law Committee, and representatives of the Florida Bankers Association and the Florida Institute of Certified Public Accountants. The committee was co-chaired by Brian J. Felcoski and Laird A. Lile. Professor Powell served as committee scrivener. Sen. David Aronberg, D-Greenacres, and Rep. Mark Mahon, R-Jacksonville, sponsored the legislation.
David F. Powell received his J.D. from the University of Texas School of Law and L.L.M. in taxation from New York University. He joined the faculty of the Florida State University College of Law in 1973 where his principal teaching responsibilities have included courses in wills and trusts, estate and gift taxation, estate planning, and property. He is an academic fellow of the American College of Trust and Estate Counsel and of counsel to Holland and Knight LLP. Professor Powell was scrivener for the Ad Hoc Trust Law Committee of The Florida Bar that drafted Florida's new trust code.
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|Title Annotation:||part 2|
|Author:||Powell, David F.|
|Publication:||Florida Bar Journal|
|Date:||Oct 1, 2006|
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