Edwards v. Maxwell, — So.3d —-, 2017 WL 1201873 (Fla. 1st DCA March 31, 2017)

To understand this case you need to keep two basic points in mind.

First, adoptions are sometimes used to “add” individuals to the class of eligible beneficiaries of  what are otherwise closed, irrevocable trusts (see here, here). According to a rule of construction found in our probate code (F.S. 732.608), adoptees are presumed to be descendants of their adoptive parents for inheritance purposes. When this rule’s applied to a trust benefiting someone’s descendants as a class (i.e., without specifically naming them), that class of beneficiaries is presumed to include adoptees.

Second, the “contingent” nature of the trusts at issue in this case determined the outcome. At the center of this case are three multi-generational trusts designed to be discretionary in nature, as in the trust beneficiaries don’t have any fixed or vested property rights. If, when and how a discretionary beneficiary gets access to any of his trust’s assets (if ever) is 100% contingent on the trustee’s independent judgment. In Florida the statutory test for whether or not you have a discretionary trust is found in F.S. 736.0504. Multi-generational discretionary trusts (often referred to as “dynasty” trusts) are the darlings of the estate planning world (see here); over the long term they deliver unbeatable tax savings and creditor protection benefits for most families (see here; here).

Case Study:

This case involves three irrevocable discretionary trusts created by the great-grandparents of John Edwards, who in 2004 adopted a son named Brindley Kuiper, which had the legal effect of adding Kuiper to the class of eligible beneficiaries for these trusts. Edwards’ biological son, Ryan Maxwell, a pre-existing member of the class of eligible beneficiaries for these same trusts, filed suit in 2014 claiming the adoption was a sham that diluted his stake in the family trusts. Maxwell argued he should have received notice of the adoption in 2004, which would have given him an opportunity to fight it in court. The trial court agreed and vacated Kuiper’s adoption order.

Not so fast said the 1st DCA. Because discretionary trust beneficiaries don’t have any fixed or vested property rights in their trusts, Maxwell can’t say for sure he would have been any better off if Kuiper’s adoption had never happened. And because he can’t be certain Kuiper’s adoption actually had an economic impact on him, Maxwell didn’t have legal standing to challenge it in court. No standing = reversal, so saith the 1st DCA:

In this case, Mr. Maxwell lacks standing to set aside the 2004 adoption because he wasn’t entitled to notice in the first place. He had no direct, immediate, and financial interest in the adoption. The interests Mr. Maxwell possesses as an eligible beneficiary to three family trusts are all contingent. See Stefanos, 673 So.2d at 13; Dennis v. Kline, 120 So.3d 11, 22-23 (Fla. 4th DCA 2013). The trusts are solely administered at the discretion of trustees. And Mr. Maxwell has no direct or immediate right to funds in the trust or control over trust-disbursement decisions. The trustees possess unilateral discretion to determine, for instance, if disbursements are made, when disbursements are made, and to whom (among the eligible beneficiaries) disbursements are made. See Blechman v. Estate of Blechman, 160 So.3d 152, 159 (Fla. 4th DCA 2015) (defining a contingent interest partly on the basis of whether it involves an event in the future, which may never happen and which lies entirely outside the control of the beneficiary to bring about with certainty). Because Mr. Maxwell does not possess direct, financial, and immediate interests in the trusts, he had no concomitant right to receive notice about the adoption that added Mr. Kuiper as an eligible beneficiary. And he cannot now have the adoption order vacated.

What’s the takeaway?

Being the beneficiary of a discretionary trust is usually nothing but upside. But you can’t have it both ways. If you can’t be taxed and your creditors can’t get at your trust assets because, as a discretionary beneficiary, you don’t have any fixed or vested property rights, then you can’t turn around and sue someone for diluting your non-existent property rights.