Florida Probate & Trust Litigation Blog : Florida Probate Litigation, Will Contest Lawyer & Attorney : Juan C. Antúnez : Serving Miami, Jacksonville, Tampa Saint Petersburg, Orlando, Fort Lauderdale

I've been a fan of the "directed trusts" idea from the time it was first talked up in the press [click here], through to its recent adoption here in Florida [click here].

Whether you make a living drafting trusts as a lawyer or administering them as a trustee, you should get to know this important new statute, and a great way to do that is to read Directed Trusts: The Statutory Approaches to Authority and Liability, written by two of Miami's very own trusts-and-estates stars, Greenberg Traurig associate Mary Clarke and shareholder Diana S.C. Zeydel.  Their article does a good job of zeroing in on the key issues drafters/trustees need to know about by using a compare-and-contrast approach among the various jurisdictions that have adopted a form of the directed-trusts statute, with a special focus on Florida and Delaware.

Here's what the linked-to article had to say about Florida's directed-trusts statute:

The Florida legislature recently passed an amendment to Florida Statutes §736.0703 intended to relieve the directed trustee of liability for acts done in reliance on the direction of a co-trustee having the authority to direct it in the trust document. Florida's approach differs from the Delaware approach and the approach in the UTC in that it permits a directed trust only if the person giving the direction is also a trustee. The bill revises Florida Statutes §736.0703 by adding a new subparagraph (9) as follows. 

Amendment to Fla. Stat. §736.0703. Cotrustees. 

(9) If the terms of a trust instrument provide for the appointment of more than one trustee but confer upon one or more of the trustees, to the exclusion of the others, the power to direct or prevent certain actions of the trustees, then the excluded trustees shall act in accordance with the exercise of the power. Except in cases of willful misconduct on the part of the directed 3 trustee of which the excluded trustee has actual knowledge, an excluded trustee shall not be liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power, regardless of the information available to the excluded trustees. The excluded trustees shall be relieved from any obligation to review, inquire, investigate or make recommendations or evaluations with respect to the exercise of the power. The trustee or trustees having the power to direct or prevent actions of the trustees shall be liable to the beneficiaries with respect to the exercise of the power as if the excluded trustees were not in office, and shall have the exclusive obligation to account to and to defend any action brought by the beneficiaries with respect to the exercise of the power. 

The significant difference between the approach in the amendment to the Florida statute and the approach of other states is that only a co-trustee may act as a “director,” thus subjecting the co-trustee with the power to direct to full liability as a fiduciary. Presumably, the governing instrument could, however, relieve the trustee with authority to direct from liability for breach of trust except for bad faith and reckless indifference to the purposes of the trust or the interests of the beneficiaries consistent with Florida Statutes §736.1011(1)(a). This should be distinguished from the authority contained in Florida Statutes §736.0808 where the power to direct the trustee does not completely exonerate the directed trustee from liability for following the direction, but the person giving the direction is limited to a fiduciary standard of “good faith,” rather than being subject to liability as a trustee.

The original bill did not include the language, “Except in cases of willful misconduct on the part of the direct[ed] trustee of which the excluded trustee has actual knowledge, ....” Surprisingly, it is not the directed trustee that is held liable for his or her own “willful misconduct” as in Delaware. Instead, the directed trustee must test the malfeasance of the directing trustee. This may present an interesting challenge for the directed trustee because the directed trustee must in effect test the state of mind of the directing trustee to determine if intentional misconduct has taken place. One wonders how the directed trustee will make such a determination. The “actual knowledge” requirement might mean that the directing trustee would have to articulate an intention to commit malfeasance regarding the trust before the directed trustee could be held liable. On the other hand, in its practical application the two tests may yield the same result. If the direction is a blatant violation of the terms of the trust, the directed trustee would likely be deemed to have engaged in willful misconduct upon following the direction, and the directing trustee would likely be deemed to have engaged in willful misconduct by giving such a direction. 

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Jonathan Klick of the Florida State University College of Law and Robert H. Sitkoff of Harvard Law School just published an outstanding article entitled Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off.  What this article does well is "crunch the numbers" to answer the sort of open-ended question trusts-and-estates litigators face all the time:

Is a particular investment strategy in the "best interests" of the trust's beneficiaries?

Crunching the Numbers:

Being non-math types, lawyers and judges often shy away from the type of quantitative, objectively-verifiable, empirical analyses employed in this article. Whether you agree or disagree with the findings, the value of this approach to any contested trust proceeding should be self evident.  Rather than relying on the judge's gut to figure out if a "prudent investor" would invest trust assets in a certain way under the terms of a specific trust agreement within the context of a specific class of trust beneficiaries, hire a finance whiz to crunch the numbers and demonstrate, in an objectively-verifiable and quantitative manner, which option results in the best overall economic benefit for the trust's beneficiaries. Once the legal wrangling over how to define the operative terms is done, everyone should step back and let the finance gurus quantitatively fill in the blanks.

Trustees Lose PR Battle:

The controversy surrounding the Hershey School Trust's decision to diversify its trust holdings by attempting to sell its controlling stake in the Hershey Company (thus potentially putting a lot of people in Hershey, Pennsylvania out of work) and subsequently backing out of the deal (thus depriving the trust's beneficiaries of a control-premium windfall profit estimated to be as high as $1 billion) is often cited as a terrible example of "politics" trumping sound sound fiduciary decision making.  For more on the political back-story of this case read The Hershey Power Play in Trusts & Estates Magazine by Pennsylvania attorney Christopher H. Gadsden, and Daniel Gross's piece in Slate entitled Hershey Barred, whose subtitle says it all: How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of the candy-maker.

However, blaming the politicians is way too easy. They were (not surprisingly) simply responding to legitimate concerns raised by their constituents. The board of directors of the Hershey School Trust deserves equal blame.  The general public holds non-profit entities to a higher civic standard than for-profit companies, which means trustees of high-profile charitable trusts need to address any potential contested proceeding with two sets of professionals: lawyers and litigation-public-relations experts [click here, here].  It's obvious the board of directors of the Hershey School Trust was blindsided by the "politics" of this deal, and bungled it terribly  .  .  .  to the detriment of the poor children they have a fiduciary duty to serve.

If someone from the trust's board of directors had reached out to the key political players from the start, involved local civic groups in the decision-making process, and preempted any local bad press with a smart PR campaign using quantitatively-verifiable facts developed using the analytical tools employed in the linked-to law review article, the end result might have been very different.  For example, if the Hershey School Trust's upside from the deal was going to be around $1 billion, its board of directors could have easily set aside $100 million (or some other mind boggling large figure) for worker retraining, community redevelopment, generous termination packages for all fired employees (not just the top brass), etc. The trustees would have come out looking like heroes, and still vastly improved the economic well-being of trust's beneficiaries. That would have been a good deal for everyone.

Blogging credit:

Credit goes to the Wills, Trusts & Estates Prof Blog for bringing the linked-to law review article to my attention in this blog post.

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Parker v. Shullman, --- So.2d ----, 2008 WL 2038046 (Fla. 4th DCA May 14, 2008)

The linked-to opinion should be read by every trust beneficiary contemplating a lawsuit against his or her trustee. Not only is the beneficiary usually at a disadvantage in terms of litigation financing (the trustee can use trust assets to pay litigation costs, the beneficiary has to pay these costs out of pocket), courts will often give an enormous amount of deference to trustees, forgiving them small "technical" mistakes and erring on their side even when the trustee's actions are questionable or down right vindictive.

Back story:

This is the third!!! time the beneficiary in this case has sued her trustee, lost at trial, and lost again on appeal before the 4th DCA. Oh, and in the last two appeals the beneficiary tried to get the Florida Supreme Court to hear the case and was denied.

The first time around the 4th DCA agreed with the trial court's ruling that although certain actions taken by the trustee were "questionable and vindictive," they didn't rise to the level warranting removal as trustee. Parker v. Shullman, 843 So.2d 960, 961 (Fla. 4th DCA), rev. denied, 857 So.2d 197 (Fla.2003). The second time around the beneficiary sued her trustee based on objections to the compensation he was paying himself as CEO of the closely held business he was also administering as trustee of the trust. The trial court's dismissal with prejudice of that lawsuit was upheld on appeal because "the trustee's simultaneous participation in the company and management of the trusts was authorized by the text of the trusts." Parker v. Shullman, 906 So.2d 1236, 1237 (Fla. 4th DCA), rev. denied, 915 So.2d 1196 (Fla.2005).

Strike three: beneficiary 0 for 3 in litigation v. trustee:

The beneficiary fared no better this time around - her third trial - than she's done in the past. This time the issues at trial were the sorts of things that often bother beneficiaries. Again, this case is a good example of why patience may be wiser (and certainly cheaper) than suing.

1.   First complaint: trustee is taking too long to fund my trust:

This is the sort of complaint trusts and estates lawyers hear all the time. Even if the trustee is dragging his feet, if there's even a whiff of legitimacy to his delay, the court will likely side with the trustee. That's what the court did in this case, and here's why the 4th DCA affirmed that ruling:

    Section [736.05053] provides that the interests of all beneficiaries of a revocable trust are subject to the trustee's duty to pay the expenses of the administration and obligations of the grantor's estate. This court was presented with a similar situation in First Union National Bank v. Jones, 768 So.2d 1213, 1215 (Fla. 4th DCA 2000), in which a trustee argued the trial court had erred in ordering disbursement of the entire corpus of a trust prior to the trust having the opportunity to seek its attorney's fees. This court reversed and remanded:

    Although a trust instrument directs termination of the trust and the distribution of the principal to the beneficiaries upon the settlor's death, the trustee cannot make complete distribution until provision has been made for all the expenses, claims and taxes the trust may be obligated to pay, and certainly not before these amounts have been fully ascertained. Moreover, when the trust is the beneficiary of the grantor's probate estate and is charged with the duty to pay the expenses, claims, and taxes imposed on the probate estate, the trustee cannot make complete distribution of the trust until the probate proceeding has been substantially concluded, which was not the case here.

First Union, 768 So.2d at 1215; see also Sheaffer v. Trask, 813 So.2d 1051, 1052 (Fla. 4th DCA 2002)(citing First Union in reversing trial court's grant of petition to distribute trust assets before authorizing trustee to pay trust debts and expenses); Merrill Lynch Trust Co. v. Alzheimer's Lifeliners Ass'n, 832 So.2d 948 (Fla. 2d DCA 2002)(holding trial court abused its discretion in finding trustee in civil contempt for failing to distribute trust where it would not have been prudent to do so without an accounting).

2.   Second complaint: it's the trustee's fault the estate's stock portfolio lost money

Under Florida's Prudent Investor Rule, F.S. 518.11, whether a trustee has done his job right in managing the trust's stock portfolio is determined by looking at his investment "process," not his investment results. In other words, if the trustee takes all the steps a reasonable investor would take to properly manage his investment portfolio, it doesn't matter if the stocks crater in value, he's done his job. As the 4th DCA put it, "section 518.11 provides that the fiduciary's decisions are to be judged under the facts and circumstances at the time of the decision or action, and that the test is one of conduct rather than resulting performance." Based on the following evidence, the beneficiary lost on this point as well (note the emphasis on process, not performance):

    The testimony and evidence at trial supports the trial court's finding that Shullman's conduct with respect to the trust's complete portfolio of assets satisfied the Prudent Investor Rule and that appellant's objections were heavily based on hindsight rather than in the context of the existing facts and circumstances at the time. The trial court found that Shullman relied upon the advice of Comerica in managing the securities. Shullman testified at length about the steps he took following Barbara's death to interview and eventually retain an investment adviser and schedule meetings with them to advise them of the trust requirements, and that he followed their advice. The trial court's decision is therefore supported by competent substantial evidence in the record that Shullman hired Comerica to manage the securities and reasonably relied on them in his capacity as trustee.

3.   Third complaint: the trustee improperly paid his legal fees without getting the court's prior approval:

This loss must have really hurt. On this point, the beneficiary was clearly in the right - and yet she lost here too. Under F.S. 736.0802(10), a trustee who's being sued for breach of trust may be personally liable for damages, thus it's a conflict of interest to use trust funds to pay for the trustee's personal legal defense. The statute deals with this conflict of interest by requiring that trustees in this situation obtain court approval prior to using trust funds to pay for their legal defense. The 4th DCA upheld this interpretation of the statute just last year in J.P. Morgan Trust Co., N.A. v. Siegel, --- So.2d ----, 2007 WL 2710957 (Fla. 4th DCA Sep 19, 2007).

On this issue the 4th DCA agreed with the beneficiary and reversed the trial court's ruling absolving the trustee from the obligation of obtaining court approval prior to paying for his personal legal defense with trust assets. But having given with one hand, the 4th DCA took with the other by simply giving the trustee a free "do over":

[I]n accordance with Siegel, we hold that the action objecting to the compensation Shullman paid himself as CEO of Sportswear put Shullman in a position of conflict under the previous version of section 737.403(2), Florida Statutes, in effect at the time. We therefore reverse on this issue without prejudice to Shullman's ability to seek court approval for the fees incurred defending that action.

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Michael A. Hiltzik of the Los Angeles Times published an excellent article reporting on the probate and trust litigation swirling around Ray Charles' $75+ million estate: Ray Charles' children battle over his legacy. This estate is so discombobulated you could probably pick it apart from an estate planning perspective in a dozen different ways. Three points that jumped out at me:

1. Talking to your heirs about your estate plan can sometimes be a VERY bad idea.
2. Picking the wrong fiduciary to be in charge of your estate can turn low level, simmering resentments that would otherwise simply blow over into World War III.
3. If an estate plan involves the creation of a private charitable foundation, governance issues are doubly important.
   

1. Talking to your heirs about your estate plan can sometimes be a VERY bad idea.


When estate planners write about parents discussing their estate plans with their children, it's almost always assumed to be a good idea [click here for example]. Well, sometimes it's a lousy idea, as the Ray Charles estate is learning. If estate litigation is even a remote possibility, family discussions about mom and dad's estate plan can make a difficult situation worse.

Shortly before Christmas 2002, Ray Charles called a meeting of his 12 children at a hotel near Los Angeles International Airport. Ten of them, ranging in age from 16 to 50 -- with 10 mothers among them -- listened as their father told them he was mortally ill and outlined what they could expect from his fortune.


Most of Charles' assets would be left to his charitable foundation. But $500,000 had been placed in trusts for each of the children to be paid out over the next five years, according to people at the meeting and a trust document.

Yet Charles' description left so much to the imagination that some of the children came away with the impression that he meant to leave them $1 million each. Charles also hinted that there would be more for them "down the line," which some interpreted to mean they would inherit the right to license his name and likeness for profit.

The confusion and contention that resulted from that family gathering, the only time so many of the children met with their father as a group, helps explain what has happened since. Charles exercised iron control over his music and recordings, but his legacy is in disarray, knotted up in legal disputes between the estate's management and his family members, according to interviews, court documents and correspondence from the California attorney general's office.

2. Picking the wrong fiduciary to be in charge of your estate can turn low level, simmering resentments that would otherwise simply blow over into World War III.

As I've written before [click here], picking the right person or bank/trust company to be in charge of your probate estate or trust may be the single most important estate planning decision you make . . . especially if your estate is large or especially complex. Ray Charles picked his long-time business manager, Joe Adams, to be the one fiduciary in charge of every aspect of his estate. After reading the following excerpts from the LA Times piece ask yourself if Adams is the right man for the job:

That executive, Joe Adams, is the target of the family's complaints. Adams signed on as Charles' manager in 1961. Toward the end of the artist's life, Adams was perceived by Charles' children and others close to him as controlling access to the star.


After Charles' death, Adams ended up with virtually unchallenged power over the estate. He was head of Ray Charles Enterprises, director of the foundation and trustee of the children's trusts. In some cases, co-officers appointed by Charles departed their roles while Adams remained.
.     .     .     .     .

Adams has kept the children and other family members from participating in ceremonies honoring their father, they say, even his funeral.

Adams interrupted a private family service at the Angelus Funeral Home in Los Angeles, attempted to eject some of the participants and ordered the casket removed from the chapel, according to several people who were there.

"The biggest issue with me is disrespect for the family and kids," the Rev. Robert Robinson, one of Charles' sons, said in an interview. "If you respect a man and his work, then you respect his kids. His blood is flowing through our veins."
.     .     .     .     .

In 1997, Charles decided he needed a fresh approach to his career and attempted to replace Adams with Jean-Pierre Grosz, a 50-year-old French artists manager who had become a close friend. Charles, however, apologetically sent Grosz home to Paris after Adams refused to relinquish his office in Charles' Washington Boulevard studio, according to the French manager.

3. If an estate plan involves the creation of a private charitable foundation, governance issues are doubly important.

Governance issues are especially important when it comes to private foundations because after the founder is dead, generally speaking no one other than the state attorney has standing to step in and make sure the foundation is being properly run. And just because it's a charity don't assume the sins of humanity are somehow banished from its hallowed halls, as reported by NY Times reporter Stephanie Strom in Report Sketches Crime Costing Billions: Theft From Charities. The following excerpt from the linked-to LA Times piece makes clear the Ray Charles private foundation may be many things, but a beacon of good governance it's not:

In February 2006, Adams' stewardship of the foundation was questioned by Deputy Atty. Gen. Wendi A. Horwitz. After learning that Adams was serving simultaneously as chairman, president and treasurer of the foundation -- in violation of state law -- she gave Adams 30 days to comply. He appointed a new treasurer and a few months later added a majority of independent outsiders to the board.


The attorney general's office never took public action against the foundation. In December, Adams resigned as president of the foundation and of Ray Charles Enterprises. He was succeeded by Ivan Hoffman, a lawyer who had worked with the estate. However, a receptionist at Ray Charles Enterprises said last week that Hoffman was not currently its president. Hoffman and a company spokesman declined to comment.

Adams still exercises power at the organizations, the lawsuit filed by Den Bok alleges. It is unclear whether he still holds any formal titles. A spokesman for Atty. Gen. Jerry Brown, who succeeded Lockyer in 2006, had no comment.

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Ohio trusts-and-estates attorney Michael D. Bonasera reported here in his The Ohio Trust & Estate Blog on a NY Times article he spotted entitled: Breaking Up Is Hard to Do. According to the NY Times, trust beneficiaries are growing increasingly dissatisfied with their corporate trustees:

Dissatisfaction with trustees — particularly corporate trustees rather than individuals — has been growing over the last five years, those experts say. Most complaints center on investment performance, mostly because beneficiaries have become more financially sophisticated and more types of investments are now available.

Poor service — including high turnover among trust officials and phone calls that are not returned — is another common complaint. “The longer a trust lasts, the more you’re going to have a change in trustee personnel,” said Richard Kahn, a partner in the law firm Day Pitney in Florham Park, N.J., who specializes in trusts and estate planning.

This is not the first time I've seen an article reporting on the drift away from traditional corporate trustees [see Trust in your bank?].

In my opinion if a trust is large enough to warrant professional management, appointing a corporate trustee is usually a good idea. However, the benefits of having a corporate trustee can be had without wedding your trust beneficiaries to a particular bank or trust company in perpetuity. The ability to fire a current corporate trustee and appoint another corporate trustee of their choosing would seem to address all of the trust-beneficiary grievances reported on in the NY Times piece. As pointed out in the article, the easiest and best way to address this issue is through proper trust-agreement drafting.

In the absence of a well-drafted trust agreement, trust beneficiaries traditionally could sue for the removal of their trustee only upon a showing of malfeasance. This type of litigation is fraught with uncertainty and usually very expensive for trust beneficiaries to pursue. The appeal of these cases drops even further when trust beneficiaries realize that although they have to pay their legal fees out of their own pockets, the trustee can use trust funds to pay its attorneys.

Fortunately for Florida trust beneficiaries, Florida's new Trust Code provides an alternative. If all of the trust beneficiaries agree, they can obtain an order compelling a trustee to resign under the following statute, without having to prove the trustee was negligent in any way.

736.0706 Removal of trustee.  .  .  .

(2) The court may remove a trustee if:

(d) .  .  . removal is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available. 

Although this statute is a vast improvement over traditional trust law with respect to the forced removal of unwanted trustees, it does impose one very significant requirement: a unanimous vote by all of the trust's qualified beneficiaries. As reported in the NY Times article, this may not be an insubstantial hurdle:

Mr. Dinzeo of Accredited Investors has been working for the last five years with a family where the younger generation is unhappy with the big international bank that has been handling its trust, worth more than $100 million. Trust officers were rotating every 12 to 18 months, these beneficiaries complained. “They wanted to switch down to a smaller trust company, a local player that would have less of an institutional feel,” Mr. Dinzeo said.

“The other side of the family agreed that the service level wasn’t par,” he added, but they wanted to stay with the big bank. “They felt that this large institution would be there. There would be continuity from generation to generation.”

The result? The beneficiaries talk periodically with bank officials, and conditions improve for a while, but then matters slide again, Mr. Dinzeo said. “It’s a constant recurring discussion that just sucks out the family’s resources and time.”

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Fleck v. Fleck, --- So.2d ----, 2008 WL 818814 (Fla. 2d DCA Mar 28, 2008)

The linked-to opinion is the second time the trial court's been reversed on appeal in this case (ouch!!).

The first time around the trust beneficiary won on appeal when the 2d DCA reversed the trial court for improperly construing a trust instrument [click here for my blog post on that appeal].

This time around the trustee was the winning side on appeal when the 2d DCA reversed the trial court for making the trustee pay the trust beneficiary interest on improperly retained trust funds . . . in spite of the fact that the trustee had paid the beneficiary all of the over $200,000 of income generated on the retained trust assets. Here's how the 2d DCA explained where the court went wrong and why:

The [trustee]  . . . argues that the trial court erred in ordering that he return to Sondra's guardian ad litem “all of the funds and assets which were turned over to [the appellant] ... plus interest on those funds at the legal rate.” The appellant contends that he “has distributed to Sondra, as beneficiary, all of the income from the assets of the Trust since the assets were ordered returned by Sondra to the Trust, approximately $236,564.48.” The appellant further asserts that in awarding interest on “the entire corpus” to Sondra, the final judgment “fails to give [him] any credit for these payments.” According to the appellant, “[i]t is the current assets of the Trust that should be ordered released to Sondra.”


*     *     *     *     *

The trial court erred in treating the earlier erroneous judgment, which required that the distributed assets be returned to the trust, as though it were a money judgment which had been satisfied and then overturned. The funds that were returned to the trust were not turned over to the appellant to deal with as he pleased but were required to be administered by the appellant in accordance with his duties as a cotrustee. The ongoing administration of the trust necessarily involved circumstances that the trial court's order on review in effect ignores.

Here, the restoration of the status quo ante simply requires that “all remaining trust assets” be distributed by the appellant, in his capacity as trustee, as Sondra had directed pursuant to the provisions of the trust agreement. . . .

We therefore reverse the portion of the final judgment ordering the return of “all the funds and assets which were turned over” to the appellant pursuant to the overturned judgment, “plus interest on those funds at the legal rate.” On remand, the judgment shall be amended consistent with this opinion.

Lesson learned:

Remedies that may make sense in a standard commercial dispute simply don't apply in trust litigation.  The new Florida Trust Code should help future litigants - and courts - avoid making this mistake by listing the remedies for a breach of trust in one place (F.S. 736.1001) and how the resulting damages, if any, should be computed (F.S. 736.1002 and F.S. 736.1003).

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Chaffin v. Overstreet, --- So.2d ----, 2008 WL 678664 (Fla. 5th DCA Mar 14, 2008)

In contested probate proceedings involving larger estates things can quickly get messy from a jurisdictional and civil procedure perspective because people don't order their lives into nice neat categories labled "probate" and "non-probate" assets.  Heirs inevitably get in front of the probate judge and ask the court to rule on all sorts of issues that simply have nothing to do with administering the decedent's probate estate, although they may have a huge impact on the economic well being of the decedent's heirs.  A prime example of this type of hodgepodge approach to litigation is the intermixing of contested trust actions with completely unrelated probate proceedings.

In the linked-to case the personal representative of "Wife's" estate was also co-trustee of a trust established by her husband ("Husband's Trust"), a trust established by Wife and a trust referred to as the "Family Trust."  The PR filed a petition within the probate proceeding seeking to remove the co-trustee of the Family Trust.  At a hearing involving the Family Trust litigation all of sudden the probate court started entering rulings having to do with Husband's Trust.  Here's how the 5th DCA described this part of the case:

On 12 September 2006, Chaffin, acting as the personal representative of [Wife's] estate, filed a Petition to Remove Robert Clay Overstreet as Co-Trustee of the [Family Trust]. Chaffin alleged that Clay was “presently ‘unable’ to serve as Co-trustee of the [Family Trust].”  .  .  .

.  .  .

During the hearing, the trial judge also inquired about the sale of the Ham Brown Road property, which was fifty acres given in trust to Cole in [Husband's Trust]. Because the property was not part of the [Family Trust], Chaffin argued that the probate court lacked jurisdiction to rule on this issue. Nevertheless, the probate judge found that Chaffin did not have authority under the language of [Husband's Trust agreement] to sell the property. Shortly thereafter, the probate judge announced that he was requiring yearly accountings on everything that goes through the trust or probate estate.

The 5th DCA agreed with the trustee's jurisdictional objection, reversing the probate court as follows:

We .  .  .  find that Chaffin's due process rights were violated when the probate court considered issues other than the Petition to Remove Clay. The only matter noticed for hearing was whether Clay should be removed as the co-trustee of the [Family Trust]. Thus, the probate court lacked jurisdiction over the [property owned by Husband's Trust] because the issue was not sufficiently raised by the pleading and noticed for hearing. See Alvarez v. Singh, 888 So.2d 159 (Fla. 5th DCA 2004).


In addition, we find that Chaffin was before the court solely in his capacity as co-trustee of the [Family Trust] and the probate court lacked jurisdiction over any other trusts. Although Chaffin sought the appointment of the guardian ad litem and the attorney ad litem in his capacity as trustee of [Husband's Trust] and [Wife's Trust], this was insufficient to constitute a general appearance by Chaffin in these capacities. See McKelvey v. McKelvey, 323 So.2d 651, 653 (Fla. 3d DCA 1976) (holding that a general appearance will ordinarily be effected by making any motion involving the merits of a plaintiff's claim and his or her right to maintain the suit and secure the relief sought); Snipes v. Chase Manhattan Mortg. Corp., 885 So.2d 899 (Fla. 5th DCA 2004). Accordingly, we find that, while Clay is entitled to the use of [Family Trust] money to obtain counsel to defend against attacks brought by Chaffin, the probate court lacked jurisdiction to award Clay trust money from any other trusts. See In re Estate of Stisser, 932 So.2d 400, 402 (Fla. 2d DCA 2006) (holding that trustees are indispensable parties and the probate court must have jurisdiction over the trustees in order to enter a ruling affecting the corpus of the trust); McLendon v. Smith, 589 So.2d 410 (Fla. 5th DCA 1991) (holding that presence in one capacity does not subject a party in another capacity to the jurisdiction of the court).

Lesson learned?

If you're already in front of a probate court and it looks like a related trust may be affected by the probate litigation, you need to anticipate the jurisdictional issues and make a choice: either file a petition getting your trust in front of the same probate judge or file a separate trust action in the general-jurisdiction division of the circuit court and get your trust in front of a different judge.  There are pros and cons to either choice, but at least you've dealt with the jurisdictional issues head on (and hopefully plead the separate trust action in a way that makes sense from a procedural view point).

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Raborn v. Menotte, --- So.2d ----, 2008 WL 90037 (Fla. Jan 10, 2008)

The linked-to Florida Supreme Court opinion is the latest chapter in a bankruptcy proceeding that's been ongoing since 2001, has been the subject of numerous appeals in the federal-court system, and single-handedly resulted in a 2004 amendment to F.S. 689.07(1), which governs conveyances of real property to trusts.  I previously wrote about this case here.

For the family involved in this case, the question was whether the family horse farm, which was deeded to one of the children as trustee of a trust benefiting him and his two siblings, would be exposed to the trustee's personal creditor's in the context of his personal bankruptcy.  For lawyers, the question is: "How can I draft a deed-to-trust that ensures none of my clients ever get sucked into this kind of nightmare?"  For those looking for sample forms, an excellent starting point are documents provided by the ABA, which I discuss and link to in a blog post entitled The ABA Promotes Land Trusts.

In order to understand the issues shaping the form text contained in the ABA documents, the Florida Supreme Court provides the following concrete guidance in the linked-to opinion explaining when a deed conveying title to a trustee conveys fee-simple title (thus exposing the trust assets to the trustee's personal creditors) or mere legal title (which does NOT expose the trust assets to the trustee's personal creditors):

    Though inartfully drafted, section 689.07(1) is unambiguous. A “deed or conveyance of real estate” that simply adds the words “trustee” or “as trustee” to the grantee's name is “declared to have granted a fee simple estate,” unless a declaration of trust is of record when the deed is recorded, or the deed itself either names any beneficiaries or the nature and purpose of the trust, if any, or facially expresses a contrary intention. See One Harbor Fin. Ltd. v. Hynes Props., LLC, 884 So.2d 1039, 1043 (Fla. 5th DCA 2004). In other words, a deed that simply refers to the grantee as “trustee” conveys a fee simple estate in Florida with three exceptions. These three exceptions are: (1) the deed names the beneficiaries or states the nature and purpose of the trust; (2) the deed expresses a contrary intention; or (3) a declaration of trust is of record. See id.


    In this case, the deed itself clearly expresses that the grantors, Robert and Lenore Raborn, intended to deed the Raborn family farm to Douglas Raborn in trust. Thus, the deed falls under the “contrary intention” exception in section 689.07(1). This “contrary intention” is expressed in the deed in multiple ways. First, the deed is entitled “Conveyance Deed to Trustee Under Trust Agreement.” In re Raborn, 470 F.3d at 1321. It then identifies Robert and Lenore Raborn as “Settlors under the Raborn Farm Trust Agreement dated January 25, 1991” and conveys the farm to Douglas Raborn, not simply as “trustee” or “as trustee,” but “as Trustee under the Raborn Farm Trust Agreement dated January 25, 1991.” Id. The deed then amplifies the limited nature of the conveyance by stating that the trustee is “to have and to hold the said estate with the appurtenances upon the trust and for the uses and purposes herein and in said Trust Agreement set forth.” Id. Moreover, the deed repeatedly refers to the Trust Agreement and acknowledges the Trustee's broad power to deal with the property. Id. Finally, the grantors/settlors signed the deed and swore before a notary public that they “executed said instrument for the purposes therein expressed.” Id. In light of these facts, though no beneficiaries are named and the nature and purpose of the trust is not stated, this deed expresses the grantor's clear intent to deed the Raborn family farm to Douglas Raborn to be held in trust in accordance with the Raborn Farm Trust Agreement dated January 25, 1991.

    Accordingly, section 689.07(1) does not operate to declare that this deed conveyed a fee simple estate to the grantee.FN2 Instead, Douglas Raborn holds mere legal title as trustee.

FN2. As noted by the amicus curiae and undisputed by the appellant, this result is consistent with the standard practice in Florida. Florida lawyers and their clients have long understood and relied on the fact that specifically identifying the trust by its name or date in a deed is sufficient to indicate the grantor's intention to convey real property in trust and thus avoid any contrary dictate of section 689.07(1). See Administration of Trusts in Florida, 14.11 (Fla. Bar Cont'ng Legal Educ. 3rd ed.2001).

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Knight v. C.I.R. , --- S.Ct. ----, 2008 WL 140749 (U.S. Jan 16, 2008)

In an opinion that will have significant implications for every estate or trust paying U.S. income taxes, the Supreme Court has just ruled on the level of deductibility Internal Revenue Code Section 67(e)(1) permits for trust investment advisory fees (IAFs). The trustee/taxpayer in this case argued that IAFs are fully deductible before arriving at a trust's taxable income.  As I previously reported [click here], this argument lost both at trial and before the Second Circuit.

Unfortunately for the trustee he also lost before the Supreme Court, which ruled in the linked-to opinion that most IAFs are are deductible only to the extent that they exceed 2 percent of a trust's adjusted gross income (AGI), often referred to as the “2 percent-of-AGI floor.”

But the news isn't all bad.  Some IAFs remain fully deductible if they can be construed as being uniquely applicable to trusts.  Chief Justice Roberts hinted at this reading of the statute during oral arguments, as reported here on law.com:

Several times during the argument hour, Chief Justice John Roberts brought up the idea of breaking up the costs for investment advice into those representing "general stock picking advice," and those for "specialized fiduciary advice," and only providing an exception for the latter. Justice Antonin Scalia, however, expressed skepticism about whether it would be possible to "slice up" adviser fees.

And here's how this approach was expressed in the Court's linked-to opinion (which was written by Chief Justice Roberts):

As the Solicitor General concedes, some trust-related investment advisory fees may be fully deductible “if an investment advisor were to impose a special, additional charge applicable only to its fiduciary accounts.” Brief for Respondent 25. There is nothing in the record, however, to suggest that Warfield charged the Trustee anything extra, or treated the Trust any differently than it would have treated an individual with similar objectives, because of the Trustee's fiduciary obligations. See App. 24-27. It is conceivable, moreover, that a trust may have an unusual investment objective, or may require a specialized balancing of the interests of various parties, such that a reasonable comparison with individual investors would be improper. In such a case, the incremental cost of expert advice beyond what would normally be required for the ordinary taxpayer would not be subject to the 2% floor. Here, however, the Trust has not asserted that its investment objective or its requisite balancing of competing interests was distinctive. Accordingly, we conclude that the investment advisory fees incurred by the Trust are subject to the 2% floor.

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• US S.Ct.: Knight v. C.I.R. , --- S.Ct. ----, 2008 WL 140749 (U.S. Jan 16, 2008) (Income tax deductions for trusts and estates)

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• FL SCT: Raborn v. Menotte, --- So.2d ----, 2008 WL 90037 (Fla. Jan 10, 2008)

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Opening safe-deposit boxes is a part of most probate administrations.  Banks are usually sticklers for protocol, which is understandable given their liability exposure if anything goes wrong.  Fortunately, Florida has a detailed statutory scheme governing access by fiduciaries to safety deposit boxes (see F.S. 655.93 - F.S. 655.94 and F.S. 733.6065).

Wachovia is learning the hard way that people will sue if things go wrong, as reported by Daniel Wise in Bank's Opening of Box Leads to Trial on Missing Cash Claim.  Here's an excerpt:

An elderly woman's claim that Wachovia Bank was liable for $75,000 allegedly lost when it authorized unsupervised locksmiths to break into her safety deposit box should proceed to trial, an acting Supreme Court justice in Manhattan has ruled.

The bank's failure to check one of its computer databases to see if the box had been rented raises a triable issue of fact as to whether the bank committed "gross negligence," Justice Michael Stallman ruled last week in Glassman v. Wachovia Bank, 115380/06.

In early 2005, Roberta Glassman, who has residences in Manhattan and Florida, rented a self-service safe deposit box at the Wachovia branch in West Palm Beach, Fla. Under the agreement, she was to be given the only keys.

The agreement also provided that any missing contents were Glassman's responsibility and that "the Bank has no liability whatsoever unless the loss is caused by the Bank's gross negligence, fraud or bad faith."

Glassman, 74, claimed that when she left in May 2005 for a trip to Europe, she removed $3,000 in cash from the safety deposit box, leaving $87,000 in $100 bills and a $100,000 Suffolk County bond.

However, an envelope bearing the box number and containing keys was mistakenly included in the bank's inventory of unrented boxes. The keys did not open her box.

On May 27, 2005, a short time after Glassman left on her trip, the bank called in locksmiths from Diebold Incorporated.

The bank's lawyer, Jocelyn Keynes, said it was the bank's policy not to supervise the work of locksmiths on unrented boxes. In this case, the locksmiths soon realized the box had been rented because it did not have a piece of white Styrofoam normally found between the door of unused boxes and the actual container for valuables.

The locksmiths, according to the lawyer's affidavit, then summoned two bank employees, who inventoried the contents of the box as $12,000 in $100 bills and the $100,000 bond.

Both sides sought summary judgment upon Glassman's claim. Wachovia claimed it had acted reasonably, and had certainly not been grossly negligent.

Stallman found that the agreement's gross-negligence provision was sustainable under both New York and Florida law.

Although the case referred to in the quoted piece [Glassman v. Wachovia Bank, 115380/06] is out of New York, fortunately for us in sunny Florida the court skirted the choice of law issues by simply applying both New York and Florida law.  Florida practitioners should find the following useful:

• Exculpatory clauses in safe-deposit box agreements are enforceable.

[I]n Florida . . . an appellate court has held that the limitation of liability provided in a safe deposit box agreement which limited the bank's obligations for loss to instances of gross negligence, fraud or bad faith was . . . [enforceable]. F.D.I.C. v. Carre, 436 So.2d 227, 229-230 (Fla App 2d Dist 1993)(court noted that whether or not “a customer is wise to enter into an agreement such as the one in this case, we cannot find that the agreement was against public policy.”). Thus, under the laws of New York and Florida, an exculpatory clause, such as the provision contained in the subject Agreement that limits a party's liability to grossly negligent conduct, is enforceable.

• If a gross-negligence exculpatory clause is enforceable, then what is "gross negligence"?

The Florida courts have acknowledged that their jurisprudence “reflects a history of difficulty in dividing negligence into degrees” and that “it is doubtful that gross negligence has precisely the same meaning in each context.” See Fleetwood Homes of Florida, Inc. v. Reeves, 833 So.2d 857, 865-66 (Fla App 2d Dist 2002); see also LeMay v. Kondrk, 860 So.2d 1022, 1025 (Fla App 5th Dist 2003) (“Courts have encountered great difficulty in attempting to draw clear and distinct lines between the various grades of negligence). In Fleetwood Homes, the court observed that, in the context of addressing workers' compensation and in awarding punitive damages based on gross negligence, the relevant statute defines gross negligence to include “conduct [that] was so reckless or wanting in care that it constituted a conscious disregard or indifference to the . . . rights of person exposed to such conduct.” Id. at 867.[FN3]

[FN3]. The same definition for gross negligence was noted in In re Standard Jury Instructions-Civil Cases, (797 So.2d 1199 [2001] ), where the Florida Supreme Court authorized the publication of guidelines for jury instructions and model verdict forms with respect to the award of punitive damages in instances that involve intentional misconduct or grossly negligent conduct.

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I can't imagine a more extreme example of trustee decision making under pressure-cooker conditions than the on-again-off-again negotiations for the sale Dow Jones & Co., which owns the Wall Street Journal.  As reported by the WSJ in Bancroft Trusts' Lawyers Hold Key to Dow Jones, at the center of that deal was a small group of lawyer-trustees:

The Bancroft family may own a controlling stake in Dow Jones & Co., but the final decision on whether to sell the publisher of The Wall Street Journal to Rupert Murdoch could well be made by a small circle of longtime family lawyers in downtown Boston.

Lawyers from Hemenway & Barnes sit at the center of dozens of overlapping trusts that hold power over most of the Bancrofts' 64% voting stake in the company .  .  .  . Those lawyers occupy two of the three trustee seats on a number of key trusts, with the third held by a family member. On one of the biggest trusts, lawyers from the firm are the only trustees. And the fact that the large Bancroft clan is divided over whether to sell further deepens the firm's influence.

"The vote really resides with them," says one family member who is leaning in favor of selling the company.

Risk management:

The best way to reduce the risk of getting sued as a trustee is to make sure the trust beneficiaries consent to your actions.  That seems to be what the trustees did in this case:

"There are 35 adult family members who have 35 points of view," Mr. Elefante said. "We've tried to be fair to all the family members by giving each of them all the information they need to make a good decision."

As the family's legal representative, Mr. Elefante likely would be reluctant to go against the family's wishes if a large portion of them oppose the deal. While trustees don't legally have to consult the beneficiaries of a trust before acting, ignoring their wishes might expose them to litigation. What's more, the Hemenway & Barnes trustees do not have to vote in concert. Mr. Elefante is expected to poll the family before deciding how the trusts would vote on a sale, a person close to him said.

Lesson learned -- plan ahead:

The earliest Bancroft trusts date back to the mid-1930s.  Back then no one could have possibly anticipated a sale of the WSJ in the year 2007 to a controversial media magnet from Australia.  Just like no one creating a trust today to hold a client's family business could possibly anticipate every contingency that trust will have to face in the decades (perhaps centuries - see here) that trust may be around for.

What you can do today is put in place a mechanism for trustee decision making that decreases the likelihood of future litigation while also making sure qualified trustees are at the helm when needed.  One way of achieving this balance is to design the trust so that an independent trustee, preferably a bank or trust company (see here for why), has ultimate decision making authority.  However, if trust beneficiaries feel their trustee isn't doing a good job or doesn't have their best interest at heart, sooner or later the parties will end up in court.  A way to avoid this type of showdown is to give the trust beneficiaries the power to hire and fire their corporate trustee at regular intervals.  Here's one way to do it:

• Require a corporate trustee:

After my death or if my personal rights under this Trust Agreement are suspended, there must be at least one Corporate Trustee serving at all times.

• Give trust beneficiaries periodic power to hire/fire corporate trustee:

Upon the third anniversary date of my death, and every three years thereafter, a majority in interest of the permissible current income beneficiaries most closely related to me who are then legally competent may remove any Corporate Trustee for any reason by giving 30 days’ written notice to that Trustee and to the permissible current income beneficiaries, including the natural or legal guardians of any beneficiaries who are then disabled.

• Give senior generation greater voting power:

If there is ever a vacancy in the office of Trustee of any trust created in this Trust Agreement and no successor is appointed as provided in this instrument, a majority in interest of the permissible current income beneficiaries most closely related to me who are then legally competent (the “beneficiaries”) will nominate as a successor Trustee a Corporate Trustee as defined in this Trust Agreement. If the beneficiaries do not appoint a successor Trustee within a reasonable time, the terminating Trustee shall, or any beneficiary may, petition a court of competent jurisdiction to appoint a successor Corporate Trustee.

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My personal theory is that most probate litigation is NOT the result of intentional malfeasance, but rather the product of well-intentioned fiduciaries who are simply in over their heads (see here).  If the estate is complex or the beneficiaries are likely to be demanding (often legitimately so), then a professional trustee is almost always a bargain . . . especially compared to the cost of contested proceedings.

A recent article entitled Trust in your bank? reports on a study just published by the Spectrem Group, Chicago, that makes two principal points:

• All probate or trust estates valued at over $5 million should be managed by a professional trustee.
• More and more families are opting for non-bank professional trustees.

I wrote here about a previously published study by Tiburon Strategic Advisors that also reported on the trend away from banks to other providers for professional trustee services.

Here are a few excerpts from the linked-to story:

A recent report, published by the Spectrem Group, Chicago, shows that, ironically, just as the baby boomers need trust services more trust money is leaving banks. Personal trust assets held by U.S. banks fell 10% to $986.2 billion in 2005 from a peak of $1.1 trillion in 1999, it says.

Banks are losing ground due to the continued growth of nonbank trust services and the selection of family members as trustees, the report says. Plus, banks have been slow to change their services and the way they provide services.

The Spectrem Group report says that every ultra-high-net-worth household -- those with at least $5 million -- should have a trust. Yet only 52% of the 930,000 households nationwide that fall in that category do.

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Wachovia Bank, N.A. v. U.S., --- F.3d ----, 2006 WL 1912805 (11th Cir.(Fla.) Jul 13, 2006)

For trust and estates lawyers this case is a good example of how NOT keeping track of minor details -- like a client paying federal income tax on a tax-exempt charitable trust for 10 years -- can lead to lively appellate opinions (interesting for lawyers, probably less appreciated by clients paying the legal bills).

After 10 years of paying federal income tax for the George C. Nunamann Trust, a tax-exempt charitable remainder trust, someone at Wachovia apparently figured out this wasn't a good idea and kindly asked the IRS to refund $111,823 in gratuitously-paid income taxes (OOPS!!).  The IRS denied the refund request citing the three-year limitations period for tax refunds (26 U.S.C. 6511(a)).  Wachovia sued for the refund arguing that the general six-year statute of limitations period for claims against the U.S. applied (28 U.S.C. 2401(a)), and won that argument in a summary judgment ruling at the trial court level.  On appeal the 11th Circuit reversed in an opinion that starts off by quoting . . . The Beatles!

The Beatles' taxman told us what we'd see:
“There's one for you, nineteen for me.”
But if we really want some funds to free,
how soon does asking have to be?

Doggerel aside, the issue presented in this case is whether the statute of limitations period set forth in 26 U.S.C. § 6511(a) applies to claims for refunds made by those who have mistakenly filed a return and paid tax when they were not actually required to file a tax return. And as the Beatles probably would have guessed, the lamentable answer is yes.

I thought that was clever.  On a more substantive note, the 11th Circuit goes on to provide the following excellent discussion on how "context is king" in all matters involving statutory construction:

Well-established and soundly based rules of statutory construction require us to consider the provisions of § 6511(a), and its language, in context. The Supreme Court has described statutory construction as “a holistic endeavor.” Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 60, 125 S.Ct. 460, 466-67, 160 L.Ed.2d 389 (2004) (citations and quotation marks omitted). In doing so, the Court explained: “A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme-because the same terminology is used elsewhere in a context that makes its meaning clear, or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” Id. at 60, 125 S.Ct. at 467.

The Supreme Court has also warned us against slicing a single word from a sentence, mounting it on a definitional slide, and putting it under a microscope in an attempt to discern the meaning of an entire statutory provision: The definition of words in isolation ··· is not necessarily controlling in statutory construction. A word in a statute may or may not extend to the outer limits of its definitional possibilities. Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis.  Dolan v. U.S. Postal Serv., 546 U.S. ----, 126 S.Ct. 1252, 1257, 163 L.Ed.2d 1079 (2006). Characteristically, Holmes put it best when he explained in another tax case about ninety years ago that, “[a] word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.” Towne v. Eisner, 245 U.S. 418, 425, 38 S.Ct. 158, 159, 62 L.Ed. 372 (1918).

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Wood v. U.S. Bank, N.A. , 160 Ohio App.3d 831, 828 N.E.2d 1072, 2005-Ohio-2341 (Ohio App. 1 Dist. May 13, 2005)

Suppose you are a bank officer and one of your large shareholders wants to appoint you as corporate trustee of his trust and, because this shareholder became wealthy owning your bank’s stock, he wants to make sure his trust can continue holding shares of stock of your bank after his death.

[Q.] What issues should the bank be thinking about to make sure that it can both comply with the testator’s wishes and avoid getting sued in the process?

[A.] The bank’s fiduciary duty of loyalty (in connection with acting as trustee of a trust holding its own stock) and the bank’s fiduciary duty to diversify the trust’s assets (in connection with retaining a large block of the bank’s stock).

This case is a good example of what can go wrong if the bank fails to think about these fiduciary duties (and liabilities). Here the grantor created a trust worth over $8 million, naming Firstar Bank of Cincinnati its corporate trustee. Nearly 80% of the trust assets were in the bank’s own stock. Not surprisingly after the grantor’s death when the bank’s stock plunged in value from a high of $35 per share to a low of $16 per share, the trust’s beneficiaries sued the bank. As summarized by the appellate court, at trial the bank pointed to the following exculpatory language as part of its defense:

"The language of John's last trust was unambiguous. It granted Firstar the power to retain its own stock in the trust even though Firstar would ordinarily not have been permitted to hold its own stock. Specifically, Firstar had the power '[t]o retain any securities in the same form as when received, including shares of a corporate Trustee * * *, even though all of such securities are not of the class of investments a trustee may be permitted by law to make and to hold cash uninvested as they deem advisable or proper.'"

On appeal the Ohio appellate court ruled that although this exculpatory language might get the bank off the hook with respect to its duty of loyalty, it in no way relieved the bank of its duty to diversify. Here is how the appellate court explained its rationale:

"The retention clause merely served to circumvent the rule of undivided loyalty. The trust did not say anything about diversification. And the retention language smacked of the standard boilerplate that was intended merely to circumvent the rule of undivided loyalty-no more, no less. There were significant tax consequences that precluded John from diversifying by selling the Firstar stock during his lifetime, but that hurdle was removed upon his death. Had John wanted to eliminate Firstar's duty to diversify, he could simply have said so. He could have mentioned that duty in the retention clause. Or he could have included another clause specifically lessening the duty to diversify. But he did not. We hold that the language of a trust does not alter a trustee's duty to diversify unless the instrument creating the trust clearly indicates an intention to do so."

Lessons Learned:

Good drafting could have allowed the bank to both carry out the grantor’s wishes and avoid getting sued. The best way to make this point is to actually look at examples of proper trust provisions for this type of scenario. With respect to authorizing the bank to hold its own stock in trust, here is a sample clause (I’ve italicized the key terms):

Waiver of Duty of Loyalty:

The Trustee is authorized to invest in assets, securities, or interests in securities of any nature, including (without limit) commodities, options, futures, precious metals, currencies, and in domestic and foreign markets and in mutual or investment funds, including funds for which the Trustee or any affiliate performs services for additional fees, whether as custodian, transfer agent, investment advisor or otherwise, or in securities distributed, underwritten, or issued by the Trustee or by syndicates of which it is a member; to trade on credit or margin accounts (whether secured or unsecured); and to pledge assets of the Trust Estate for that purpose.

With respect to authorizing the bank to retain a highly concentrated stock position, in other words relieving the bank of its duty to diversify, here is a sample clause (I’ve italicized the key terms):

Waiver of Duty to Diversify:

I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in XYZ Corp., or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as "XYZ Corp."), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ Corp. because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust’s portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ Corp. that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called "uncompensated risk") incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ Corp., and nothing in this paragraph will be interpreted in any manner to limit the Trustee’s authority to do so.

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This recent failure-to-diversify case out of Ohio underscores the trustee-liability issues I wrote about here regarding the recent appellate-court reversal of a $24 million judgment against Chase Manhattan in New York. In both cases the bank's liability (or lack thereof) for losses arising from the decision to hold family stock in trust for decades (versus selling the family stock and diversifying the trust's stock portfolio) hinged on express exculpatory language incorporated into the governing trust agreement itself.

In Natl. City Bank v. Noble, 2005 WL 3315034, 2005-Ohio-6484 (Ohio App. 8 Dist. Dec 08, 2005), the issue before the court was whether the corporate trustee, National City Bank ("NCB"), was liable for the alleged 52% drop in the trust's portfolio value. The trust in question was created in 1965 by Welker Smucker, son of the founder of the J.M. Smucker Company. Among the assets originally funding the trust were over 1,000 shares of J.M. Smucker Company common stock. The following exculpatory language was incorporated into the trust agreement:

"2. The Trustees are empowered to retain as an investment, without liability for depreciation in value, any part or all of any securities * * * from time to time hereafter acquired by the Trustees as a gift, devise or bequest from the Grantor or any other person, * * * even though such property be of a kind not ordinarily deemed suitable for trust investment and even though its retention may result in a large part or all of the trust property's being invested in assets of the same character or securities of a single corporation. * * *. Without limitation upon the generality of the foregoing, the Trustees are expressly empowered to retain as an investment, without liability for depreciation in value, any and all securities issued by The J.M. Smucker Company, however and whenever acquired, irrespective of the proportion of the trust properly invested therein * * *.

The Trustees are empowered to invest and reinvest any part or all of the trust property * * * in such securities * * * as they may select, irrespective of any limitation prescribed by law or custom upon the investments of trustees and even though the trust property may be entirely invested in common stocks or other equities * * *." Trust Agreement, at Section E(2)-(3).

Based on this language, the court ruled that NCB could not be held liable for any alleged losses resulting from the failure to diversify the trust's portfolio.

The language contained in Welker Smucker's Trust Agreement is clear on its face that the trustees could retain investments without liability or depreciation. The trust went even one step further to insulate NCB as the corporate trustee, providing specifically that it had no duty to review or to make recommendations without the specific request of the individual trustee.

Lessons Learned:

In an excellent essay published online here by BNA, the trustee-liability issues alluded to above are discussed in great detail. The introductory paragraphs to the linked-to essay sum up nicely the lessons to be learned from the Smucker and Kodak failure-to-diversify cases:

Investment diversification, always important for trustees, has in the last ten years become more important than ever. The Restatement (Third) of Trusts - Prudent Investor ("Restatement") and the Uniform Prudent Investor Act have made clear that a trustee's duty with respect to trust investments is to view those investments as a portfolio (rather than viewing each asset in isolation), and to diversify that portfolio. However, these innovations raise a question: do trustees now have an absolute duty to diversify trust investments?

To spoil the ending of this tale, the answer, of course, is no. The Prudent Investor Act states explicitly that a trustee is to diversify investments unless there is a prudent reason not to. The factors that might convince a trustee not to diversify can include language in the trust agreement directing the trustee not to do so, the particular situations of beneficiaries or the tax cost of selling an asset that dominates the portfolio.

Nevertheless, case law indicates that the duty to diversify may, in certain circumstances, be given greater weight than the trustee or her advisors might expect. In light of this judicial gloss, a trustee should assume, almost regardless of the circumstances, that she has the duty to diversify, and act cautiously when deciding not to do so. Further, lawyers drafting trust agreements should take extra care when drafting instruments for grantors who want trustees not to diversify.

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$24,076,937.31 Judgment v. Chase Manhattan Bank Reversed on Appeal

It is not unusual for the family wealth to be the product of one or two extremely successful investments or stock holdings. In those cases any testamentary trusts created by the decedent will obviously be funded with large blocks of one or two very valuable stock holdings. Not surprisingly the family will probably want the trustee to hold on to the large blocks of stock that made them all wealthy to begin with.

As Chase Manhattan Bank learned in this case, the family's desire to remain concentrated in one or two stock holdings may conflict directly with the trustee's duty to diversify the trust fund's stock portfolio. In Florida, the duty to diversify is required under Florida's prudent investor statute. See F.S. § 518.11(1)(c); see also F.S. § 737.302.

The duty to diversify may, however, be excused by the person creating the trust. It is exactly this type of direction that got Chase Manhattan off the hook for a $24+ million judgment! Here is the language focused on by the New York appellate court in In re Chase Manhattan Bank, 809 N.Y.S.2d 360 (N.Y.A.D. 4 Dept. Feb 03, 2006):

The trust was funded with a concentration of Kodak stock. Decedent's will provided that "[i]t is my desire and hope that said stock will be held by my said Executors and by my said Trustee to be distributed to the ultimate beneficiaries under this Will, and neither my Executors nor my said Trustee shall dispose of such stock for the purpose of diversification of investment and neither they [n]or it shall be held liable for any diminution in the value of such stock." Decedent's will further provided that "[t]he foregoing *** shall not prevent my said Executors or my said Trustee from disposing of all or part of the stock of [Kodak] in case there shall be some compelling reason other than diversification of investment for doing so."

Lesson Learned:

Deep-pocket trustees (read: corporate trustees) need to ensure proper language is included in the trusts they administer if the family's desire is to hold on to one or two key stock holdings. The provision I include in my documents is the following:

I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in [XYZ STOCK], or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as "XYZ STOCK"), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ STOCK because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust's portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ STOCK that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called "uncompensated risk") incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ STOCK, and nothing in this paragraph will be interpreted in any manner to limit the Trustee's authority to do so.

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Recent newspaper stories reporting on multimillion dollar lawsuits involving two of the wealthiest families in the United States, the Pritzkers (reported here by the New York Times) and the duPonts (reported here by the Daily News), are interesting for many reasons.

The angle I find most interesting is to ask myself what could have been done to avoid litigation in the first place. Both cases seem to revolve around disputes over the administration of family trust funds (versus a zero-sum dispute over a set pot of money by conflicting parties). Without knowing more about these cases, I'd guess the manner in which the subject trust agreements were drafted is in all likelihood at least partly to blame for the current litigation.

Trust documents that may (either initially or over time) govern huge sums of money and span several family generations must be drafted with (1) enough specificity to accomplish the original founder's goals while (2) also allowing for enough flexibility to work through unforseen future contingencies - without having to go to court.

A poorly drafted trust agreement gives the parties only two choices: do nothing or sue. A properly drafted trust agreement provides multiple options for conflict resolution/avoidance between those two extremes.

As I previously wrote here, the amount of wealth flowing into multi-generational trusts or "dynasty trusts" is skyrocketing (current estimates are in the $100 billion range). In the absence of carefully drafted trust agreements, more trust litigation of the type reported above seems inevitable.

• The following are excerpts from the New York Times article on the Pritzker trust litigation:

The Pritzker clan, [Chicago's] first family of fortune and philanthropy, has been riven by accusations of betrayal, self-dealing and conflicts of interests, according to court records unsealed here Tuesday.

The revelations come halfway through a secretive decade-long process in which the Pritzkers must untangle and liquidate huge holdings, including their signature Hyatt hotel chain and the 60 companies in the $6 billion Marmon Group, in order to divide the assets by 2011. The family fought fiercely to keep the records sealed - and the schism secret - but The Chicago Tribune successfully sued to bring them to public light.

The current fight began in July 2000, months after Jay Pritzker's funeral, when six of the cousins - Dan, James, J. B., John, Linda and Tony - wrote the others questioning "whether the structure of our family enterprise needs to be updated." Quoting "Great Grampa Nicholas," the cousins worried that as the growing clan developed divergent interests, members would "feel unfairly treated, and that strains and tensions may develop among people who should be a loving family."

Their letter said information about the family's fortune was too tightly held and asked for more independence in making charitable gifts. "We do not want a divisive process that leaves hurt feelings," it said.

But when the requests were refused, the cousins hired lawyers, and soon conference rooms were filled with documents. They settled about 18 months later, devising a 10-year plan, and went to court only for a limited proceeding to make the agreement binding on future generations.

(Emphasis added.)

• The following are excerpts from the Daily News article on the duPont trust litigation:

He's a direct descendant of one of America's wealthiest families, but Alexis du Pont de Bie Sr. says he's now "literally destitute and homeless" - at least by du Pont standards.

He grew up in a house with 20 bedrooms and 13 bathrooms, set on a 260-acre estate in Delaware, but now he sleeps on the sofas of kindhearted friends.

He once had a trust fund worth $7 million, but now it's worth only $2.7 million - trimming his monthly allowance to $3,000.

De Bie is suing two management companies, Tredegar Trust Co. and Middleburg Financial Corp., both of Virginia, for mismanaging the trust fund, forcing him to live on a working-class salary.

Neither Tredegar nor Middleburg returned calls for comment. The suit seeks $60 million - $10 million based on what the trust would be worth had it been properly invested and $50 million in punitive damages. It also seeks to have a new trustee appointed.

(Emphasis added.)

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Iraqi Heir Loses Half of Estate, Blames Bank

After years of litigation, plus an appeal to Georgia's Supreme Court (see Namik v. Wachovia Bank of Ga., 612 S.E.2d 270 (Ga. S. Ct. 2005), the Court of Appeals in Georgia recently upheld a $1.1 million judgment against Wachovia Bank of Georgia for failing to avoid estate taxes on trust assets held for a non-resident-alien ("NRA") (see Wachovia Bank of Ga. v. Namik, 620 S.E.2d 470 (Ga. Ct. App. August 25, 2005).

Although the latest appeal in this case was published in August of 2005, the trial took place in 2002. Here's an excerpt from this 2003 newspaper story regarding the facts of the case:

The case tests to what extent a bank can be held responsible for investment decisions that expose an estate to higher taxes. The issue is clouded, however, by the bank's unsuccessful efforts to contact the client, who died in an Iraqi prison.

Issam Namik, son of retired Iraqi general Ibrahim Namik Ali, claims Wachovia mismanaged a living trust his father established with the bank in 1989. The bank, he claims, failed to follow Ali's instructions and unnecessarily exposed the $3 million estate to $1.4 million in estate taxes. In December 2002, a Fulton County probate judge ordered the bank to pay $1.1 million to the estate.

According to documents in the trial and appeals courts, Ali came to Atlanta in the spring of 1989 to visit his son. While he was here, he set up a living trust at Wachovia. Ali bought three certificates of deposit, two for $350,000 and one for $2.65 million.

The bank sent Ali to trust officer Thomas Slaughter, who set up the revocable living trust with the understanding that when the largest CD matured, the proceeds would fund the trust. Ali told the bank he wanted the funds invested only in U.S. government backed investments, and Slaughter set down Ali's instructions in a memo, according to court documents.

The largest CD matured in September 1989, with $2,780,380 rolling into Ali's trust. A new trust officer tried repeatedly to contact Ali, using the phone number and addresses Ali had provided earlier that year, but failed. Namik claimed he ordered the bank to stop trying to contact his father because Ali had been arrested on his return to Iraq and was in danger.

Meanwhile, in order to avoid what it thought would be a 30 percent income tax withholding requirement, Wachovia parked the funds from the Ali trust in a tax-free Fidelity money market account while awaiting further instructions from Ali.

Those instructions never came. Ali, arrested immediately and without explanation upon his return to Iraq, died in custody in May 1990. Namik didn't learn of his father's death until 1992 and did not inform the bank until 1994. Wachovia didn't receive a death certificate until 1995, and that's when the legal struggle began. (Emphasis added.)

Lesson Learned:

U.S. situs assets held by non-resident-aliens ("NRAs") are subject to U.S. estate taxes (see IRC § 2101 and IRC § 2106). Avoiding this tax is so simple U.S. corporate trustees run the risk of getting sued when beneficiaries learn that dad's savings account just got chopped in half to pay easily avoidable U.S. estate taxes (which is what happened to Wachovia in this case). In this case Wachovia learned that short-term U.S. treasury bills (under 183 days) are subject to U.S. estate tax, while long-term U.S. treasury bills are not (see IRS Technical Advice Memorandum 9422001). Any corporate trustee that services NRA clients owes it to itself (and its shareholders) to know these tax situs rules cold.

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