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2018 was another interesting legislative year for those of us toiling in the vineyards as trusts and estates lawyers. Here’s my summary of what happened on the probate and trust front. I’ll post a separate summary of 2018’s guardianship legislation.

[1] Waiver of homestead rights through deed:

Under Florida law a surviving spouse’s testamentary rights in the couple’s marital homestead residence are spelled out in Art. X, § 4(c) of the Florida Constitution and F.S. 732.4015(1). Spouses are free to contractually waive their homestead rights, and often do for estate planning purposes. The statutory requirements governing those waivers are found in F.S. 732.702. These waivers can be incorporated into any kind of “written contract, agreement, or waiver,” including a deed.

However, deeds often include all sorts of antiquated catchall phrases lawyers have been using for centuries, like “tenements, hereditaments, and appurtenances,” that most of us would never guess include spousal homestead rights. And yet, a pair of appellate decisions concluded that these boilerplate phrases still matter, which means they were enough to constitute homestead waivers under F.S. 732.702. The first decision was published in 2011 by the 3d DCA in Habeeb v. Linder (which I wrote about here), and the second decision was published in 2014 by the 4th DCA in Stone v. Stone (which I wrote about here).

Homestead rights are a big deal. If someone’s going to waive those rights, it shouldn’t happen by accident, like by signing a joint deed that never mentions the word “homestead”. To make sure that doesn’t happen, CS/SB 512 created new F.S. 732.7025, which clarifies when a person knowingly waives homestead rights in a deed. Under the new statute, if you’re going to waive your homestead rights by signing a deed, you need to explicitly say so by including the following or substantially similar language in the deed: “By executing or joining this deed, I intend to waive homestead rights that would otherwise prevent my spouse from devising the homestead property described in this deed to someone other than me.”

For more on the backstory to this statute you’ll want to read the Legislative Staff Analysis.

[2] Beneficiary “best interests” vs. Settlor “intent”: Who wins?

Traditionally, strong public policy principles were the only limits placed on settlor intent (inter-faith marriage clauses are classic example, see here). 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. For an excellent examination of this trend, sometimes referred to as the “benefit-of-the-beneficiary rule,” you’ll want to read The New Direction of American Trust Law. Here’s an excerpt:

There is a central tension in the law of trusts between the rights of the donor and the rights of the beneficiaries. On the one hand, the position of the donor seems paramount. The donor—known in trust law as the “settlor”—establishes the terms of the trust and, therefore, has the power to determine the extent of the beneficiaries’ equitable interests and the power to control the actions of the trustee in the trust’s administration. Indeed, the organizing principle of the law of donative transfers, as stated in the Restatement (Third) of Property: Wills and Other Donative Transfers, is that the “donor’s intention is given effect to the maximum extent allowed by law.” On the other hand, the position of the beneficiaries also has a claim to supremacy. Only the beneficiaries hold the ownership interests in the trust, not the settlor. Of course, it sometimes happens that the settlor is also a beneficiary, but here we are speaking of the settlor as such. The beneficiaries, not the settlor, have the equitable ownership of the trust assets, and this would seem to limit the power of the settlor to control the trust. And indeed the Restatement (Third) of Trusts emphasizes that “a private trust, its terms, and its administration must be for the benefit of its beneficiaries.”

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.

HB 413 tilts the scales in Florida decidedly in favor of settlor intent, which may or may not be the best public policy, but it certainly clarifies things for our courts and the litigants appearing before them. The bill amends sections of our Trust Code to remove current language that a trust and its terms be administered for the benefit of the beneficiaries. The effect is to establish the settlor’s intent as the guiding principle with respect to the terms, interests, and purposes of a trust. Specifically:

  • The definition of “interests of the beneficiaries” under s. 736.0103(11), F.S. is amended to mean the beneficial interests intended by the settlor as provided under the terms of the trust.
  • The exception to the general rule that the terms of the trust prevail over provisions of the Code contained in s. 736.0105(2)(c), F.S., is amended to remove the mandatory requirement that the terms of the trust be for the benefit of the beneficiaries.
  • Section 736.0404, F.S., is likewise amended to remove the requirement that the trust and its terms be for the benefit of the beneficiaries. As amended, a trust’s purpose only needs to be lawful, not contrary to public policy, and possible to achieve.

For a better understanding of the policy arguments in favor of this push against the “benefit-of-the-beneficiary rule,” you’ll want to read Benefit-of-the-Beneficiary Rule. Here’s an excerpt:

The Benefit-of-the-Beneficiary Rule narrowly defines “benefit” to mean wealth maximization. This wealth maximization theory, combined with modern portfolio theory endorsed by the drafters of the rule, discounts other reasons why clients create trusts. Clients may create trusts that not only financially benefit the beneficiaries, but also personally and perhaps spiritually support the beneficiaries. There are many worthwhile goals in creating trusts other than wealth maximization. As a result, trust provisions often reflect both the settlor’s ideas about investment strategies and the settlor’s moral or religious beliefs. Settlors may also create provisions that incentivize beneficiaries or merely create a fallback cushion. …

Likely, the biggest effect of the rule—when enough practitioners are aware of it—is that settlors will simply avoid it by establishing trusts in settlor-friendly jurisdictions. With a rule that so drastically changes our historic trust law, states vying for trust business will market themselves and attract settlors who wish to avoid the rule. Essentially, the Uniform Law Commission, whose central mission is making states’ laws uniform, by including the rule in the UTC, undermines its very mission as states will likely reject the rule.

“Glitch” warning:

On the other hand, HB 413 leaves untouched the single most powerful tool available to beneficiaries seeking to have trust agreements modified to better address their interests. That provision is found in F.S. 736.04115(1), which allows our courts to modify otherwise irrevocable trusts “if compliance with the terms of a trust is not in the best interests of the beneficiaries.” The public policy underlying this provision is best stated in the following commentary to s. 412 of the Uniform Trust Code:

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. See Restatement (Second) of Trusts Section 124 cmt. g (1959). Thus, attempts to impose unreasonable restrictions on the use of trust property will fail. See Restatement (Third) of Trusts Section 27 Reporter’s Notes to cmt. b (Tentative Draft No. 2, approved 1999).

I’ve been told informally that the folks who worked on the legislation emphasizing settlor intent in HB 413 never intended to invalidate F.S. 736.04115(1), and that the apparent contradictions were unintentional. Hopefully this will all be cleared up in a future “glitch” bill.

But then again, often the easiest way to amend an irrevocable trust to address valid beneficiary concerns is to just “decant” into a new trust with new and improved terms, which avoids having to go to court altogether. And guess what? Florida’s decanting statute is now broader than ever.

[3] Decanting irrevocable trusts just got easier in Florida:

If you’re working with an irrevocable trust that needs fixing for some reason, your first thought should be to simply re-write the trust by using Florida’s “decanting” statute (F.S. 736.04117). Decanting lets trustees re-write irrevocable trust agreements by figuratively pouring the assets from an old trust into a new one. Decanting is all the rage in estate planning circles, as it should be: it’s a legislatively-sanctioned way to privately re-write an irrevocable trust without going through the costs and delays inherent to a judicial modification proceeding. (Yes, this all gets done out of court.) For a solid general introduction to decanting you’ll want to read Decanting is Not Just for Sommeliers.

Our old statute was great, but it had one major limitation: you could only use it if the trustee’s power to invade principal was “absolute”. In other words, you couldn’t decant if the trustee’s power to distribute trust principal was limited by an ascertainable standard, such as the classic health, education, maintenance, and support (“HEMS”) standard. HB 413 gets rid of that limitation, and basically overhauls the rest of the statute to make it work better for all concerned. For those of you hoping to make sense of the new and improved version of our decanting statute, you’ll want to read the bill’s Legislative Staff Analysis, which provides the following summary:

The bill substantially amends s. 736.04117, F.S., related to the trustee’s power to invade principal and expands the ability of the trustee to decant when granted less than absolute power. The bill:

  1. Authorizes a trustee to decant principal to a second trust pursuant to a power to distribute that is not absolute. When such power is not absolute, the trustee’s decanting authority is restricted so that each beneficiary of the first trust must have a substantially similar interest in the second trust. The bill provides a definition for “substantially similar” to mean, in relevant part, that “there is no material change in a beneficiary’s beneficial interest or in the power to make distributions and that the power to make a distribution under a second trust for the benefit of a beneficiary who is an individual is substantially similar to the power under the first trust to make a distribution directly to the beneficiary.”
  2. Authorizes a trustee to decant principal to a supplemental needs trust where a beneficiary is disabled. The trustee may take this action regardless of an absolute discretionary power or discretionary power limited to an ascertainable standard. The bill provides a definition for “supplemental needs trust” to mean a trust that the authorized trustee believes would not be considered a resource for purposes of determining whether the beneficiary who has a disability is eligible for governmental benefits.
  3. Expands the notice requirements under the state’s current decanting statute. Specifically, notice is required to be provided to the settlor of the first trust, if the first trust was not a grantor trust and the second trust will be a grantor trust, all trustees of the first trust, and any person with the power to remove the authorized trustee of the first trust. Moreover, the notice must include copies of both the first and second trust instruments.

In addition to these major changes, the bill:

  • Provides definitions for purposes of interpreting and applying the provisions of s. 736.04117, F.S., including absolute power, authorized trustee, beneficiary with a disability, current beneficiary, government benefits, internal revenue code, power of appointment, presently exercisable general power of appointment, substantially similar, supplemental needs trust, and vested interest.
  • Provides that, with respect to permissible or impermissible modification of certain trust provisions, the second trust may omit, create or modify a power of appointment.
  • Expands the existing prohibition on reducing certain fixed interests to include vested interests.
  • Provides that the second trust may extend the term of the first trust, regardless of whether the authorized trustee has an absolute discretionary power or discretionary power limited to an ascertainable standard.
  • Adds additional tax benefits associated with the first trust that must be maintained in the second trust to include the gift tax annual exclusion, and any and all other tax benefits for income, gift, estate or generation-skipping transfer for tax purposes.
  • Incorporates provisions regarding “grantor” trust status and the trustee’s ability to decant from a grantor trust to a non-grantor trust.
  • Provides that a second trust may be created under the laws of any jurisdiction and institutes certain safeguards to prohibit an authorized trustee from decanting to a second trust which provides the authorized trustee with increased compensation or greater protection under an exculpatory or indemnification provision.
  • Provides that a trustee may decant to a second trust that divides trustee responsibilities among various parties, including one or more trustees and others.

[4] Is there a limit on how far back you can ask for accountings from a trustee who’s never served accountings?

At its core, the job of trustee is as much about keeping beneficiaries adequately informed as anything else.  Most trust litigation can be traced back to a trustee’s inability to adequately explain him or herself to the trust’s beneficiaries, and the Corya v. Sanders case (which I wrote about here) was no different. That 4th DCA case involved several family trusts that had been irrevocable for decades before suit was filed — one dating back to 1953 — for which the trustee had never prepared accountings. When the trustee was finally sued, the plaintiff demanded trust accountings going back decades to each trust’s respective start date.

So what did the 4th DCA decide in Corya? The trustee only had to go back to 2003 for its accountings. And why did it decide that way? Because F.S. 736.08135(3) said it only applied to “trust accountings rendered for any accounting periods beginning on or after January 1, 2003.” That limitation apparently didn’t sit well with trust-accounting purists. So HB 413 amended F.S. 736.08135(3) to add the following new sentence at the end of the statute: “This subsection does not affect the beginning period from which a trustee is required to render a trust accounting.” Does this change mean there’s now no limit on how far back a trustee has to account for? I’m not convinced, but this statutory change definitely opens the door to that argument.

The Corya court also held that a plaintiff’s ignorance of the law (for example, his legal right to annual trust accountings) doesn’t toll the laches clock until he finally gets around to consulting a lawyer — decades after learning the operative facts for an accounting action. Which meant the trustee couldn’t be compelled to account for more than 4 years prior to getting sued. HB 413 attempts to statutorily reverse this ruling as well by amending F.S. 736.1008 to provide that a beneficiary’s actual knowledge that he or she has not received a trust accounting does not cause a claim to accrue against the trustee for a breach of trust. Moreover, the beneficiary’s actual knowledge of that fact does not commence the running of any statute of limitations concerning such claims.

Bottom line, for those of us who read the Corya case as setting January 1, 2003, as the farthest date back a court can compel a trustee to account if he or she’s never served accountings in the past, HB 413 attempts to statutorily undo that result. I’m not sure this is a good thing, and I’m also not sure the bill’s legislative changes accomplish what they set out to do, but you’ll want to know about these changes if one of these cases crosses your desk. For more on the backstory to these changes you’ll want to read the bill’s Legislative Staff Analysis.

[5] Revamp of Florida’s rules for electronically posting/serving trust accountings, trust disclosure documents, and limitation notices:

In today’s world banks do everything possible to communicate with us electronically, and trust companies are no exception, which lead to the inclusion of F.S. 736.0109(3) in our Trust Code. This statute allows a trustee to comply with its notice and reporting requirements by “posting on a secure electronic account or website.” But you only get to use electronic posting if you comply with a long list of requirements, which as a practical matter limits the rules use to corporate trustees.

Well, the electronic posting rules were revamped this year in HB 413.  If you work with corporate trustees and are looking for a quick summary of what’s changed, you’ll want to read the bill’s Legislative Staff Analysis, which summarizes the new electronic posting rules as follows:

The bill provides that the enumerated procedures for electronic posting are solely for the purposes of meeting the notice requirements of s. 736.0109, F.S., and are not intended to restrict or govern courtesy postings in any way. Moreover, the bill provides that the retention requirements only apply if electronic posting is the only method of giving notice.

The bill requires that the initial authorization specifically state whether trust accountings, trust disclosure documents, and limitation notices, each as defined in s. 736.1008(4), F.S., may be posted electronically, but allows a more general description of other types of documents that the sender may provide by posting.

The bill allows a recipient to terminate authorization by following the procedures on the web site instead of giving written notice of such termination.

The bill additionally amends the 4-year document retention requirement:

  • If access is terminated by the sender before the end of the 4-year retention period, then the running of the applicable statute of limitations periods contained in s. 736.1008(1) & (2), F.S., are suspended until 45 days after the sender sends a notice by separate means to the recipient that either access has been restored, or access has been terminated and that the recipient may request copies of the posted documents at no cost.
  • The applicable statute of limitations is also suspended from the time the recipient asks for copies until 20 days after those documents are provided.
  • Documents do not need to be maintained on the website once the recipient’s access has been terminated.
  • No retention is required, and no statute of limitations is suspended, if access is terminated by the action of, or at the request of the recipient. Revocation of authorization to receive documents via posting is not considered to be a request to terminate access to documents already posted.
  • Failure to maintain access does not invalidate the initial notice.

[6] Life insurance agents as trustees, guardians or power of attorney holders for their clients

Trusts and estates lawyers usually focus on the estate-tax planning benefits of life insurance, especially when used to fund an irrevocable life insurance trust or “ILIT”. What we don’t often focus on are the non-tax, state law requirements peculiar to life insurance contracts, such as the insurable interest requirement, which is defined as follows in F.S. 626.798(3)(b):

“Insurable interest” means that the life agent or family member of the life agent has an actual, lawful, and substantial economic interest in the safety and preservation of the life of the insured or a reasonable expectation of benefit or advantage from the continued life of the insured.

This rule is basically designed to make sure people don’t have an economic incentive to buy life insurance on someone they might be tempted to “bump off”. Life insurance agents that run afoul of this rule can find themselves on the wrong side of a lawsuit that’s going to make them really bad (as I wrote about here).

But what about serving as your client’s fiduciary with control over life insurance you’ve sold and are the beneficiary of, is that OK? According to the Legislative Staff Analysis, the old rule was a flat no “unless he or she is a family member of the insured or is a bank or trust company duly authorized to act as a fiduciary.” CS/HB 1073 modifies that rule by amending F.S. 626.798(2) to allow a life insurance agent to serve as a trustee or guardian or accept authority to act under a power of attorney for non-family members if the agent is:

  • Acting as a fiduciary;
  • Licensed as a certified public accountant under s. 473.308, F.S.; and
  • Registered as an investment advisor, or a representative thereof, under federal law or registered as a dealer, investment adviser, or associated person under state law.

As I’ve previously expressed here, serving as trustee of a life insurance trust is a thankless job that carries all sort of uncompensated risks with it. If on top of that you’re the insurance agent who both sold the policy and get a piece of the action when the insured dies, you really need to ask yourself why on earth you’d ever expose yourself to that kind of risk. Under new F.S. 626.798(2) you have that option if you meet the statute’s very strict requirements. Seems to me anyone smart enough to legally qualify as insurance agent and fiduciary under the new rules is probably smart enough to say “no.”