Driven partly by inter-state competition for a bigger slice of the lucrative family trust business, and partly by developments in our own courts, 2014 was a busy legislative season on the trusts and estates front. Here’s my summary:
1. New “Florida Family Trust Company Act”:
As reported here by the WSJ, increasingly the über wealthy are setting up their own family-owned trust companies to handle their trust assets. To maintain its competitive edge in the trust world, Florida needed to react to this new trend, and it has. With the passage of CS/SB 1238, effective October 1, 2015 we now have a statutory framework tailored specifically for family-owned private trust companies. The new legislation is contained in F.S. Chapter 662 and is called the “Florida Family Trust Company Act.” Here’s an excerpt from the legislative Staff Analysis summarizing the new act:
CS/SB 1238 creates “Family Trust Companies” in Florida. Trust companies are for-profit business organizations that are authorized to engage in trust business and to act as a fiduciary for the general public. Some states allow families to form and operate private or family trust companies that provide trust services similar to those that can be provided by an individual trustee or a financial institution. However these family trust companies are owned exclusively by family members and may not provide fiduciary services to the public. These private, family trust companies are generally formed to manage the wealth of high net-worth families in lieu of traditional individual or institutional trustee arrangements for a variety of personal, investment, regulatory, and tax reasons. Currently, there are no Florida statutes authorizing the formation of family trust companies, licensed family trust companies, and foreign licensed family trust companies.
The bill authorizes families to form and operate any of these three family trust companies in Florida, subject to varying regulatory requirements, including a license or registration with the Office of Financial Regulation (OFR), maintenance of minimum capital accounts with a principal place of business in Florida, and certain reporting requirements. This bill specifies the powers of family trust companies such as serving as a trustee of trusts held for the benefit of family members and providing fiduciary, investment advisory, and wealth management services to a family. A family trust company cannot perform these services for the general public.
This bill authorizes the OFR to investigate applications for licensure or registration, requires annual renewals and other regulatory filings from licensees and registrants, and authorizes the OFR to conduct periodic examinations of family trust companies, licensed family trust companies, and foreign licensed family trust companies.
This bill is effective October 1, 2015, if the linked public records bill or similar legislation is adopted in the same legislative session.
2. Florida improves its “directed trust” statute:
This legislation is another example of Florida reacting to competitive market forces (which is a good thing!). The subject is “directed trusts”, a trust-administration tool that’s much in demand (as reported here by the WSJ), which Florida first provided for by statute in 2008 with amendments to F.S. 736.0703(9) (as I reported here). With the passage of CS/CS/HB 405, effective July 1, 2014 Florida’s taken another crack at improving its directed-trust statute. Here’s an excerpt from the legislative Staff Analysis explaining the new legislation:
The bill amends s. 736.0703(9), F.S., to allow drafting of a trust document that fully exonerates an excluded cotrustee. The bill enhances the previously existing exoneration of an excluded cotrustee by fully removing any duty of inquiry. The excluded cotrustee is exonerated under the new provision even if he or she has actual knowledge of willful misconduct by the included cotrustee, and regardless of the information available to the excluded cotrustee. The bill provides that the excluded cotrustee is exonerated from liability for following the direction of the included cotrustee, except in cases of its own willful misconduct.
So how does Florida’s revised directed-trust statute measure up? Is the latest version as good as – or better than – that of Delaware or Nevada? Only time will tell. In the meantime, we can expect to see a good amount of commentary, including the excellent presentation prepared by Fiduciary Trust International of the South entitled Directed Trusts: Delaware v. Florida.
3. Greater protection for life insurance proceeds payable to trusts:
In 2012 I wrote here about the Morey v. Everbank decision, in which the 1st DCA held that loose language contained in the decedent’s revocable trust resulted in a waiver of the creditor protection usually afforded to life insurance proceeds under F.S. 222.13. Oops! That decision caused a whole lot of heartburn for Florida estate planners, which didn’t waste any time getting new legislation passed (CS/CB 998) aimed at avoiding a repeat of this case in the future. Here’s an excerpt from the legislative Staff Analysis explaining the new legislation:
These . . . changes are a response to the 2012 Morey v. Everbank decision . . . and are intended to clarify the circumstances under which death benefits, such as life insurance, payable to a trust are exempt from any obligation to pay the expenses of the administration and obligations of the decedent’s estate.
Section 5 amends s. 733.808, F.S., to provide that a waiver of the statutory exemption, protecting death benefits from claims of creditors or the decedent’s estate, must be explicit. It clarifies that a general provision directing the trustee to pay all debts does not waive the statutory exemption from creditor claims for death benefits paid to the trustee.Section 6 provides that the changes to s. 733.808, F.S., are intended to clarify existing law, are remedial in nature, and apply retroactively without regard to the date of the decedent’s death.
Section 9 amends s. 736.05053, F.S., and is designed to insure that a trustee, paying the expenses of administration and obligations of the settlor’s estate, cannot use the death benefits described in s. 733.808(1), (2), or (3), F.S., unless the settlor specifically waived the prohibition of the use of those benefits in accordance with s. 733.808(4), F.S. If the settlor desires to waive the exemption, there must be a specific waiver. This language establishes that a general direction to pay all of the settlor’s debts is not sufficient.Section 10 provides that the changes made to s. 736.05053, F.S., are intended to clarify existing law, are remedial in nature, and apply retroactively without regard to the date of the settlor’s death.
4. Synchronizing Florida’s probate and trust code “antilapse” provisions:
As I’ve previously discussed here, at common law, a “lapse” occurs when the beneficiary or the “devisee” under a will predeceases the testator, invalidating the gift. The gift would instead revert to the residuary estate or be granted under the law of intestate succession. Florida enacted F.S. 732.603, an anti-lapse statute, to ameliorate the potentially harsh effects of this common law rule. Rather than lapsing, gifts covered by the statute go to a pre-deceased beneficiary’s descendants. There’s a similar, but not identical, antilapse provision contained in our trust code (F.S. 736.1106). There’s no rhyme or reason to the difference between these two statutes, resulting in arbitrarily different outcomes depending on whether the dispositive document happens to be a will or revocable trust. In CS/CB 998, F.S. 736.1106 is amended to make the trust code and probate code provisions consistent with each other. Here’s an excerpt from the legislative Staff Analysis explaining the new legislation:
Presently, the antilapse statute of the Trust Code saves all devises without regard to the familial relationship between the recipient and the creator of the gift. This was apparently done for administrative convenience. This approach differs from the Probate Code and what was an earlier version of the Trust Code. It often results in unintended consequences and litigation under the Trust Code.
. . .
The purpose of this section is to make the antilapse statute of the Trust Code consistent with the antilapse statute of the Probate Code in the area of outright devises to persons who do not survive the settlor of a revocable trust or the testator of a testamentary trust. The bill amends the antilapse provisions of the Trust Code to cause an outright devise to a deceased beneficiary to lapse unless the beneficiary was a grandparent, or lineal descendant of a grandparent of the settlor of a revocable trust, or the testator of a testamentary trust. It is the opinion of some practitioners of probate and trust law that people enter into trust arrangements thinking that a trust devise operates the same as a will. When the results under the terms of a trust are not what the individuals had hoped for litigation ensues.This provision amending s. 736.1106, F.S., applies to trusts that become irrevocable after June 30, 2014.
5. Synchronizing Florida’s probate and trust code provisions as to the burden of proof in will and trust contests:
The Florida probate code and the Florida trust code both provide that a will, trust, or revocation of a will or trust, is void if it is procured by fraud, duress, mistake, or undue influence. Both codes also specify grounds for a will or trust contest that challenges the validity of the document. But only the probate code specifies which party bears the burden of proof in a contest. There’s no equivalent statute in our trust code. In CS/CB 998, that gap is filled by new statutory language clarifying who bears the burden of proof in a trust contest. Here’s an excerpt from the legislative Staff Analysis explaining the new legislation:
Sections 3 and 7 amends ss. 733.107, F.S., and 736.0207, F.S., to clarify that the party contesting the validity of a trust or seeking to revoke a trust, in whole or in part, bears the burden of establishing the grounds for invalidity on all issues. Because the current trust code is silent on this matter, these changes may provide clarity to the courts and attorneys involved in trust disputes as to which party bears the burden of proof. Unlike a will contest, these changes place the complete burden on the contestant.
Section 4 of the bill provides that the changes to the burden shifting provisions in s. 733.107, F.S., are intended to clarify existing law, are remedial in nature, and apply retroactively to proceedings pending on or before the bill becomes law and all cases that are begun on or after the effective date of this bill.
Section 8 provides that the changes made to s. 736.0207, F.S., trusts contests, apply to all cases commenced on or after the effective date of the act. The effective date of the act is “upon becoming a law.”
6. Pre-2013 gifts to lawyers and other disqualified persons “grandfathered” in by statute:
The common law rule in Florida was that gifts made to lawyers in violation of ethics Rule 4-1.8(c) weren’t void per se, but they did trigger a rebuttable presumption of undue influence by the drafting lawyer. If lawyer couldn’t rebut the presumption, the gift was then voided (see here, here). In other words, under our prior common law improper gifts to lawyers weren’t automatically void, but they were voidable. As I reported here, in 2013 Florida adopted F.S. 732.806, effectively reversing the common-law rule. Improper client gifts are now automatically void as a matter of law, which should make it less expensive and time consuming for parties contesting such gifts to have them set aside. Unfortunately, the new statute didn’t make clear it only applied to prospective gifts, not gifts made prior to adoption of the new statute in 2013. CS/CB 998 fixes that glitch. Here’s an excerpt from the legislative Staff Analysis explaining the new legislation:
Section 732.806, F.S., generally prohibits an attorney or any of the attorney’s relatives from being the beneficiary of a gift in a written instrument drafted by the attorney. The bill provides that the prohibition applies to written instruments executed on or after October 1, 2013. This effectively grandfathers such gifts in written instruments preexisting the effective date of the 2013 legislation. The bill further provides that this change is intended to clarify existing law and is remedial in nature.