If you’re a trustee, you can’t just quit and walk away leaving your former trust to fend for itself. Until a successor trustee’s appointed to replace you, F.S. 736.0707 tells us you remain duty-bound to pay all trust-related “debts, expenses, and taxes” that may be “necessary to protect the trust property.”
In an ideal world, a former trustee’s resignation and a successor trustee’s appointment happens simultaneously and with all sorts of prior planning and coordination ensuring the transition is seamless. But what about those cases where the transition from trustee-to-trustee is far from ideal? A former trustee’s duties (read: liabilities) don’t go away just because everyone’s not playing nice. How’s a former trustee supposed to pay for all of his mandatory trust-preservation duties pending the appointment of his successor in those cases? Answer: exercise your right as a trustee under F.S. 736.0707 to “retain a reasonable reserve for the payment of debts, expenses, and taxes.”
But how much is a reasonable reserve amount? And if you get sued for allegedly keeping back the wrong reserve amount or mismanaging those funds, who decides your case? A judge or jury? These questions were at the heart of a recent 4th DCA opinion that’s a must read for Florida trust attorneys.
Case Study
This case involved a corporate trustee of a charitable trust valued in excess of $111 million who kept back a reserve of $8.9 million when removed as trustee. The corporate trustee’s standard practice was to hold back a 10% reserve. The reserve amount in this case was approximately 8% of the trust fund. The successor trustee sued the former trustee claiming that the reserve amount was too high, and that the reserve amount was improperly invested, which damaged the trust. Because the successor trustee was seeking damages, he also demanded a jury trial.
Is $8.9 million a reasonable reserve amount for a removed trustee?
The judgment entered in this case does an excellent job of explaining why an $8.9 million reserve fund was reasonable and appropriate in this case. If you’re advising a resigning trustee who’s trying to figure out what’s a reasonable reserve amount, the trial court’s judgment in this case is gold. Here’s an excerpt:
The Defendant established that it was the company’s standard practice to hold a reserve of 10% of the total funds. On this point, Defendant provided three reasons which it found prudent to maintain a 10% percent reserve: (1) the fear that it would be sued or brought in as a party to an ongoing Massachusetts malpractice lawsuit, (commonly known as the Sally & Fitch litigation), which it determined that its potential liability exposure could be as high or greater than $20,000,000.00); (2) the need to complete a complex final accounting of the Trust and as personal representative of James Salah’s Estate; and (3) the need to potentially address any objections to its Trust and Estate accountings (in light of the then successor trustee’s unwillingness to sign a consent and waiver). …
As indicated herein, the purpose of a reserve as indicated within section 736.0707(2) Fla. Stat., is to pay debts, expenses, and taxes of the trust administration. This includes payment of trustee and attorney fees. See Smith v. Jones, 162 So. 496 (Fla. 1935); First Union Nat’l Bank v. Jones, 768 So. 2d 1213 (Fla. 4th DCA 2000); and Sheaffer v. Trask, 813 So. 2d 1051 (Fla. 4th DCA 2002).
Who decides? A judge or jury?
The operating assumption among trusts and estates litigators is that if you’re the plaintiff, your odds of success go up if your case is decided by a jury instead of a judge. Not surprisingly, the plaintiff in this case demanded a jury trial. In support of this tactic, the plaintiff framed his case as one seeking the recovery of money damages. Was this enough to get him past the general rule that trust cases are “equitable,” and thus generally not subject to jury trials? Nope. Judge decides. So saith the 4th DCA:
The Trust sought a judicial determination that Brown Brothers’ reserve was unreasonable, requesting remedies expressly covered in Chapter 736. We have found nothing in Chapter 736 which directs fact determinations to be submitted to a jury. This case falls under Rosen’s observation that even if a claim against a trustee involves the recovery of money, the claim is within the exclusive jurisdiction of equity, so the right to a jury trial does not attach. …
In Chauffeurs, a Seventh Amendment case, the United States Supreme Court recognized that actions “by a trust beneficiary against a trustee for breach of fiduciary duty … were within the exclusive jurisdiction of courts of equity[,]” so no right of jury trial attached. Id. at 567, 110 S.Ct. 1339. Similarly, in Rosen v. Rosen, 167 So. 2d 70, 72 (Fla. 3d DCA 1964), the Third District wrote:
Courts of equity have original, general, and inherent jurisdiction over trusts and the administration thereof. All trusts, whether express or implied, are within the jurisdiction of the chancellor, even though the relief demanded is for the recovery of money. Proceedings involving trusts are ordinarily within the exclusive jurisdiction of equity.(quoting 33 Fla. Jur. Trusts § 111); see also Hoppe v. Hoppe, 370 So. 2d 374, 376 (Fla. 4th DCA 1978) (recognizing that claims arising out of a trustee’s breach of fiduciary duty were an action formally cognizable in equity). …
This approach aligns with the Restatement (Second) of Trusts. Section 197 provides, “Except as stated in § 198, the remedies of the beneficiary against the trustee are exclusively equitable.” Restatement (Second) of Trusts § 197. Those exceptions are: (1) If the trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the beneficiary can maintain an action at law against the trustee to enforce payment. (2) If the trustee of a chattel is under a duty to transfer it immediately and unconditionally to the beneficiary and in breach of trust fails to transfer it, the beneficiary can maintain an action at law against him. Restatement (Second) of Trust § 198. Neither of these exceptions applies here.