One of the basic building blocks of modern estate planning in Florida is the “pour over” will/revocable trust combination. Which means it’s extremely common to find yourself administering a probate estate in which your primary — if not only beneficiary — is a residuary trust. In those cases, the first question you need to ask yourself is whether the trustee of the trust or a beneficiary of the trust is going to be the “beneficiary” or “interested person” you need to account to. In other words, does the probate look through rule apply?
What’s the probate look through rule and why should I care?
You can’t administer a probate estate unless you know who you’re supposed to be accounting to. Why? Because that answer determines, among other things, who are the estate’s beneficiaries entitled to receive a copy of the notice of administration (F.S. 733.212, Fla. Prob. R. 5.240) and inventory (Fla. Prob. R. 5.340), as well as who are the estate’s interested persons entitled to service of interim accountings (Fla. Prob. R. 5.345) and the petition for discharge and final accounting (Fla. Prob. R. 5.400), as well as who has standing to object to the PR’s fees (F.S. 733.617(7)) and the PR’s attorney’s fees (F.S. 733.6171(5)). So yeah, it’s a big deal.
F.S. 731.201(2) tells us that in “the case of a devise to an existing trust … the trustee is a beneficiary of the estate … [and] the beneficiary of the trust is not a beneficiary of the estate …” In other words, you don’t look through the trustee to the beneficiaries, you only account to the trustee.
However, if the personal representative and the trustee are the same person, there’s an obvious conflict of interest. In those cases, we’re told you must look through the trustee and account directly to the trust’s beneficiaries. Here’s the operative text in F.S. 731.201(2):
However, if each trustee is also a personal representative of the estate, each qualified beneficiary of the trust as defined in s. 736.0103 shall be regarded as a beneficiary of the estate.
This look through rule’s at the heart of the Mukamal case.
Duff-Esformes v. Mukamal, — So.3d —-, 2021 WL 5499686 (Fla. 3d DCA November 24, 2021):
This case involved a pour over will and revocable trust. The same two individuals served as personal representatives of the estate and trustees of the trust. The decedent’s surviving spouse received some kind of pre-residuary devise that had been fully satisfied (the opinion doesn’t give specifics), and she was also a lifetime income beneficiary of her husband’s trust.
The personal representatives petitioned for $91,035.14 in attorney’s fees and a $23,650.28 payment to themselves directly as trustees. When surviving spouse objected, the probate judge struck her objections for lack of standing because she’d already received her full pre-residuary distribution from the estate. What this ruling completely ignored was surviving spouse’s ongoing status as an income beneficiary of the trust.
In other words, surviving spouse wore two hats: pre-residuary devisee of the probate estate and income beneficiary of the trust. Focus on one to the exclusion of the other, and you’ve got yourself a reversal on appeal. Here’s why.
Is the income beneficiary of a residuary trust an “interested person” of the estate? YES
The term “interested person” excludes a beneficiary who’s received her complete distribution. Here’s the operative text in F.S. 731.201(23):
(23) “Interested person” means any person who may reasonably be expected to be affected by the outcome of the particular proceeding involved. … The term does not include a beneficiary who has received complete distribution.
So as a pre-residuary devisee, surviving spouse is definitely not an interested person (she’s “received [her] complete distribution”). But as an income beneficiary of the residuary trust, she clearly has an ongoing economic stake in the amount of funds going into her trust, which loops her back into “interested person” status for purposes of the probate proceeding — with standing to object. So saith the 3d DCA:
By virtue of her status as lifetime income beneficiary of the residuary Trust, Duff-Esformes is “expected to be affected by the outcome” of the fee petition. Every dollar the co-personal representatives expend from the administration of the Estate will reduce her resultant income from the residuary Trust. As such, Duff-Esformes qualifies as an “interested person” under section 731.201(23) with standing to contest the petitioned increase in compensation.
Is the income beneficiary of a residuary trust a “beneficiary” of the probate estate? YES … if the look through rule applies.
For probate administration purposes, the term “beneficiary” excludes a beneficiary who’s received her complete distribution of the estate. Here’s the operative text in F.S. 731.201(2):
(2) “Beneficiary” means heir at law in an intestate estate and devisee in a testate estate. The term “beneficiary” does not apply to an heir at law or a devisee after that person’s interest in the estate has been satisfied.
So as a pre-residuary devisee, surviving spouse is clearly not a beneficiary (she’s “received [her] complete distribution”). But if, as in this case, the look through rule applies because the same individuals are serving as both personal representatives and trustees, surviving spouse (as beneficiary of the trust) is looped back into “beneficiary” status for purposes of the probate proceeding — with standing to object. So saith the 3d DCA:
Importantly, the statute carves out an exception for persons to be regarded as beneficiaries in circumstances where “each trustee is also a personal representative of the estate.” In the instant case, both co-personal representatives, Mukamal and Appel, are also co-trustees of the Trust. As such, Duff-Esformes, as a qualified beneficiary of the Trust entitled to lifetime distributions, must be “regarded as a beneficiary” of the Estate even though her interest in the Estate has been satisfied.
So what’s the takeaway?
F. Scott Fitzgerald famously wrote: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” This case is a good test of that maxim. Can we, as probate practitioners, function while holding the following two opposing ideas in our minds at the same time: the same person can simultaneously be both a beneficiary of the estate who’s received her entire distribution (as a pre-residuary devisee) and a beneficiary of the estate who will never receive her entire distribution (as the lifetime income beneficiary of a residuary trust).
Also, you can’t make sense of Florida’s Probate Code unless you approach it as a cohesive body of law that’s meant to be read together. Pick and choose standalone clauses here and there, and you might cobble together a winning argument before a busy trial court judge, but you’re going to run into problems on appeal. That’s what happened here. So saith the 3d DCA:
We find that the co-personal representatives’ argument … violate[d] the axiomatic principle “that all parts of a statute must be read together in order to achieve a consistent whole.” Forsythe v. Longboat Key Beach Erosion Control Dist., 604 So. 2d 452, 455 (Fla. 1992).