4th DCA: If you’re the successor trustee of a revocable trust whose settlor is alive but mentally incapacitated, do you owe any duties to the remainder beneficiaries?

Brundage v. Bank of America, Trustee, — So.2d —-, 2008 WL 4722970 (Fla. 4th DCA Oct 29, 2008)

Incapacitated Settlor of Revocable Trust:

Florida’s Trust Code is clear, while a trust is revocable, the duties of the trustee are owed exclusively to the settlor [F.S. 736.0603]. Equally important, a trustee will not be held responsible for actions consented to by the settlor of a revocable trust [736.1012]. But what happens if the revocable trust’s settlor becomes mentally incapacitated? That’s the most interesting issue addressed in the linked-to opinion.

In this case the successor co-trustees of a revocable trust were sued by the trust’s remainder beneficiaries following the settlor’s death.  Prior to her death, a doctor had examined the settlor and concluded that she was not competent to manage her affairs.  The trial court dismissed the complaint against the successor trustees on the grounds that they didn’t owe the remainder beneficiaries any duties during the settlor’s life (which is when the alleged wrongful conduct took place). Wrong answer said the 4th DCA, for the following reason:

As settlor of her own revocable trust of which she was the sole beneficiary until her death, Dorothy reserved to herself the sole power to change beneficiaries or revoke her trust at any time. “[T]he beneficiaries of [the] trust other than [the settler] … do not come into possession of any of the trust property until the event of [the settlor’s] death, and even this interest is contingent upon her not exercising her power to revoke. Since she is the sole beneficiary of the trust during her lifetime, she has the absolute right to call the trust to an end and distribute the trust property in any way she wishes.” Fla. Nat’l Bank of Palm Beach County v. Genova, 460 So.2d 895, 897 (Fla.1984) (emphasis omitted). The interest of the Brundages did not vest until Dorothy’s death. See In re Johnson’s Estate, 397 So.2d 970 (Fla. 4th DCA 1981). It follows that during the settlor/beneficiary’s lifetime, a trustee owes a fiduciary duty to the settlor/beneficiary and not the remainder beneficiaries, who not only have no vested interest but whose contingent interest may be divested by the settlor prior to her death.

We have found no case which enforces on a trustee a duty owed to a contingent beneficiary of a revocable trust. However, once the interest of the contingent beneficiary vests upon the death of the settlor, the beneficiary may sue for breach of a duty that the trustee owed to the settlor/beneficiary which was breached during the lifetime of the settlor and subsequently affects the interest of the vested beneficiary. Smith v. Bank of Clearwater, 479 So.2d 755 (Fla. 2d DCA 1985), illustrates this principle. In Smith the court held that a contingent remainderman of a trust, whose interest vested with the death of the lifetime beneficiary, had standing to sue for mismanagement of trust assets during the lifetime of the income beneficiary, because such mismanagement diminished the value of the trust assets to which the remainderman was entitled. The trustee owed the lifetime beneficiary the duty to properly manage the assets of the trust, and a breach of that duty could be enforced by the remainderman. Cf. Siegel v. Novak, 920 So.2d 89 (Fla. 4th DCA 2006) (applying New York law and reaching a similar result). 

How could the successor trustees have avoided this trap?

My idea: focus on obtaining informed consent for the trustee’s actions in spite of the settlor’s apparent mental incapacity. One way to do that in this context is through the appointment of a guardian of the property for the settlor. Once you have a court-appointed guardian, you’ve put in place the foundation for informed consent. Building on that foundation, any trust accounting you send the guardian will then bind the settlor/ward, and if the trustees want to be extra safe, they can demand that the guardian sign consents on behalf of the settlor/ward for any out-of-the-ordinary estate planning actions involving the revocable trust [F.S. 736.0303(1), F.S. 736.0813(3)]. If the defendant trustees in this case had coupled these protective measures with a trust-accounting "limitations notice" triggering the shortened 6-month statute of limitations period [F.S. 736.1008(2)], my guess is that we wouldn’t be reading about them in the linked-to opinion.

How does a stock split affect a specific bequest of stock?

Stock splits, mergers, consolidations, etc. have been causing trusts-and-estates lawyers and their clients headaches for generations, certainly more than enough time to develop a body of law dealing with that issue. Here’s how the 4th DCA summarized Florida common law on this point, which has been codified in F.S. 736.1107:

Florida follows the general rule that where a will bequeaths stock to a beneficiary and the stock splits, because the split is a mere change in form and not in substance, a beneficiary is entitled to the shares generated by stock splits that occur between the date of execution and demise. See In re Vail’s Estate, 67 So.2d 665, 667 (Fla.1953). Where the stock devise made in the will is no longer in the estate at the time of the testators death, the gift is considered adeemed. In re Estate of Walters, 700 So.2d 434, 436 (Fla. 4th DCA 1997). For securities, however, this issue is controlled by [F.S. 736.1107]. That statute codifies the rule of ademption and provides that gifts of securities are limited to the securities owned by the trust at the time of death:

Change in securities; accessions; non-ademption

A gift of specific securities, rather than their equivalent value, shall entitle the beneficiary only to:

(1) As much of the gift securities of the same issuer held by the trust estate at the time of the occurrence of the event entitling the beneficiary to distribution.

§ 736.1107, Fla. Stat. As the trust did not hold any more than 54,000 shares of AHP stock on the date of Dorothy’s death, the event entitling the beneficiaries to the distribution, the Brundages cannot claim a greater share. They argue that the court should have considered Dorothy’s intent with respect to the distribution of the stock before ruling on the legal effect of the transfer. The statute, however, does not require or allow for an inquiry into the intent of the testator. It creates a clear rule of ademption where the trust does not hold the securities at the date of death.