3d DCA: Beneficiary’s “best interests” vs. Settlor’s conflicting “intent”: who wins?

Bellamy v. Langfitt, — So.3d —-, 2012 WL 385606 (Fla. 3d DCA February 08, 2012) 

There is a central tension in the law of trusts between the rights of settlors to specify exactly how they want their trusts administered, and the rights of beneficiaries to have their trusts administered in a fair and equitable manner.

The 3d DCA’s opinion in this case crystallizes that tension. After presumably having full access to all of the relevant evidence, the probate judge in this case made a factual determination, concluding it was in the beneficiaries’ best interest to modify the trust by eliminating a clause requiring a corporate trustee at all times. Based on a “no-modification” clause in the trust agreement, the 3d DCA reversed, even if, as the 3d DCA admitted, the trial judge’s ruling was in the best interests of the trust’s beneficiaries.

Does settlor’s “intent” always prevail? NO

Effectuating settlor intent is the primary guiding principle of trust law. What’s often overlooked is that this principle has always been subject to limitations based on competing public policy concerns. For example, a trust clause disinheriting a beneficiary for marrying someone of a certain faith won’t be enforced on public policy grounds, no matter how clearly this outcome violates the settlor’s intent (a topic I previously wrote about here). Another more common example is the spendthrift clause found in most well drafted trust agreements. No matter what the settlor’s intent may be, for public policy reasons, under F.S. 736.0503 some creditors are permitted to bypass the trust’s spendthrift clause, particularly those who supply the beneficiary with “necessaries” (usually food and shelter, but sometimes clothing and transportation, if these are not extravagant). Most jurisdictions, like Florida in F.S. 736.0503, also permit courts to ignore a settlor’s spendthrift clause to satisfy a beneficiary’s child support and alimony payment obligations.

Beneficiary’s “best interests” vs. Settlor’s conflicting “intent”:

Traditionally, strong public policy principles were the only limits placed on settlor intent. That’s changing. Today, a trust beneficiary’s “best interests” are also weighed heavily against, and sometime permitted to trump, a settlor’s contrary intent. Prof. Gallanis recently published an excellent article examining this trend in trust law entitled, The New Direction of American Trust Law. Here’s an excerpt:

In navigating between the extremes of settlor control and beneficiary control, the law of trusts has at times taken a position more favorable to the settlor, and at other times a position more favorable to the beneficiaries. . . . [A]fter decades of favoring the settlor, [American trust law] is moving in a new direction, with a reassertion of the interests and rights of the beneficiaries. I [believe] this new direction is appropriate and welcome.

. . . 

[T]he new direction of American trust law is to rebalance the wishes of the settlor with the ownership rights of the beneficiaries. The administration of the trust must, in the end, be for the benefit of the beneficiaries, and their equitable ownership over the trust assets must be respected.

For trust-administration clauses, such as the mandatory corporate trustee clause at issue in the 3d DCA opinion linked-to above, the new trend in trust law is based on the doctrine of “administrative deviation,” which permits the modification/deletion of problematic trust clauses if they conflict with the best interests of the beneficiaries. This doctrine was codified in section 412(b) of the Uniform Trust Code. Florida adopted its own version of the rule in F.S. 736.04115.

Why can beneficiary “best interest” trump settlor “intent” in these cases? The answer is found in the comment to UTC section 412(b):

Although the settlor is granted considerable latitude in defining the purposes of the trust, the principle that a trust have a purpose which is for the benefit of its beneficiaries precludes unreasonable restrictions on the use of trust property. An owner’s freedom to be capricious about the use of the owner’s own property ends when the property is impressed with a trust for the benefit of others. 

Case Study: 

The estate/trust at the center of the linked-to case above has been litigated for years. In order to resolve one facet of that litigation, the parties entered into a settlement agreement permitting the trust’s corporate trustee to resign without liability and allowing the trust to proceed into the future without a corporate trustee. The no-corporate-trustee element of the deal required modification of the trust agreement, which contained a mandatory corporate-trustee clause.

After presumably considering the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and extrinsic evidence relevant to the proposed modification, the trial judge approved the settlement agreement — even if it was contrary to the settlor’s intended mandatory corporate-trustee clause — because the settlement agreement was fair, reasonable and in the best interests of the trust’s beneficiaries. The 3d DCA reversed based on a no-modification clause included in the trust agreement . . . even if the modification was in the best interest of the beneficiaries:

In Paragraph 18 of the Trust, as restated in 2002, Mr. Bellamy specifically addressed, and prohibited, the judicial modification of the Trust, specifically providing: “[T]o the extent permitted by law, I prohibit a court from modifying the terms of this Trust Agreement under Florida Statutes s. 737.4031(2) or any statute of similar import.” . . . 

In the instant case, the trial court found that the settlement agreement was in the best interest of the beneficiaries and that Paragraph 2 was being modified to allow Merrill Lynch to act as a custodian, as opposed to a trustee, because the “purpose of having a corporate trustee is no longer served because the Trust is substantially administered.” As Paragraph 18 of the Trust prohibits the judicial modification of the Trust, even if it is in the best interest of the beneficiaries, we conclude that the trial court erred by modifying Paragraph 2.

Lesson learned?

Given the general trend in trust law codified in F.S. 736.04115, which weighs heavily the “best interests” of trust beneficiaries vs. strict adherence to settlor intent, settlors and their lawyers can’t assume the clear text of a trust agreement will always be followed.

Usually, for the reasons explained by Prof. Gallanis in The New Direction of American Trust Law, the flexibility injected into irrevocable trusts by F.S. 736.04115 is a good thing. But sometimes a client has very good reasons for making sure his trust is administered exactly the way he’s planned. In those cases a careful estate planner will want to include the type of no-modification clause at the heart of the linked-to case above, which is explicitly sanctioned in F.S. 736.04115(3) as follows:

(3) This section shall not apply to:
. . .
(b) Any trust created after December 31, 2000, if:
. . .
2. The terms of the trust expressly prohibit judicial modification.

Full Disclosure:

I represented one of the parties in this case years ago. Neither I nor anyone at my firm has been involved in this case for years. However, to be clear, this blog post only reflects my personal views in my individual capacity. It does not necessarily represent the views of my law firm or my past clients, and is not sponsored or endorsed by them. The case-specific information contained in this blog post is based solely on the 3d DCA’s opinion, and is provided only for educational purposes and is not intended to provide specific legal advice. No representation is made about the accuracy of the information posted on this blog site. Blog topics may or may not be updated and entries may be out-of-date at the time you view them.