Florida’s adoption of a modified version of the Uniform Trust Code in 2007 was good news for all sorts of reasons. One primary benefit was the UTC’s beefed up litigation defenses for trustees. Two of those defenses are the subject of an interesting article just published in the ABA’s Probate & Property Magazine by Arizona trusts-and-estates litigator Kevin J. Parker entitled Trustee Defenses: Statute of Limitations, Laches, Self-Executing Accounting Release Provisions, and Exculpatory Clauses.
FTC authorizes exculpatory clauses: F.S. 736.1011
If you’re working with a client at the drafting stage and there’s even a hint of future trouble, you need to consider folding an exculpatory clause into the trust agreement. As explained in the Parker article, these clause weren’t always enforced in the past. Under the UTC/FTC, they’re now expressly authorized by statute:
Many trusts include a provision that purports to immunize the trustee from liability to the beneficiaries absent something beyond “ordinary” negligence or breach of fiduciary duty, such as fraud or intentional misconduct.
In the early days, such clauses were held unenforceable as against public policy. The modern rule (reflected in the Restatement and uniform statutes) provides for enforceability of such clauses, with certain limitations, although some state statutes still invalidate such clauses.
Most states deal with exculpatory clauses in trust instruments in one of three ways. Some states follow the Restatement principles. Some states have adopted the Uniform Trust Code. Some states have, by statute, nullified exculpatory clauses as being against public policy.
The Restatement and Uniform Trust Code provisions are similar. Both provide that exculpatory clauses are generally enforceable. Both provide that such clauses are to be strictly construed. Both establish substantive limitations, providing that the exculpatory clause does not relieve the trustee from bad faith, intentional misconduct, or reckless indifference. Both the Restatement and Uniform Trust Code also provide that an exculpatory clause will be unenforceable if insertion of the clause into the trust instrument was itself a breach of fiduciary duty.
When it comes to exculpatory clauses, Florida law tracks the UTC pretty closely, subject to one significant modification. Like UTC 1008, under F.S. 736.1011 an exculpatory clause may relieve a trustee of liability for breaches resulting from ordinary negligence, but not for breaches committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. Under F.S. 736.0105(2) these restrictions are mandatory; you can’t draft around them.
In addition, under F.S. 736.1011 an exculpatory clause is unenforceable if it was inserted as a result of an abuse of a fiduciary or confidential relationship between the trustee and settlor. This latter restriction applies to terms that were drafted or caused to be drafted by the trustee unless the trustee proves that the term is fair and its existence and contents were adequately communicated directly to the settlor.
Here’s where Florida law and the UTC part ways. Unlike the UTC, Florida law adds the requirement that an exculpatory clause drafted by or at the direction of the trustee must be directly communicated to the settlor in order to be enforceable. This requirement is meant to clearly distance Florida law from a statement in the comments to UTC section 1008 that disclosure to the settlor’s attorney would suffice for this purpose.
By the way, here’s an example of a typical FTC exculpation clause:
The exercise or non-exercise of the powers and discretions granted in the Trust by any of my Covered Trustees shall be conclusive on all persons, and they shall not be liable for any act or omission taken or not taken that causes a loss to the Trust or to any beneficiary thereof, unless such act or omission is the result of their bad faith or reckless indifference to the purposes of the Trust or the interests of the beneficiaries. It is my intent that my Covered Trustees shall be relieved of liability to the maximum extent permitted by Section 736.1011 of the Florida Statutes, and, notwithstanding any provision in the Trust to the contrary, the Trust shall be construed in accordance with and to achieve such intent. In furtherance thereof, I hereby confirm that this exculpatory clause was not drafted or caused to be drafted by any of my Covered Trustees, this exculpatory clause’s existence and contents were adequately communicated directly to me, and I believe that this exculpatory clause is fair under the circumstances.
Triggering FTC’s ultra-short limitations periods for lawsuits against trustees: think “limitation notice”: F.S. 736.1008
Another way to protect a trustee from frivolous litigation is to make sure you give a recalcitrant beneficiary the least amount of time possible to sue. Historically limitations periods were unclear in the trust context, and they were usually pro-beneficiary. Under the UTC the tide has turned, with the limitations-period regime now being decidedly pro-trustee. Here’s how the Parker article put it:
The law on the time limits for a beneficiary to bring an action against a trustee has evolved over time. In early cases, the courts were pro-beneficiary, rejecting time limit defenses on various grounds, including that the cause of action was not time barred unless and until a certain period of time had elapsed after termination of the trust or resignation of the trustee, or that statutes of limitation were tolled until full disclosure had been made by the trustee. Some courts held that statutes of limitation did not apply at all, on the theory that claims against trustees were equitable claims and therefore only equitable timeliness defenses (laches, for example) were available to the trustee. The modern rules are more pro-trustee.
The shortest limitations period provided in Florida’s trust code is a mere 6 months! The protective value of a 6-month limitations period can’t be over stated, and Florida trustees are cheating themselves if they don’t take full advantage of this tool.
Here’s how it works: under F.S. 736.1008 the 6-month limitations period applies to actions on matters the trustee has adequately disclosed on a trust accounting or other trust disclosure document when the trustee has provided the beneficiary with a related limitation notice. So getting your limitations notice right is key. Fortunately, the statute provides a sample clause in 2009->Ch0736->Section%201008#0736.1008″>F.S. 736.1008(3)(c):
A limitation notice may but is not required to be in the following form: “An action for breach of trust based on matters disclosed in a trust accounting or other written report of the trustee may be subject to a 6-month statute of limitations from the receipt of the trust accounting or other written report. If you have questions, please consult your attorney.”
Word to the wise: use the statutorily provided sample clause.
For trustees NOT taking advantage of Florida’s ultra-short 6-month limitations period, 2009->Ch0736->Section%201008#0736.1008″>F.S. 736.1008(1)(a) provides that the claims are barred as provided under Florida’s general limitations period rules, which are found in F.S. Ch. 95. Under these rules assume your trustee will be exposed for at least 4 years to the threat of a lawsuit. 6 months vs. 4 years: that’s a huge difference. Which limitations period applies to your trustee may very well be the single most important factor controlling whether or not he gets sued. Yeah, this is a big deal.