The Florida Trust Code (FTC) was enacted as new Chapter 736 of Title XLII of the Florida Statutes (F.S.) and went into effect July 1, 2007. While generally modeled after the Uniform Trust Code (UTC), the FTC embodies only 60 percent of the UTC's provisions — and nearly one-third of those provisions are substantively revised.1 The remaining 40 percent come from Florida's earlier laws.
We will not examine the entire spectrum of changes to Florida trust law, but rather will discuss the practical and pressing issue now facing professionals involved in drafting Florida trusts: How should Florida trust forms be updated?
Default and Mandatory
Generally, under the FTC, the provisions of the trust instrument control and the code provides nothing more than a set of default rules. But there are a number of mandatory provisions that practitioners need to know, all of which are enumerated in F.S. Section 736.0105(2). Consider noting the existence of these mandatory rules in the trust instrument. (See Form 1 for a sample trust provision.)
When referring to the individual establishing a trust, some practitioners use the word “grantor” in trust instruments; others use “settlor.”2 The FTC uses “settlor,”3 so consideration should be given to adopting its use. References to a Florida “resident” have been replaced by Florida “domiciliary.”4 Although this latter change is not substantive,5 consider updating your trust forms.
In various places, the FTC refers to “beneficiaries,” “qualified beneficiaries,” and “eligible beneficiaries.” Of the three terms, “qualified beneficiaries” is the most important. Qualified beneficiaries are a subset of all beneficiaries consisting generally of current beneficiaries, intermediate beneficiaries and first-line remainder beneficiaries.6 The trustee's duty to account and provide certain information and notices runs only to a trust's “qualified beneficiaries.”
More on that later.
The FTC has changed Florida trust law with respect to trust creation, choice of law and modification of trusts.
Trust creation — Under the FTC, an inter vivos irrevocable trust is validly created if the execution requirements comply with either: (1) the law of the place of execution; or (2) the law of the settlor's domicile at the time of execution.7 The same rules generally apply to revocable trusts, but revocable trusts also are subject to a special rule8 that provides the “testamentary aspects” of a revocable trust (this part of the special rule is consistent with current Florida law) created by a “Florida domiciliary”9 (this part of the special rule represents a change in Florida law) must be executed with the formalities of a Florida will. Note two important aspects of the special rule: (1) The FTC does not require irrevocable trusts to be executed with the formalities of a will; and (2) the special rule for revocable trusts is applicable to Florida domiciliaries no matter where the trust is executed, but is not applicable to non-Florida domiciliaries (even if the revocable trust is executed in Florida.)
Choice of law — Because of the FTC, choice-of-law provisions in trust instruments need to be given greater attention than previously accorded. These provisions designate which jurisdiction's laws control for purposes of the validity, construction and administration of a trust instrument. The laws of multiple jurisdictions may apply.
The FTC has changed Florida's choice-of-law rules in several respects:
Under prior Florida law, simply designating in the trust instrument that a particular jurisdiction's laws control was enough for that jurisdiction's laws to apply. No particular nexus to the designated jurisdiction was required. Under new F.S. Section 736.0107, the meaning and interpretation of trust provisions is determined by the law designated in the trust instrument, as long as there is a “sufficient nexus” to the designated jurisdiction either at the time of the trust's creation or during the trust's administration.10 What is a sufficient nexus? Examples include the trust holding real property located in the designated jurisdiction and the settlor, trustee or a trust beneficiary residing in the designated jurisdiction.11
Also under prior Florida law, simply designating in the trust instrument that a particular jurisdiction's law controls the administration of a trust was enough for that jurisdiction's laws to apply to the trust's administration. New F.S. Section 736.0108 provides that the terms of a trust designating the principal place of administration of the trust are valid only if there is a “sufficient connection” with the designated jurisdiction. Section 736.0108 provides examples of (but doesn't limit the means of establishing) the requisite sufficient connection, including that: (1) a trustee's principal place of business is in the designated jurisdiction; (2) a trustee is a resident of the designated jurisdiction; and (3) all or part of the trust's administration occurs in the designated jurisdiction.
The FTC also changes the rules applicable to a transfer of the principal place of the trust's administration. Under F.S. Section 736.0108, a trustee is authorized to transfer the principal place of trust administration to a different jurisdiction, but must notify all “qualified beneficiaries” of the proposed transfer not less than 60 days before that transfer. The elements of the required notice are spelled out in F.S. Section 736.0108(6). The required notice provision is not a mandatory provision and therefore is waivable in the trust instrument.
F.S. Section 736.0108(4) imposes a continuing duty on a trustee “to administer the trust at a place appropriate to its purposes and its administration.” This continuing duty is not a mandatory provision and therefore is waivable by provisions in the trust instrument.
(See Form 2 for a sample choice of law provision.)
Also altered is Florida's law governing trust modification, termination, combination, division and decanting:
Trust modification — Under F.S. Section 736.04115, a court is authorized to modify an irrevocable trust when continuing the status quo is not in the “best interests” of the trust beneficiaries.12 If desired, a settlor may prevent judicial modification of a trust under F.S. Section 736.04115 by: (1) incorporating a limited rule against perpetuities,13 and (2) by expressly prohibiting judicial modification under this statute. F.S. Section 736.04115 instructs that the court shall, in exercising its power to modify the terms of a trust, consider the terms and purposes of the trust; and that it shall exercise discretion in a manner that conforms, to the extent possible, with the settlor's intent. Thus, even if a settlor fails to comply with the previously stated requirements, it may be possible to influence a court to modify a trust under F.S. Section 736.04115 by emphasizing the settlor's belief that the best interests of the trust beneficiaries are served by retaining the trust's original terms. (See Form 3 for a sample trust provision that attempts to do this.)
F.S. Section 736.0412(1) provides that after a settlor's death, the trustee and all qualified beneficiaries may modify or terminate a trust if they agree unanimously to do so. But, under F.S. Section 736.0412(4)(b), a settlor can prohibit non-judicial modification if the trust instrument incorporates the limited rule against perpetuities.
F.S. Section 736.0808(3) provides that the terms of a trust instrument may confer on a trustee or other person a power to direct a trust's modification or termination. Therefore, the FTC expressly permits the appointment of, for example, a trust protector to amend or terminate a trust. F.S. Section 736.0808(4) provides that such a person is presumptively a fiduciary and is therefore required to act in good faith. But because this provision is not mandatory, it is possible and may be useful to clarify that the trust protector is not liable for actions taken or not taken in good faith.14
Termination of uneconomical trusts — F.S. Section 736.0414 provides for the means of terminating uneconomical trusts after notifying the qualified beneficiaries. The statutory dollar figure is $50,000, so settlors should consider whether the statutory dollar amount should be increased or decreased. Because this section is not mandatory, it's possible to dispense with the notice to qualified beneficiaries in the trust instrument. (See Form 4 for a sample trust provision.)
Combination and division of trusts — F.S. Section 736.0417 provides that, after notice to qualified beneficiaries, a trustee may combine two or more trusts or divide a trust into two or more trusts, if the result does not impair the rights of any beneficiary or adversely affect achievement of the trusts' purposes. Because this section is not mandatory, it's possible to dispense with the notice to qualified beneficiaries in the trust instrument. (See Form 5 for sample trust provisions.)
Florida's decanting statute — On occasion, the terms of an irrevocable trust become outdated and practitioners are asked to determine if it's possible to update the terms of an otherwise irrevocable trust. Many trust instruments include provisions authorizing the trustee to merge a trust or transfer trust assets to a new trust that has “substantially similar terms.” Often, however, the terms of the new trust are not substantially similar to the old trust. One option may be a so-called “decanting statute” which has been enacted in a number of jurisdictions, including Florida.15
Section 2 of Florida CS/HB 743 (known as the “Glitch Bill”) added a new F.S. Section 736.04117 regarding the trustee's power to invade trust principal. F.S. Section 736.04117(1)(a) provides that unless the trust instrument provides to the contrary, a trustee who has “absolute power”16 under the terms of the trust to invade trust principal to make distributions to or for the benefit of one or more persons may instead exercise the power by appointing trust principal in further trust for the trust beneficiary or beneficiaries. There are a number of restrictions on this power, including that the power not jeopardize a trust's favorable tax attribute and that the beneficiaries of the second trust may only include beneficiaries of the first trust. The statute does, however, allow the second trust to be for the benefit of only one of a number of beneficiaries of the first trust. That is, there is no requirement that the beneficiaries of the first and second trusts be identical.
Unless the qualified beneficiaries waive the notice period, the trustee must provide notice to the first trust's qualified beneficiaries, in writing, at least 60 days prior to the effective date of the trustee's exercise of this power.17 But notice to qualified beneficiaries is not mandated by statute and may be waived in the trust instrument.
Florida's new decanting statute should prove a useful tool in updating the terms of an otherwise irrevocable trust. The breadth of the power may trouble some settlors and practitioners, as it essentially allows a trustee to unilaterally amend the terms of an irrevocable trust by transferring trust assets to a new trust. But Florida common law already granted a trustee this authority;18 F.S. Section 736.04117 merely codified it. Consideration should be given to the power of Florida's decanting statute, and, if desirable, a trust instrument should prohibit the trustee from exercising such power (or limiting its exercise to new trusts with substantially similar terms as the old trust.) (See Form 6 for sample trust provisions.)
Trustee Duties, Other Powers
The FTC has codified a trustee's duty under Florida law — and expanded a trustee's duties along the way.
Duty to administer a trust in good faith — Pursuant to F.S. Section 736.0801, a trustee has a non-waivable19 duty to “administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this code.” Trustees administering Florida trusts were subject to a similar duty before the FTC.20 Thus, although trust language grants broad discretion to the trustee (for example, absolute and sole discretion), the trustee still is obligated to administer a trust in good faith.
Duty of loyalty — F.S. Section 736.0802 contains detailed rules regarding a trustee's duty of loyalty to trust beneficiaries. It appears that a trustee's general duty of loyalty may not be entirely waived in the trust instrument.21 That being said, nothing in F.S. Section 736.0105(2) makes F.S. Section 736.0802 and its duty of loyalty provisions specifically mandatory. Accordingly, if it's desirable, a drafter could consider waiving one or more of the specific duty of loyalty provisions detailed in F.S. Section 736.0802. The four loyalty provisions are:
Self-dealing — F.S. Section 736.0802(2)(a) provides that a sale, encumbrance or other transaction involving the investment or management of trust property entered into by a trustee for the trustee's own benefit or that is otherwise affected by a conflict between the trustee's fiduciary and personal interests is voidable by an affected beneficiary unless the transaction meets one of a number of exceptions, including being authorized by the terms of the trust instrument. (See Form 7 for a sample trust provision.)
Trustee affiliates — F.S. Section 736.0802(3) provides that a sale, encumbrance or other transaction involving the investment or management of trust property is presumed to be affected by a conflict of interest (and hence voidable under F.S. Section 736.0802(2)(a)) if the sale, encumbrance or other transaction is entered into by the trustee with: (a) the trustee's spouse; (b) the trustee's descendants, siblings, parents or their spouses; (c) an officer, director, employee, agent or attorney of the trustee; or (d) a corporation or other person or enterprise in which the trustee or a person that owns a significant interest in the trustee has an interest that might affect the trustee's best judgment. If it's desirable, a drafter could consider waiving such conflicts of interest. (See Form 8 for a sample trust provision.)
Trust opportunities — Pursuant to F.S. Section 736.0802(4), a transaction not concerning trust property in which the trustee engages in the trustee's individual capacity involves a conflict between personal and fiduciary interests if the transaction concerns an opportunity properly belonging to the trust. Again, if it's desirable, a drafter could consider waiving such conflicts of interest. (See Form 9 for a sample trust provision.)
Corporate trustees and affiliated services — F.S. Section 736.0802(5) introduces a number of new rules with respect to corporate trustees and investments in their own affiliated services and products. This section provides that an investment by a corporate trustee of an irrevocable trust in an “investment instrument”22 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, is not presumed to be affected by a conflict of interest, provided the trustee complies with F.S. chapters 518 and 660 and the trustee complies with certain disclosure requirements.
The section is relevant when a corporate trustee desires to make an investment that is not otherwise permitted as a qualified investment.23 In such circumstances, either: (a) the trust instrument must specifically authorize the trustee, by specific reference to F.S. Section 736.0802(5)(e)(2), to invest in investment instruments owned or controlled by the trustee or its affiliate; or (b) the corporate trustee must provide advance notice24 and a majority of the trust's qualified beneficiaries must provide written consent within 90 days of the written request of the corporate trustee.25
It appears, however, that even if the trust instrument expressly authorizes such investments, the corporate trustee is required to make certain disclosures to all qualified beneficiaries regarding its investments in non-qualified investments in the corporate trustee's own affiliated services or products.26 As a result of these new affiliated service and products rules, the drafter must consider whether to authorize or prohibit such investments. (See Form 10 for sample trust provisions authorizing and prohibiting such investments.)
The FTC also provides that a trustee or its affiliate may receive compensation for rendering services to the trust beyond the compensation received by the trustee for administering the trust, provided the trustee fully discloses such compensation in writing to all qualified beneficiaries. Accordingly, a drafter must now consider whether to authorize or prohibit such double fees. (See Form 11 for sample trust provisions authorizing and prohibiting such double fees.)
Duty to deal impartially with trust beneficiaries — F.S. Section 736.0803 provides that “[i]f a trust has two or more beneficiaries, the trustee shall act impartially in administering the trust property, giving due regard to the beneficiaries' respective interests.” The term “beneficiaries” is defined in F.S. Section 736.0103(4) to include a person who has a present or future beneficial interest in a trust, vested or contingent, or holds a power of appointment over trust property in a capacity other than as trustee. Thus, if a settlor wants to favor one class of beneficiaries over another, it's necessary for the drafter to address this preference in the trust instrument. (See Form 12 for a sample trust provision evidencing a settlor's intent to favor current beneficiaries over remainder beneficiaries.)
Delegation by trustee — Before the FTC, Florida law permitted delegation of investment functions and the employment of agents. The FTC retains these provisions and expands a trustee's delegation authority. First, a trustee's authority to delegate all or a part of the trustee's investment authority has been retained in F.S. Section 518.112.27 A trustee must exercise reasonable care, judgment and caution in selecting the investment agent, in establishing the scope and terms of the delegation of investment authority, and in reviewing the agent's performance. The trustee also must provide written notice of the trustee's intention to delegate investment authority to the trust's beneficiaries (notice is not a mandatory provision and therefore can be waived in the trust instrument.)
F.S. Section 736.0802(8) provides that a trustee's duty of loyalty does not preclude the employment of agents or the payment of reasonable compensation and costs incurred in connection with such employment from the assets of the trust. Importantly, one significant change was made with respect to the employment of agents. F.S. Section 736.0802(8) provides that a trustee may act without independent verification of an agent's recommendations.
F.S. Section 736.0807 expands a trustee's ability to delegate to any duties and powers that a prudent trustee would delegate under the circumstances. But the trustee must exercise reasonable care, skill and caution in: (1) selecting the agent; (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and (3) reviewing the agent's actions periodically, to monitor the agent's performance and compliance with the terms of the delegation. (See Form 13 for a sample trust provision regarding the employment of agents.)
Duty to inform and account — F.S. Section 736.0813 requires a trustee to keep an irrevocable trust's qualified beneficiaries reasonably informed of the trust and its administration. The duties required in this respect are non-waivable pursuant to F.S. Section 736.0105(2)(q)-(s). This duty to inform and account includes, but is not limited to:
- within 60 days after accepting the trust, the trustee must notify the trust's qualified beneficiaries of the acceptance and provide them with the trustee's full name and address;28
- within 60 days after the date the trustee acquires knowledge that an irrevocable trust has been created, or that a formerly revocable trust has become irrevocable (whether by the settlor's death or otherwise), the trustee must notify the qualified beneficiaries of the trust's existence, the identity of the settlor or settlors, the beneficiaries right to request a copy of the trust instrument, and their right to accountings;29
- upon receiving a qualified beneficiary's reasonable request, the trustee must provide that beneficiary with a complete copy of the trust instrument;
- a trustee of an irrevocable trust must provide a trust accounting, as set forth in F.S. Section 736.08135, to each qualified beneficiary on an annual basis, as well as when the trust terminates or there's a change of trustee; and
- upon receiving a qualified beneficiary's reasonable request, the trustee must provide that beneficiary with relevant information about the assets and liabilities of the trust and the particulars relating to the trust's administration.
While a trust is revocable, the trustee's duties under F.S. Section 736.0813 extend only to the settlor. The duties we've outlined are likely to be some of the more controversial of all of the FTC provisions. The administrative inconvenience placed on trustee's by F.S. Section 736.0813 can be eased by making use of the representation provisions of F.S. Sections 736.0301 through 736.0306. (See Form 14 for a sample trust provision dealing with the trustee's duty to inform and account.)
Duty to enforce and defend claims — F.S. Section 736.0816(14) provides that a trustee may “[p]ay or contest any claim, settle a claim by or against the trust, and release, in whole or in part, a claim belonging to the trust.” F.S. Section 736.0811 provides that a trustee shall “take reasonable steps to enforce claims of the trust and to defend claims against the trust.” The latter statute appears to provide a duty on the trustee to enforce and defend claims, while the former statute appears to leave the enforcement and defense of trust claims to the trustee's discretion. (See Form 15 for an alternative trust provision intended to clarify that the decision of whether to enforce or defend claims is in the sole discretion of the trustee.)
Powers to direct trustee — For various reasons, practitioners sometimes bifurcate trust roles, granting a trustee authority to make distributions of income and/or principal and designating another person as the investment advisor with the power to direct the trustee with respect to the investment of trust assets. Another common practice is the use of a trust protector with the authority to direct the trustee to modify or terminate the trust.
Before the FTC, Florida law did not formally sanction granting others the power to direct the trustee to take certain actions. F.S. Section 736.0808 now sanctions this practice. F.S. Section 736.0808(2) provides that a directed trustee is to act as directed “unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust.” F.S. Section 736.0808(4) provides that a person, other than a beneficiary, holding the power to direct the trustee is presumptively a fiduciary, and, as such, must act in good faith and is liable for any loss that results from breach of a fiduciary duty.
In some irrevocable trust instruments, a person, who may or may not be a trust beneficiary, is designated as the “appointing person” during the settlor's lifetime and is granted the power to direct the trustee to make distributions of trust income and/or principal in favor of any one or more persons (other than the appointing person.) Assuming that the appointing person is not a trust beneficiary, F.S. Section 736.0808(4) provides that the person is presumptively a fiduciary. One question is whether this presumption can be negated by the terms of the trust by providing that the appointing person is not a fiduciary. This provision is not mandatory and therefore may be subject to change by the trust instrument. Still, the appointing person likely would be liable for acts in bad faith. (See Form 16 for a sample trust provision that attempts to negate the presumption of a fiduciary role.)
Trust instruments are sometimes drafted to restrict or eliminate the rights of trust beneficiaries (particularly remainder beneficiaries) to receive accountings, a copy of the trust instrument, etc. The drafters of the FTC sought to balance the right of settlors to privacy and control of trust provisions and the interests of trust beneficiaries to trust information. The FTC provides that a trustee has a non-waivable duty to account and to provide certain information and notices to qualified beneficiaries. At first blush, it appears the FTC favors trust beneficiaries over the settlor. But the FTC, more than the UTC, counterbalances the trust beneficiaries' rights through the use of a unique set of representation provisions. F.S. Section 736.0301 provides these three introductory rules:
- Accountings and notices provided to a person who may represent a beneficiary may serve as a substitute for and have the same effect as accounting and notices provided directly to the beneficiary.
- Actions taken by a person who represents the interests of a beneficiary are binding on the person represented to the same extent as if the actions had been taken by the person represented.
- A trustee is not liable for giving accountings and notice to a beneficiary who is represented by another person and nothing prohibits the trustee from doing so.
The FTC provides for two types of special representation: representation by the holder of a power of appointment; and designated representatives. More specifically:
Representation by holders of powers of appointment — F.S. Section 736.0302(2) states: “The holder of a power of appointment may represent and bind persons whose interests, as permissible appointees, takers in default, or otherwise, are subject to the power.” Unlike the UTC,30 the FTC makes no distinction between limited and general powers.
A number of exceptions apply to a power holder's ability to represent other trust beneficiaries. Representation does not extend to any matter determined by a court to involve a trustee's fraud or acts in bad faith, nor to a power of appointment held by a person while that person is the sole trustee.31 Also, a trustee's discretionary power to distribute trust property is not a power of appointment for this purpose. Note, however, that the FTC makes no exception for conflicts of interest, as the UTC does.32
Trust instruments often are drafted so that upon the death of the survivor of a married couple, separate trusts (which we'll refer to as “discretionary trusts”) are created for the couple's then-living descendants. Discretionary trusts sometimes grant a current trust beneficiary a limited power of appointment over the trust. F.S. Section 736.0302(2) provides that the current beneficiary with a power of appointment may represent all other trust beneficiaries for purposes of receiving accountings and other notices.
This representation provision also will prove useful for certain irrevocable trusts. Irrevocable trusts sometimes designate an appointing person and grant that person the power, during the lifetime of the settlor and/or the settlor's spouse, to direct the trustee to distribute trust assets to anyone (other than the appointing person.) The trust's ultimate distribution is subject to the appointing person's exercise of the power of appointment. In this context, as a result of F.S. Section 736.0302(2), the appointing person may represent and bind all other trust beneficiaries for purposes of receiving accountings and notices.
Designated representatives — The second special Florida provision is found in F.S. Section 736.0306 and has no counterpart in the UTC. The FTC section allows a settlor to designate a person to receive accountings and notices as well as to bind the beneficiary for whom such accountings and notices are received. The designation can be of a specific person or by a process detailed in the trust instrument. The designated representative is not a fiduciary and is not liable for acts or omissions to act made in good faith.
A number of exceptions apply, including: A designated representative may not represent and bind a beneficiary while that person is serving as trustee;33 and a person may not serve as a designated representative if that person is also a trust beneficiary,34 unless the settlor named that person35 or that person is the beneficiary's spouse or a grandparent or descendant of a grandparent of the beneficiary or the beneficiary's spouse. The trust instrument cannot waive these restrictions.36
The designated representative provisions should prove particularly useful if a person is not granted a power of appointment or otherwise does not qualify to serve as a representative. For example, dynasty trusts often are drafted so that the class of current beneficiaries includes all descendants of the settlor. If no person is designated as the appointing person or otherwise granted a power of appointment over the trust, all of the settlor's descendants are qualified beneficiaries and must receive accountings and notices, as required by F.S. Section 736.0813. This could prove to be a significant administrative burden on the trustee. The designated representative provisions should help address this issue. (See Form 17 for sample trust provisions that attempt to address the special FTC representation provisions.)
We're not going to get into an in-depth discussion of FTC trust asset protection law. For these rules, we encourage practitioners to review FTC Part V. What we will do here is to address drafting issues with respect to the FTC and trust asset protection law. Specifically:
Spendthrift provisions — The FTC does not include provisions that would make all trusts spendthrift trusts by default. It does, however, change Florida law with respect to the scope of a restraint on alienability. Under most states' laws, trust spendthrift provisions must restrain both the beneficiary's ability to alienate the trust estate and creditors' ability to attach a beneficiary's trust interest to satisfy a judgment. Under Florida case law, it appears that spendthrift provisions could be drafted to allow limited transfers among family members.37 F.S. Section 736.0502(1) now provides that a “spendthrift provision is valid only if the provision restrains both voluntary and involuntary transfer of a beneficiary's interest.” This is a mandatory provision and thus cannot be waived.38
One issue not specifically addressed by the FTC is the very issue raised in In re Bottom,39 a Florida bankruptcy case. In that case, Wayne D. Bottom filed for bankruptcy and claimed that a trust established by his father for his benefit was excluded from his bankruptcy estate because of the trust's spendthrift provisions. The trust named Bottom as the sole trustee and sole current beneficiary. The Florida bankruptcy court held that, under Florida law, the trust was not a spendthrift trust, because “the Trustee and the sole beneficiary cannot be one and the same under Florida law.” As a result, the trust was included in the debtor's bankruptcy estate. While the FTC addresses the issue of the beneficiary serving as the sole trustee in the context of the trust's qualifying as a discretionary trust, it fails to address the matter with respect to qualification as a spendthrift trust. In addition, under F.S. Section 736.0302(2), a holder of a power of appointment is not able to represent all trust beneficiaries for purposes of receiving accountings and notice if the beneficiary is the sole trustee. For these reasons, practitioners interested in creditor protection for trust beneficiaries should strongly consider not naming the current beneficiary as the sole trustee of the trust.40
Discretionary trusts — In a discretionary trust, a trustee is granted broad discretion to distribute income and/or principal to the beneficiary. As a result, the beneficiary of a discretionary trust is said to have no property interest in the trust. Because a beneficiary of a discretionary trust has no property interest, a creditor has no interest to attach to satisfy a judgment. This is what makes a discretionary trust such a valuable asset protection tool.
In various jurisdictions, one of the objections to the UTC has been its mandate that a trustee has a duty to act in “good faith.”41 Some practitioners fear this mandate lowers the trustee's discretionary authority by buttressing the beneficiaries' ability to successfully argue that they are entitled to a distribution. As a result, the argument continues, it may be possible for a creditor to successfully argue that the beneficiary has a property interest in the trust and that interest therefore is subject to attachment.
F.S. Section 735.0801 does provide that a trustee must administer the trust in good faith. This is a mandatory duty that cannot be waived.42 But this requirement does not represent a change in Florida law. In Mesler v. Holly, the court held that “even though a grant of ‘absolute discretion’ to a fiduciary is very broad, it does not relieve a trustee from the exercise of good faith or from being judicious in his administration of the trust, which administration is always subject to review by the court in appropriate instances.”43 Thus, some practitioners' asset protection objection to the UTC is not applicable to the FTC.
Comment g to Section 60 of the Restatement (Third) of Trusts raised an issue about whether a trust can qualify as a discretionary trust if the sole current beneficiary is serving as the sole trustee of such trust. F.S. Section 736.0504(2) addresses this issue. This section states, “If a Trustee's discretion to make distributions for the Trustee's own benefit is limited by an ascertainable standard, a creditor may not reach or compel distribution of the beneficial interest except to the extent the interest would be subject to the creditor's claim were the beneficiary not acting as Trustee.” However, given the issues raised in our spendthrift discussion, we believe that it's still preferable that the sole current beneficiary not be named the sole trustee.
Discretionary income tax reimbursement in grantor trusts — All items of income, deductions and credits of a grantor trust are reported on the trust settlor's personal income tax return. As a result, it's sometimes desirable to include provisions in the trust instrument granting the trustee the discretion to reimburse the settlor for the trust's income tax liability. The issue is that F.S. Section 736.505(1)(b) and the Restatement44 both provide that a settlor's creditor may reach the maximum amount that can be distributed to, or for the benefit of the settlor and thus a creditor could attach an amount equal to the income tax liability of the trust. The argument is that if a trust is subject to the settlor's creditors, an invalid Internal Revenue Code (IRC) Section 2036(a) string is retained by the settlor, resulting in the trust estate being included in the settlor's gross estate for estate tax purposes.45 Because state law often does not address the 2036 question and the Restatement supplements state trust law, practitioners fear that including such a provision, while sometimes desirable, may cause the trust estate to be included in the settlor's gross estate under IRC Section 2036(a)(1).
F.S. Section 736.0505(1)(c) addresses but does not allay this concern. It provides that “the assets of an irrevocable trust may not be subject to the claims of an existing or subsequent creditor or assignee of the settlor, in whole or in part, solely because of the existence of a discretionary power granted to the trustee by the terms of the trust, or any other provision of law, to pay directly or to the taxing authorities or to reimburse the settlor for any tax on trust income or principal which is payable by the settlor under the law imposing such tax.” The statute addresses the creditor issue, but not all facets of the IRC Section 2036(a)(1) issue. Any time the assets of an irrevocable trust may be distributed to or for the benefit of the trust settlor, you run the risk of a successful IRS argument that an implied agreement existed between the settlor and the trustee that the settlor would be reimbursed when desired. As a result, we recommend that notwithstanding the enactment of F.S. Section 736.0505(1)(c), practitioners carefully consider whether adding such a provision opens the door to other IRC Section 2036(a)(1) arguments. (See Form 18 for a sample trust provision authorizing the trustee to reimburse the settlor for taxes payable by the settlor.)
Also worth mentioning are changes involving certifications of trust and anti-lapse and descendibility provisions.
Certifications of trust — Financial and other institutions dealing with a trust often request a copy of the trust instrument to establish a financial account and/or otherwise verify the identity and powers of the trustee to act with respect to the trust estate. Estate planners typically prefer to provide a redaction for this purpose to maintain the confidentiality of the trust's other terms. But that leaves financial institutions worried about their liability for relying on something less than a complete copy of the trust instrument.
F.S. Section 736.1017 seeks to address these concerns. F.S. Section 736.1017(1) provides that instead of furnishing a complete copy of the trust instrument, the trustee may furnish a certification of trust in its place. F.S. Section 736.1017(6) provides that a person acting in reliance on a certification of trust without knowledge that the representations contained in the certification are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the trust certification. Subsection (7) provides that a “person who in good faith enters into a transaction in reliance on a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct.”
The trust certification may be signed by any trustee and must contain the following information:
- a statement that the trust is in existence and the date the trust instrument was executed;
- the settlor's identity;
- the identity and address of the currently acting trustee(s);
- the trustee's powers;
- the revocability or irrevocability of the trust and the identify of any person holding a power to revoke the trust;
- the authority of co-trustees to sign and whether all or less than all are required in order to exercise powers of the trustee;
- the manner of taking title to trust property; and
- a statement that the trust has not been revoked, modified or amended in any manner that would cause the representations contained in the certification to be incorrect.
(See Form 19 for a sample certification of trust.)
Anti-lapse and descendibility provisions — As many Florida practitioners can appreciate, the regime in effect prior to the enactment of the FTC with respect to anti-lapse and descendibility issues left much to be desired. However, many of the issues were and still are addressed by a well-drafted trust instrument. The revised anti-lapse and descendibility provisions are found in F.S. Sections 732.603 and 736.1106. We encourage practitioners to review both of these sections thoroughly, as a complete review of each is outside the scope of this article. But two changes deserve to be highlighted. First, pursuant to F.S. Section 736.1106, vested remainders are now contingent on the taker surviving to the time of possession.
The second change involves the relationship test in the anti-lapse statute. The relationship test46 applies to devises made under a will pursuant to F.S. Section 732.603. That is, the anti-lapse statute applies to save devises made in a will if the devisee is sufficiently related to the testator; if the devisee is not sufficiently related, the devise fails. In contrast, there is no relationship test with respect to devises in a trust pursuant to F.S. Section 736.1106. Rather, if a devisee, no matter the devisee's relationship or non-relationship to the settlor, fails to survive to take possession, a per stirpital alternate gift arises in the descendants of the devisee. As a result of these conflicting rules,47 it's important that the trust instrument be drafted so as to address how a devise is to descend if the devisee fails to survive to take possession.
Impetus for Form Update
The FTC provides a trust code for Florida generally patterned after the UTC. Its enactment brings a number of significant changes to Florida trust law. The new law should provide impetus for practitioners to engage in a comprehensive review of their trust forms. In the course of that review, practitioners may wish to incorporate some of the suggestions we have made.
— The opinions contained in this article are the authors' and should not be attributed to another person, the Florida State University College of Law, Holland & Knight LLP or Katten Muchin Rosenman LLP.
- Real Property, Probate & Trust Law Section of The Florida Bar, Florida Trust Code Scrivener's Summary (May 21, 2006) (Scrivener's Summary). A copy of the Scrivener's Summary is available at http://councils.naepc.org/_cgi-bin/library.asp?CouncilID=378. Professor David Powell was the scrivener for the Ad Hoc Trust Law Committee of The Florida Bar that drafted Florida's new trust code.
- The form language should not be used without your independent personal consideration of the legal and tax consequences that may result therefrom. The authors waive any warranty as to the appropriateness and/or effectiveness of any such form language.
- Florida Statutes (F.S.) Section 736.0103(16).
- F.S. Section 736.0403(2).
- The Scrivener's Summary provides: “The change from ‘resident’ in F.S. 737.111 to ‘domiciliary’ in section 736.0403(2) has no substantive effect as the two terms are defined to be synonymous in F.S. 731.201(11). Supra note 1, Scrivener's Summary, at p. 19, note 163.
- F.S. Section 736.103(14). Trust forms sometimes define the term “beneficiary” to include the person or persons to whom distributions of trust income and/or principal may be made. Because of the significance of the term “qualified beneficiary” and the corresponding references that likely will be made in revised trust forms, the authors recommend that trust forms be revised to define qualified beneficiaries as well.
- F.S. Section 736.0403(1).
- Under the Florida Trust Code (FTC), the default rule has been changed so that if a trust does not state whether the trust is revocable or irrevocable, it is presumed to be revocable by the settlor. F.S. Section 736.0602(1).
- The “Florida domiciliary” aspect of the special rule applicable to revocable trusts is a change from current law and accordingly is effective only prospectively.
- F.S. Section 736.0701 provides, however, that “[n]otwithstanding subsection (1) or subsection (2), a designation in the terms of a trust is not controlling as to any matter for which the designation would be contrary to a strong public policy of this state.”
- F.S. Section 736.0107(1).
- Note that F.S. Section 736.04115 is not a substantive change to Florida law; rather it is identical to F.S. Section 737.4031(2), except for a clarification that either a trustee or qualified beneficiary may apply for trust modification.
- Lives in being, plus 21 years or the 90-year statutory period.
- Trust protectors likely will remain liable for actions they take in bad faith.
- See, for example, F.S. Section 736.04117; New York Estates, Powers & Trusts Law 10-6.6(b); 12 Delaware Code Section 3528; Arkansas Statute Section 13.36.157; South Dakota Statutes 55-2-15.
- “Absolute power” is defined in subsection (1)(b) as including a power to invade principal that is not limited by an ascertainable standard, including powers to invade for a beneficiary's best interests, welfare, comfort or happiness.
- F.S. Section 736.04117(4).
- See Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940).
- See F.S. Section 736.0105(2)(b).
- See Mesler v. Holly, 318 So. 2d 530 (Fla. 2d Dist. Ct. App. 1975).
- F.S. Section 736.0105(2)(c) provides that the “requirement that a trust and its terms be for the benefit of the trust's beneficiaries” is a non-waivable provision.
- “Investment instrument” is defined in F.S. Section 660.65(6) and includes, among other investments, investments in securities, options, futures, 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.
- Defined in F.S. Section 736.0802(5)(f)(2)(c) as including a mutual fund, common trust fund or money market fund described in and governed by F.S. Section 736.0816(3).
- The requisite notice is outlined in F.S. Section 736.0802(5)(f). The contents of the notice were revised by Section 3 of Florida CS/HB 743 (the Glitch Bill).
- See Section 3 of the Glitch Bill, supra note 24.
- See F.S. Section 736.0802(5)(b).
- This statute is incorporated in the FTC pursuant to F.S. Section 736.0901.
- This duty does not apply to an irrevocable trust created before July 1, 2007, or to a revocable trust that becomes irrevocable prior to July 1, 2007. In addition, this duty does not apply to a trustee who accepted a trust, whether revocable or irrevocable, before that date.
- This duty does not apply to an irrevocable trust created before July 1, 2007, or to a revocable trust that became irrevocable before July 1, 2007.
- Under Uniform Trust Code (UTC) Section 302, the power must be a general power of appointment.
- This exception is an additional rationale for not allowing the beneficiary to serve as the sole trustee. For a discussion of the asset protection concerns with a beneficiary serving as sole trustee, see Charles Harris and Tye J. Klooster, “Beneficiary-Controlled Trusts Can Lose Asset Protection,” Trusts & Estates, December 2006, at pp. 37-43.
- UTC Section 302. Unlike the exceptions to the designated representative provisions, the exceptions applicable to powers of appointment are not listed as mandatory provisions. We believe this is an oversight and generally do not recommend attempting to waive any of the exceptions.
- Presumably, “as Trustee” means that a beneficiary may not represent and bind a beneficiary while that person is serving as the sole trustee or as a co-trustee. This is a non-waivable provision. F.S. Section 736.0105(2)(h).
- The exception, which provides that a beneficiary may not act as a designated representative, is a non-waivable provision. F.S. Section 736.0105(2)(h).
- Presumably, this includes specific designations by the settlor in the trust instrument or designations by the settlor pursuant to a plan, executed after the trust instrument.
- F.S. Section 736.0105(2)(h).
- See Mason v. Mason, 789 So. 2d 895 (Fla. 3d Dist. Ct. App. 2001); Gilbert v. Gilbert, 447 So. 2d 99 (Fla. 2d Dist. Ct. App. 1984).
- F.S. Section 736.0105(2)(l).
- In re Bottom, 176. B.R. 950 (Bankr. N.D. Fla. 1994).
- David F. Powell believes that In re Bottom was implicitly overruled by the enactment of the F.S. See John Grimsley and David Powell, Florida Law of Trusts, Section 16-5, note 10 (2007 Edition, Thomson/West, Egan, Minn.).
- See, for example, Mark Merric and Steven J. Oshins, “Effect of the UTC on the Asset Protection of Spendthrift Trusts,” Est. Plan. (August 2004), at p. 375.
- F.S. Section 736.0105(2)(b).
- Mesler v. Holly, 318 So. 2d 530. (Fla. 2d Dist. Ct. App. 1975).
- Restatement (Third) of Trusts, Section 60 (2003); Restatement (Second) of Trusts, Section 156(2) (1959).
- Bradley M. Beaman, “Estate Tax Consequences of Revenue Ruling 2004-64: Silence in Grantor Trusts Is Anything But Golden,” Drake L. Rev., at p. 934 (2006).
- That is, the devisee is a grandparent or a descendant of a grandparent of the testator.
- The Scrivener's Summary provides that this difference results from the different rationales of the two sections. Application of the relationship test in the context of a will is “first, foremost, and exclusively a rule based on presumed intent … The rationale behind section 736.1106 is different. It is found [sic] in large part on matters of economy and administrative convenience.” Scrivener's Summary, supra note 1, at p. 63.
David F. Powell, top, is a professor at Florida State University College of Law in Tallahassee, Fla., and of counsel to Holland & Knight LLP. Tye J. Klooster is an attorney in the Chicago office of Katten Muchin Rosenman LLP
To assist practitioners, the authors prepared sample trust provisions. These are available at www.trustsandestates.com in the Trusts & Estates Bookstore & Library, Supporting Documents section, under “Drafting Florida Trusts.” Look in this article for the symbol: