Florida Banking July 2022

A trustee should also consider whether the remainder beneficiary will stand by her consent. A remainder beneficiary not wanting to upset a spouse or parent may consent to the actions of a trustee despite concerns, and later pursue a claim for breach after the income beneficiary dies. If a trustee foresees a difficult remainder beneficiary, she should consider obtaining court approval. Other circumstances might warrant court approval as well. For example, when the nature of the approval changes. A remainder beneficiary’s consent to expenditure for an income beneficiary’s hobbies is unlikely to extend to a mother’s hobbies when she takes up gambling. Court approval can avoid conflict and maintain balance in these more complicated circumstances. Exercising Discretion Regardless of consent or court approval, the trustee remains obligated to use her discretion and judgment to avoid making questionable distributions to the income beneficiary. Exercising discretion and judgment, however, does not require a trustee to treat the income and remainder beneficiaries equally, only impartially. If a grantor wanted the beneficiaries treated equally, the trust document would provide for equal distributions to all beneficiaries. Impartiality necessarily requires the trustee to make decisions resulting in unequal treatment of, and possible dissatisfaction by, the remainder beneficiary. Where and when the trustee can expect the remainder beneficiary to voice that dissatisfaction depends on multiple factors. The type of trust is a primary factor determining when a remainder beneficiary may challenge a trustee’s decisions. The Revocable Trust Per Florida’s Trust Code, while a trust is revocable the trustee’s duty is exclusively to the settlor/beneficiary and remainder beneficiaries do not have standing to challenge the trustee’s actions while the settlor/beneficiary is alive.2 A settlor/beneficiary of a revocable trust may direct the use of trust funds as she deems appropriate and a trustee has no obligation to prevent the settlor from a knowing, voluntary use of revocable trust assets. When the settlor/beneficiary dies, the remainder beneficiary may sue for breach of a duty the trustee owed to the settlor/beneficiary during the settlor/ beneficiary’s lifetime, which breach subsequently affected the interest of the remainder beneficiary. Florida courts have recognized remainder beneficiaries’ claims when the grantor/beneficiary is NOT the trustee of the revocable trust. In those situations, a remainder beneficiary could assert a trustee mismanaged trust assets when the trustee was only following a settlor/beneficiary’s instructions. The trustee should thus consider whether to obtain written consent from the settlor/beneficiary before engaging in conduct that a remainder beneficiary could challenge. If the remainder beneficiary does allege breach, Florida case law recognizes a limit on how far back the remainder beneficiary can question the trustee’s actions. Florida law recognizes other potential limits on the remainder beneficiary’s ability to allege breach by the

trustee of a revocable trust. Florida cases suggest that remainder beneficiaries cannot disturb the trustee’s decisions when the settlor/beneficiary of the revocable trust is also the trustee. In such cases, accountings of the trust prior to the death of settlor/beneficiary/trustee have been denied absent allegations of breach. It appears unlikely that such a breach can successfully be alleged absent allegations of incompetency or undue influence of the settlor/beneficiary/trustee. Similarly, it makes no sense that where a trustee owes no accounting to a settlor/beneficiary during life, the trustee should face retroactive accounting duties after the settlor/beneficiary’s death. While there appear to be limits on the ability of a remainder beneficiary to allege breach by the trustee of a revocable trust, the law in this area continues to evolve. The Irrevocable Trust While the trustee’s tightrope act has now been extended to include remainder beneficiaries of a revocable trust, trustees of irrevocable trusts have always had to find the balance between the needs of income and remainder beneficiaries. The marital trust provides an obvious example, where income is distributed annually to a surviving spouse and the trustee has the discretion to distribute principal. The remainder beneficiary, a child from a first marriage, may object to the trustee’s investments in high yield, income-producing assets like REITs or junk bonds, without regard to growth. Challenges by remainder beneficiaries of irrevocable trusts are so common that specific legislation has been crafted to provide trustees with guidance when trust documents provide little or none. Florida’s Principal and Income Act, Chapter 738, for example, allows trustees to make adjustments between income and principal3 and convert a trust to a unitrust 4 , either of which can bring about the balance needed to minimize complaints from remainder beneficiaries. Those trustee tools are beyond the scope of this article but should be reviewed with the appropriate legal and financial advisors to determine if increasing inflation requires adjustments to the trustee’s investment strategy. Conclusion Trustees must be proactive in protecting the interests of income and remainder beneficiaries of revocable or irrevocable trust. Each case is unique, but proper planning, effective record keeping and seeking the guidance of experienced financial and legal professionals can minimize risk and achieve the balance needed to master the trustee tightrope. Kelly O’Keefe is a shareholder in Stearns Weaver Miller’s Tallahassee office. She represents professional and family member fiduciaries in complex and high stakes estate, probate and trust disputes and litigation. You can reach her at kokeefe@stearnsweaver.com. 1For purposes of this article, income beneficiaries are as defined in section 738.102(6) and (12), Florida Statutes. An income beneficiary is a person to whom net income of a trust is or may be payable. A remainder beneficiary is entitled to receive principal when an income interest ends. 2§§736.0603(1), 736.0813(4), Fla. Stat. 3§738.104. 4 §738.1041.

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