September, 2008 Newsletter
Provided by Leimberg Information Services
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Recent Important Changes to Florida Trust Code
Here, LISI Commentator Alan S. Gassman provides you with an update on the latest provisions of the new Florida Trust Code.
Alan, who is Board Certified in Estate Planning and Probate Law, is an attorney in Clearwater, Florida who practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law with Gassman, Bates, & Associates.
Even though not all LISI practitioners work in Florida, a disproportionate number of you have clients who live or are contemplating a move to Florida. And even if you don't – and never will – have clients in Florida – some of the provisions added to Florida law are unique, creative, and well worth contemplating in your own state.
Here's the latest on Florida trust law developments:
On May 28, 2008 several provisions, from what is known as "House Bill 435", were added to the Florida Trust Code. These provisions codify the ability to segregate co-trusteeship functions and liability, provide updated time limitations on causes of action against trustees, and provide for limitations on the ability of a trustee to have attorney's fees and costs of defense paid from the trust corpus during a proceeding against the trustee. The new Act took effect on July 1, 2008 and is more fully summarized in LISI Estate planning Estate Planning Newsletter 1290 (May 27, 2008).
On its first birthday, the Florida Trust Code has been updated with amendments to three of its statutes: Sections 736.0703, 736.1008, and 736.0802. These amendments became effective on July 1, 2008, and create the following primary changes:
736.0730 (9): Allows for the creation of a directed trusteeship whereby a particular trustee is assigned specific duties or facets of a trusteeship, and that trustee is excluded from liability exposure for acts or omissions of co-trustees regarding duties or facets of the trusteeship that are not specifically directed to the trustee, absent actual knowledge of willful misconduct of a co-trustee.
STATUTE OF LIMITATIONS:
736.1008 (6): Establishes the statute of repose (limitations) for claims by a beneficiary against a trustee as:
The later of:
· 10 years after the termination of the trust or the trusteeship if the beneficiary had actual knowledge of the existence of the trust and the beneficiary's status as a beneficiary throughout the 10 year period, or
· 20 years after the date of the act or omission of the trustee that is complained of if the beneficiary had actual knowledge of the existence of the trust and the beneficiary's status as a beneficiary throughout the 20 year period; or
· 40 years after the termination of the trust or the trusteeship, if the beneficiary had no actual knowledge of the existence of the trust and the beneficiary's status as a beneficiary.
If a beneficiary shows by clear and convincing evidence that a trustee actively concealed facts supporting a cause of action, any of the above applicable statutes of repose will be extended by 30 years.
BREACH OF TRUST FORFEITS TRUSTEE'S ABILITY TO USE TRUST MONEY TO DEFEND SUIT:
736.0802 (10): Restricts the ability of a trustee, against whom a beneficiary has filed a claim for breach of trust, to use trust assets to pay legal costs and expenses that result from the defending the claim, if a party provides a reasonable basis for a court to conclude that there has been a breach of trust. The new version of the statute also requires a trustee, against whom a beneficiary has filed a claim for breach of trust, to provide written notice to each qualified beneficiary whose share may be affected by the use of trust assets for the payment of legal costs and expenses incurred in defense of such claim. The notice must also inform the qualified beneficiary of his or her right to petition the court to prohibit the trustee from using trust assets to pay such expenses.
The changes to the Florida Trust Code are material and should be understood by trust advisors and trustees.
Trustees need to understand that they may not be able to use trust assets to pay legal expenses associated with claims against them without court approval.
The amendments also provide for the ability of a trustee to "specialize" on a particular facet of the trusteeship, without concern for the any potential liability that may arise in other areas of the trusteeship to which a trustee is specifically excluded. This heightened sense of accountability placed on trustees, coupled with the power of a settlor to direct specific duties and areas of the trusteeship to a particular trustee, will likely result in a more efficient use of resources by each particular co-trustee to ensure that the specific duties that have been delegated are performed more effectively.
IN MORE DETAIL:
House Bill 435 adds Subsection (9) to Florida Statute Section 736.0703, which recognizes that the terms of the trust agreement may provide for multiple trustees having multiple powers. The statute provides that a trustee who is not given a particular power is an "excluded trustee."
The "excluded trustee" will not be responsible for actions or inactions of the trustee given exclusive powers, except in the case of willful misconduct of the empowered trustee, of which the excluded trustee has actual knowledge.
The statute relieves excluded trustees from having any obligation to review, inquire, investigate, or make recommendations or evaluations with respect to the exercise of the power or powers of the empowered trustee. For example, one co-trustee may be given exclusive powers with respect to investment decision-making, while all acting co-trustees may share distribution decision making powers.
Florida Statute Section 736.0703 (9) recognizes that the terms of the trust agreement may provide for multiple trustees having multiple powers. The statute provides that a trustee who is not given a particular power is an "excluded trustee."
The "excluded trustee" will not be responsible for actions or inactions of the trustee given exclusive powers, except in the case of willful misconduct of the empowered trustee that the exclusive trustee has actual knowledge of. The statute relieves excluded trustees from having any obligation to review, inquire, investigate, or make recommendations or evaluations with respect to the exercise of the power or powers of the empowered trustee.
The use of specific trustees for specific functions allows for the division of responsibilities between corporate trustees who may significant experience and expertise in investing trust assets and a non-professional trustee who may have the experience and experience of dealing with the beneficiaries and their proclivities.
This strategy is especially helpful where a settlor has a significant amount of non-fungible trust assets, such as real estate or a closely held business. In such case, the settlor can name a trustee that may have particular knowledge or experience with management of the specific assets, without subjecting that trustee to liability that may arise from outside his or her area of expertise.
For example, a settlor can name an advisor, relative, or a friend that is familiar with the management and characteristics of particular real estate holdings or a closely held business. This particular advisor, relative, or friend may not have the acumen to manage a portfolio of marketable securities or complex investment strategies, but may have the specialized knowledge to be the best trustee with respect to managing an ongoing closely held business. If any liability should arise from a facet of trust management that is outside the scope of this trustee's specific duties, then he or she is not on the hook for such liability, absent the trustee's willful misconduct where he or she has actual knowledge of the breach of trust.
The enactment of this "directed trustee" statute enhances Florida's status as a more enticing trust situs jurisdiction. Additionally, the statute seems to achieve an optimal economic result because relieving "excluded trustees" from liability will cause the allocation of specific facets of a trusteeship to the particular trustees that are best suited to handle them. Trustees can concentrate on performing specific tasks assigned to them, without the obligation to review or inquire about the tasks performed by other "excluded trustees".
Excellent form trust agreements, which provide for segregated duties between administrative trustees, investment trustees, and distribution decision-making trustees can be found on the website of the Alaska Trust Company. The following is sample language that may be used to insulate an excluded trustee from liability in accordance with the newly edited statute:
The Settlor recognizes that certain investment risks may appropriately be taken, and that investments held by the Settlor or put into place during the Settlor's lifetime maybe regarded as aggressive, not conventionally diversified, and/or risky. The Settlor hereby appoints (name of investment trustee) to serve as the Investment Trustee under this trust, with (name of alternate investment trustee) to serve as alternate Investment Trustee. It is recognized that additional individuals and/or institutions are also being appointed under this Section (name of section that appoints co-trustees) to serve as co-trustees with the Investment Trustee. Any individual and/or institution serving as co-trustee with one of the above named individuals shall be relieved of any and all liability or obligation with reference to the investments of the trust, consistent with Florida Statute Section 736.0703, and any Investment Trustee shall be indemnified and held harmless for any and all liability or obligation incurred unless the applicable trustee has engaged in unconscionable or illegal misconduct or has knowledge of willful misconduct on the part of any co-trustee that has been materially harmful to the trust or its beneficiaries.
736.1008– Statutes of Limitation for Beneficiary Claims Against a Trustee
The new additions to the Florida Trust Code also include Subsection (6) to Florida Statute 736.1008. Under Section 736.1008 (6)(a) all claims by a beneficiary against a trustee are barred upon the later of 10 years after the termination of the trust or the trusteeship if the beneficiary had actual knowledge of the existence of the trust and the beneficiary's status as a beneficiary throughout the 10 year period, or 20 years after the date of the act or omission of the trustee that is complained of if the beneficiary had actual knowledge of the existence of the trust and the beneficiary's status as a beneficiary throughout the 20 year period.
If neither of the above applies then claims are not barred until 40 years after the date the trust terminates, the trustee resigns, or the fiduciary relationship between the trustee and the beneficiary otherwise ends. The 40 year period may be extended by 30 years (a 70 year statute of repose!) where the beneficiary shows by clear and convincing evidence that the trustee actively concealed facts supporting a cause of action. This 30 year extension applies to any otherwise applicable statute of repose!
What's more, Florida Statute Section 736.0105(d) prevents a settlor from drafting around the prescribed statutes of limitation. Under that statute, the settlor may not alter the periods of limitation for commencing a judicial proceeding by including trust provisions that extend or shorten the applicable statute of limitations.
The obvious result of this new provision is that trustees are more inclined to inform beneficiaries of the trust and their status as beneficiaries. Furthermore, this new law places a premium on the trustee to keep performance of their duties as trustees as visible as possible to beneficiaries in order to avoid the application of the 30 year extension in the statute of repose.
Although the "clear and convincing evidence" standard is rather high and exceptions to statutes of repose are strictly construed, the presence of the potential for a 30 year extension is frightening to trustees. This could potentially cause a zealously determined remote beneficiary of many years in the future to investigate a past trustee's actions, if such beneficiary feels slighted by any decision made by that trustee in the past. The clear and convincing evidence standard may be over come in such a situation; however, a trustee that has long since retired from the trusteeship would nevertheless have to expend both time and money to defend such a claim.
736.0802– Allowance of Trustee to Use Trust Assets for Payment of Attorney's Fees
Finally, under the newly edited Florida Statute Section 736.0802(10), upon a court finding that there is a reasonable basis to conclude that there has been a breach of trust, based upon motion made by a litigating party, the court is to enter an order prohibiting the payment of further attorney's fees and costs from the assets of the trust, and is to further order that attorney's fees and costs previously paid from assets of the trust be refunded. A trustee is permitted to apply for reimbursement of attorney's fees and costs incurred once the proceeding has been concluded.
Further, the new subsection (10) to Florida Statute Section 736.0802 states that a trustee is required to provide written notice to each qualified beneficiary whose share of the trust may be affected by the payment of attorney's fees and costs where a claim or defense based upon a breach of trust is made against a trustee in any proceeding. This notice must inform each qualified beneficiary that he or she has the right to petition the court to prohibit the trustee from using trust assets to pay legal costs and attorney's fees.
If a trustee does not comply with an order issued by the court that demands a refund of trust assets already used by the trustee for legal expenses, then the court has the ability to strike defenses and pleadings filed by the trustee, as well as the ability to pursue other civil remedies or sanctions.
There appears to be nothing in the Florida Trust Code that prevents the settlor from drafting around the application of this provision by inserting language in the trust that exempts the trustee from first notifying qualified beneficiaries before making a payment of attorney's fees from trust assets. Florida Statute Section 736.0105 does not state that a trustee must notify qualified beneficiaries of a proceeding against the trustee by another beneficiary.
However, the broad language of 736.0105(e) states that the terms of a trust cannot prevail over the power of a court to take such action and exercise such jurisdiction that may be necessary in the interests of justice. Therefore, a court may attempt to exercise its jurisdiction to prevent trust language from abrogating the notice requirement brought forth by the new edition of the statute because the court deems the notice requirement to be in the ever discretionary "interests of justice."
Nevertheless, until litigation occurs on this issue, practitioners should be aware that no express restriction exists to prevent overriding this new notice requirement.
HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
LISI Estate Planning Newsletter # 1337 (August 27, 2008) at http://www.leimbergservices.com/ Copyright 2008 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.
2008 Fla. HB 435
Florida Statute 736.0703
Florida Statute 736.1008
Florida Statute 736.0802
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