For estate planners planning for litigation-avoidance in the trust context, protecting the trustee will be a clear priority. The goal is to ensure the trustee will be invested with the level of fiduciary independence and financial resources to appropriately manage any threatened and/or filed lawsuits or other coercive tactics by disgruntled heirs. Balanced against the need to protect the trustee, however, must also be concerns for appropriate “checks and balances” on the trustee’s authority – especially if the trust is intended to remain in existence for the lifetime of a surviving spouse or the grantor’s children, and more important still if the trust is intended to remain in existence for multiple generations. The “checks and balances” issue was addressed in the post entitled “Who Picks the Trustee and When Can You Fire Him.”
With respect to protecting the trustee, two clauses can be employed to “tilt” the litigation playing field in favor of the trustee: an “exculpation” clause and a “litigation-defense-fees” clause. An exculpation clause actually expands the trustee’s discretionary authority by narrowing the grounds upon which he or she may be sued. This is accomplished by lowering the standard of care generally applicable to fiduciaries under Florida law. Example:
Exculpation. A fiduciary’s exercise or non-exercise of the powers and discretions granted in this instrument shall be conclusive on all persons, and no fiduciary shall be liable for any act or omission taken or not taken that causes a loss to any trust established under this instrument or to any beneficiary thereof, unless such act or omission is the result of the fiduciary’s bad faith or reckless indifference to the purposes of this instrument or the interests of the beneficiaries.
Under Florida’s new trust code exculpation clauses for anything other than “bad faith” or “reckless indifference to the purposes of the trust or the interests of the beneficiaries” are explicitly sanctioned. See F.S. §736.1011.
The second provision to consider is one that explicitly states that a fiduciary’s litigation costs will be “advanced” in the event of litigation. Essentially, the beneficiary would thus be paying the fiduciary’s defense costs up until a court rules against the fiduciary. Under Florida law a trustee involved in any litigation including breach-of-trust allegations must obtain prior court approval to pay legal defense fees. F.S. §737.403(2)(e). The following clause would essentially override the default rule in Florida. Example:
Legal Defense Indemnification. In the absence of bad faith or reckless indifference to the purposes of this instrument or the interests of the beneficiaries, the fiduciary shall be indemnified from the trust for any and all liability, cost, and expense incurred by the fiduciary by reason of any act or omission taken or not taken on behalf of any trust hereunder. In furtherance thereof, in the case of litigation expenses, including attorney’s fees, the fiduciary shall be indemnified for such expenses as they are incurred, which expenses the fiduciary may pay out of the trust or trusts as to which the act or omission is alleged to have been taken or not taken. The fiduciary’s right to indemnification hereunder shall not await the resolution of the litigation or a determination that the fiduciary is entitled to indemnification under this paragraph; provided, however, that if a court of competent jurisdiction subsequently determines that the fiduciary engaged in intentional misconduct or gross negligence, the fiduciary shall repay to the trust all costs and expenses previously indemnified hereunder.
A recent Miami-Dade case provides an example of how a trustee may find himself bearing the expenses of litigation in the absence of proper planning. In Brigham v. Brigham, 2006 WL 1479813, 31 Fla. L. Weekly D1517 (Fla. 3d DCA 2006), the Third DCA articulated the rule in Florida as follows:
Appellees brought suit against Appellants in their trust roles and as individuals for trust mismanagement. Because Appellants defended against individual liability, their personal interests conflicted with their position as trustees. See Shriner v. Dyer, 462 So.2d 1122, 1124 (Fla. 4th DCA 1984). When a trustee’s individual interests conflict with his or her duties to a trust, court approval is necessary before a trustee can use trust funds to pay his or her own attorneys’ fees. § 737.403, Fla. Stat. (2003).
This rule has been carried over into Florida’s new trust code. See F.S. §736.802(10).