TRUST DISPUTES: THE NEW PARADIGM By: Patrick J. Lannon (786) 207-4525 plannon@lannon-law.com Trusts are versatile and robust vehicles that are increasingly utilized to help individuals meet estate planning goals. Benefits of a well drafted trust may include avoidance of domiciliary and ancillary probate, protection of assets from creditors of the trust beneficiaries or the trust settlor, avoidance of federal gift, estate, and generation skipping transfer tax, avoidance of guardianship for a minor or incapacitated adult, avoidance of state income and estate tax, and facilitation of wealth transfer across generations. Trusts may also facilitate professional management of trust assets and play a role in the financial education of younger generations. Inevitably, in some cases an interested party will challenge the validity, interpretation, or operation of a trust. For example, a beneficiary or other interested party may believe that the trust agreement fails to adequately meet the trust settlor s original intent due to undue influence, lack of capacity, drafting error, or change of circumstances, or may be unhappy with the investment of trust assets, the amount and timing of trust distributions, or the trustee s interpretation of trust provisions. The trustee may find itself at odds with one or more challengers or may be a relatively passive participant in a dispute between interested parties. Occasionally the trustee may avoid or resolve a trust dispute by educating beneficiaries about their rights. The trustee may also avoid or resolve a trust dispute by obtaining professional assistance with the performance of its duties. For example, in some situations it may be sufficient for the trustee to improve communications with beneficiaries, provide comprehensive annual accountings, or revise an investment or distribution policy to better comport with the trust agreement and applicable law. Often the trustee and the beneficiaries, working together with attorneys, accountants, and investment advisors, can resolve a dispute fairly informally. In other cases, however, a dispute may persist in spite of such efforts. Traditionally, trustees and trust beneficiaries had limited tools at their disposal to resolve trust disputes without significant court involvement. However, over time techniques have been developed that allow many disputes to be settled efficiently and amicably with no or minimal court involvement. 1 While they do not replace litigation, these techniques allow flexible solutions that may increase the likelihood of resolving the trust dispute whether or not an adversary legal proceeding has been initiated. Attorneys being asked to assist with a trust 1 The use of these techniques is aided by the limitation of certain rights and powers to qualified beneficiaries as defined in Florida Statutes 736.0103(14) and by the expansive virtual representation provisions of 736.0301 to 736.0306. In many cases it will be possible to use the techniques discussed in this article without the need for appointment of a guardian ad litem for otherwise unrepresented trust beneficiaries such as minors.
dispute should carefully consider these techniques as alternatives or adjuncts to litigation. The following are a sampling of the strategies that may be used to resolve disputed trust matters. Unitrust Election Many trust disputes arise because a beneficiary who is entitled to all or a portion of the trust s income requests an investment mix that favors income generation. Beneficiaries who are entitled to trust principal in the future naturally resist this strategy and request an investment mix that favors principal growth. Section 738.104 of the Florida Statutes allows a trustee to make adjustments between principal and income and 738.1041 allows a trustee to elect to distribute a unitrust amount between 3 and 5 percent of trust principal as income each year without reference to actual accounting income earned. 2 An exercise of either of these powers allows a trustee to invest in a diversified portfolio while allowing an appropriate income distribution. 3 In other words, the election should allow the trustee to separate investment decisions from the income needs of the beneficiaries. Often beneficiaries will agree in advance to settle a trust dispute regarding the appropriate investment of trust assets by use of one of these powers. Delegation of Investment Functions It is not uncommon for a beneficiary to challenge a trustee s investment of trust assets, especially if the trustee is not sophisticated financially or if the trustee is also a beneficiary who stands to disproportionately benefit from the investment strategy. 4 Trustees who are individuals may recognize that they lack sufficient training to invest and they may desire to avoid liability for investment decisions. Section 518.112 of the Florida Statutes allows a trustee to delegate investment functions to an investment advisor after giving notice to all beneficiaries (or their legal representatives) eligible to receive distributions from the trust within 30 days of the delegation. The trustee is required to exercise reasonable care, judgment, and caution in selecting the investment agent, in establishing the scope and specific terms of the delegation, and in periodically reviewing the agent s actions. The trustee who otherwise complies with the statute is relieved of liability for the investment decisions, actions, and omissions of the investment agent, and the investment advisor by accepting delegation is subject to the same standards as the trustee in the performance of the delegated function. By shifting the investment function to a competent professional the trustee may be able to avoid, or settle, a trust dispute. 2 A trustee should carefully review the applicable statute for considerations, limitations, and notice requirements before using one of these powers. 3 In a low interest rate environment these powers will generally be exercised to allow more income to be distributed than is actually earned. 4 For example, a trustee who is also the sole income beneficiary may be tempted to invest to maximize income at the expense of investments that would allow for principal growth accruing to remainder beneficiaries.
Delegation of Duties and Powers Opportunities for delegation are not limited to investment functions. Under Florida Statutes 736.0807 a trustee may also limit liability by delegating other duties and powers. The trustee is required to exercise reasonable care, skill, and caution in selecting the agent, in establishing the scope and specific terms of the delegation, consistent with the purposes and terms of the trust, and in reviewing periodically the agent s actions. An agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation, and a trustee who complies with the statute is not liable to the beneficiaries or to the trust for an action of the agent. Proper use of this delegation authority may also avoid or resolve a trust dispute. Decanting Some irrevocable trust agreements contain administrative or dispositive provisions that the trustee considers to be inappropriate. If the trust agreement grants the trustee unlimited discretion to make distributions to one or more beneficiaries it may be possible, within limits, for the trustee to change the trust provisions. Operating on the principal that the power to make an outright distribution includes the power to make a distribution of less than full ownership, both Florida common law 5 and Florida Statutes 736.04117 provide that a trustee may use the distribution power to make a distribution to a new trust. This power, commonly referred to as decanting, may be exercised to remove (but not add) beneficiaries, to change or add trustees, and otherwise revise the provisions of the current trust instrument. In the right circumstances decanting can resolve a wide range of actual or potential trust disputes. Judicial Reformation to Correct Mistakes Even the most carefully drafted trust can inadvertently fail to conform to the trust grantor s intent. Section 736.0415 of the Florida Statutes allows the court to reform both ambiguous and unambiguous terms of the trust to fix errors to a trust made by reason of a mistake of fact or law. The court may consider evidence relevant to the trust settlor s intent even though the evidence contradicts an apparent meaning of the trust agreement. Nonjudicial Settlement Agreement Often trustees and beneficiaries prefer to avoid the expense and delays inherent in court proceedings. Section 736.0111 of the Florida Statutes provides that all interested persons may agree to any resolution to a trust dispute that could have been properly ordered by a court. If all interested persons are represented (outright or by the virtual representation provisions of 736.0301 through 736.0306), such an agreement can efficiently resolve a dispute without court involvement. Participants must be careful, however, not to include terms that could not have been properly ordered by a court. As a practical matter, for additional certainty many settlement agreements are submitted to the court for approval after all parties have agreed to their terms. 5 See Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940).
Judicial Trust Construction Disagreements occasionally arise as to the proper interpretation of trust provisions. One solution involves asking the court to construe the ambiguous provisions. 6 Many potential disputes can be avoided by achieving clarity of provisions before any actions are taken which might later be challenged. Trustees and beneficiaries who can reach agreement on the proper interpretation without court involvement can make the interpretation binding by entering into a nonjudicial settlement agreement, discussed above. Judicial Trust Modification It may be possible to judicially modify an irrevocable trust due to change of circumstances under Florida Statutes 736.04113. For a trust created or becoming irrevocable on or after January 1, 2001, 7 under Florida Statutes 736.04115 the court may also modify the trust if modification is in the best interests of the beneficiaries. The court must exercise its discretion in a manner that conforms to the settlor s intent (to the extent possible), taking into account the current circumstances and best interests of the beneficiaries. 8 The court must also consider the terms and purposes of the trust, the facts and circumstances surrounding the trust s creation, and extrinsic evidence relevant to the proposed modification. 9 Lastly, the court must consider the trust s spendthrift provisions, if any, as a factor in deciding whether to modify, but is not precluded from modifying the trust just because it contains a spendthrift provision. 10 Additionally, under Florida Statutes 736.0412 a trust created or becoming irrevocable on or after January 1, 2001 may be modified upon unanimous agreement of the trustee and all qualified beneficiaries (but only after the settlor has died). The scope of modification permitted by Florida Statutes 736.04113, 736.04115, or 736.0412 is extremely broad. The court may (a) amend the terms of the trust (including distribution and administration provisions), (b) terminate the trust (in whole or in part), (c) direct or permit the trustee to do acts that are not authorized by the trust (or that are prohibited by the trust), or (d) prohibit the trustee from performing acts that are permitted or required by the trust. 11 A charitable trust may be modified or terminated under Florida Statutes 736.0413 if a particular charitable purpose becomes unlawful, impracticable, impossible to achieve or 6 See Florida Statutes 736.0201. 7 The statute does not apply to any trust created after December 31, 2000 if the trust uses the common law or the 90- year rule against perpetuities period (as opposed to the 360-year perpetuities provision) and the trust expressly prohibits judicial modification. Florida Statutes 736.04115(3)(b). 8 Florida Statutes 736.04115(2)(a). 9 Florida Statutes 736.04115(2)(b). 10 Id. 11 Florida Statutes 736.04113(1) and 736.04113(2).
wasteful. Under Florida Statutes 736.0416 a trust may be modified by the court in a manner that is not contrary to the settlor s probable intent to achieve the grantor s tax objectives. Trustee Removal or Resignation It is not uncommon for beneficiaries to become disenchanted with the performance of a trustee, or for a trustee to tire of the burden of dealing with beneficiary complaints. It may be possible to resolve trust disputes by removal (or resignation) and replacement of the trustee. If an agreement may be reached, the trustee may resign in return for releases by the beneficiaries. If not, removal may be possible under the terms of the trust instrument or in accordance with Florida Statutes 736.0706. If there has been a substantial change of circumstances or removal is requested by all qualified beneficiaries, removal may be ordered by the court without any finding of wrongdoing on behalf of the trustee. If it is not possible to prove a substantial change of circumstances or obtain consent of all qualified beneficiaries, a court may still remove a trustee due to a breach of trust, lack of cooperation among trustees that substantially impairs the administration of the trust, or due to the unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively. A court may also consider whether the trust is being administered in a place appropriate to its purposes and its administration as required by Florida Statutes 736.0108. Conclusion The increasing popularity of trusts has as its inevitable corollary an increasing number of trust disputes of every type. The strategies discussed above give interested parties the opportunity to resolve many disputes with no or minimal court involvement. Whether or not court involvement is necessary or desirable these strategies allow interested parties unprecedented flexibility in resolving disputes.