If the client has already been diagnosed as suffering from diminished capacity, but the estate planning attorney is confident the client has the requisite mental capacity to execute a testamentary instrument under Florida law, then in addition to other efforts focused on documenting the client’s current mental capacity, it may be helpful to explicitly address the issue in the document. For example:

Because I have been diagnosed as having senile dementia, probable Alzheimer’s, I recognize that some persons who will be disappointed with the provisions of my testamentary plan may question my capacity and may consider challenging the validity of this instrument. However, my illness has not progressed to the point that my judgment and thinking about my assets, my loved ones and my estate plan have been materially impaired. I have given very careful consideration to my testamentary affairs, and I affirm that the dispositions made in this instrument reflect my decisions, which I have carefully and unequivocally reach after deliberation and after seeking the advice and counsel of my attorney PERRY MASON, who has prepared this instrument at my direction. My attorney and I are initialing here, ________ (testator), _________ (attorney), to reflect my attention to and understanding of this paragraph.

For estate planners planning for litigation-avoidance in the trust context, protecting the trustee will be a clear priority. The goal is to ensure the trustee will be invested with the level of fiduciary independence and financial resources to appropriately manage any threatened and/or filed lawsuits or other coercive tactics by disgruntled heirs. Balanced against the need to protect the trustee, however, must also be concerns for appropriate “checks and balances” on the trustee’s authority – especially if the trust is intended to remain in existence for the lifetime of a surviving spouse or the grantor’s children, and more important still if the trust is intended to remain in existence for multiple generations. The “checks and balances” issue was addressed in the post entitled “Who Picks the Trustee and When Can You Fire Him.”

With respect to protecting the trustee, two clauses can be employed to “tilt” the litigation playing field in favor of the trustee: an “exculpation” clause and a “litigation-defense-fees” clause. An exculpation clause actually expands the trustee’s discretionary authority by narrowing the grounds upon which he or she may be sued. This is accomplished by lowering the standard of care generally applicable to fiduciaries under Florida law. Example:

Exculpation. A fiduciary’s exercise or non-exercise of the powers and discretions granted in this instrument shall be conclusive on all persons, and no fiduciary shall be liable for any act or omission taken or not taken that causes a loss to any trust established under this instrument or to any beneficiary thereof, unless such act or omission is the result of the fiduciary’s bad faith or reckless indifference to the purposes of this instrument or the interests of the beneficiaries.

Under Florida’s new trust code exculpation clauses for anything other than “bad faith” or “reckless indifference to the purposes of the trust or the interests of the beneficiaries” are explicitly sanctioned. See F.S. §736.1011.

The second provision to consider is one that explicitly states that a fiduciary’s litigation costs will be “advanced” in the event of litigation. Essentially, the beneficiary would thus be paying the fiduciary’s defense costs up until a court rules against the fiduciary. Under Florida law a trustee involved in any litigation including breach-of-trust allegations must obtain prior court approval to pay legal defense fees. F.S. §737.403(2)(e). The following clause would essentially override the default rule in Florida. Example:

Legal Defense Indemnification. In the absence of bad faith or reckless indifference to the purposes of this instrument or the interests of the beneficiaries, the fiduciary shall be indemnified from the trust for any and all liability, cost, and expense incurred by the fiduciary by reason of any act or omission taken or not taken on behalf of any trust hereunder. In furtherance thereof, in the case of litigation expenses, including attorney’s fees, the fiduciary shall be indemnified for such expenses as they are incurred, which expenses the fiduciary may pay out of the trust or trusts as to which the act or omission is alleged to have been taken or not taken. The fiduciary’s right to indemnification hereunder shall not await the resolution of the litigation or a determination that the fiduciary is entitled to indemnification under this paragraph; provided, however, that if a court of competent jurisdiction subsequently determines that the fiduciary engaged in intentional misconduct or gross negligence, the fiduciary shall repay to the trust all costs and expenses previously indemnified hereunder.

A recent Miami-Dade case provides an example of how a trustee may find himself bearing the expenses of litigation in the absence of proper planning. In Brigham v. Brigham, 2006 WL 1479813, 31 Fla. L. Weekly D1517 (Fla. 3d DCA 2006), the Third DCA articulated the rule in Florida as follows:

Appellees brought suit against Appellants in their trust roles and as individuals for trust mismanagement. Because Appellants defended against individual liability, their personal interests conflicted with their position as trustees. See Shriner v. Dyer, 462 So.2d 1122, 1124 (Fla. 4th DCA 1984). When a trustee’s individual interests conflict with his or her duties to a trust, court approval is necessary before a trustee can use trust funds to pay his or her own attorneys’ fees. § 737.403, Fla. Stat. (2003).

This rule has been carried over into Florida’s new trust code. See F.S. §736.802(10).

The consequences of un-clear drafting or ill-considered provisions included in testamentary documents can be years of litigation. The cost of avoiding this type of litigation is always pennies on the dollar: an extra hour working on the document or the cost of an “extra set of eyes” is usually less than a rounding error when compared to the cost of litigation. The following cases are examples of this type of cost. Note that these cases all generated appellate opinions. In other words, not only were they litigated at the trial court level, but they generated appellate court proceedings as well. The number of un-appealed litigation arising out of sloppy drafting is in all likelihood several orders of magnitude higher.

Popp v. Rex, 916 So.2d 954 (Fla. 4th DCA 2005)

The case involved the reformation of the Virginia F. Davis 1986 Irrevocable Trust (the “1986 trust”), which provided that when Mrs. Davis died it would be divided in half with one share for each of her two sons and each son’s share would be distributed in three installments-one immediately, one five years later, and the last one five years after that. Mrs. Davis died on November 2, 2000, predeceased by her husband (i.e., about 14 years after the 1986 trust was signed). The litigation in question arose in the context of probate-administration proceedings involving one of Mrs. Davis’ children, Scott F. Davis, who died without issue on November 19, 2002 (i.e., about 16 years after the 1986 trust was signed) – having received only one of the three installment payments he was originally entitled to under the 1986 trust. Under Scott Davis’ will, the residuary beneficiaries of his estate were the Pittsburgh State University Foundation, Inc. and the WPBT Communications Foundation, Inc. According to the Fourth DCA, the 1986 trust contained the following drafting error:

The 1986 trust, as a result of a drafting error, omitted instructions as to what would happen if one of the sons died without children before he had received his installment payments. The trust provisions expressly covered what would happen if a son died with children (providing that the unpaid installments would go to those children) but stopped without going to the next step, directing where the unpaid installments should go if a son had no issue.

Roberts v. Sarros, 920 So.2d 193 (Fla. 2d DCA 2006)

In this case the Second DCA was asked to rule on an internal inconsistency within a trust agreement. The problematic language revolved around whether a surviving widow had the authority to revise a trust agreement after her husband had passed away. Surviving widow signed a trust amendment disinheriting one set of her grandchildren. Grandchildren understandably didn’t think this was a good idea, and the case ended up in court. Here’s the “problematic” language, as described by the Second DCA:

Article XV of the Trust provides, “AMENDMENT AND REVOCATION: This Trust is subject to revocation, change or amendment, in writing, by the Grantors from time to time.” Article XII contains rules of construction for the Trust instrument, including the following provision that is pertinent to this appeal: “Unless the context required [sic] otherwise, masculine personal pronouns include the feminine, and the singular and plural may be construed interchangeably.”

At the trial court level the judge ruled that surviving widow lacked the authority to amend the trust agreement. The trial court agreed with the disinherited-grandchildren when they argued that use of the plural form “Grantors” in the trust-amendment section meant widow lacked authority to unilaterally amend the document. The Second DCA reversed, based on the following line of reasoning:

[I]n considering the trust instrument as a whole, it is clear that if the singular/plural clause were not applied, it would produce absurd results. Every reference in Article I is to the plural form “Grantors.” Article I deals with the disposition of principal and income of the Trust to the Grantors during their lifetime. If the references to the “Grantors” were construed to mean only the plural form, then after the death of the first Grantor the surviving Grantor could no longer receive income from the Trust. Such a result is contrary to the stated purpose of the Trust, which is to provide for the McNeills “for so long as they may live.” Article I also provides that “the Trustees shall make payments from the principal of the Trust Fund to or for the benefit of the Grantors in such sums and at such times as the Grantors may request from time to time.” Again, if construed to mean only the plural “Grantors,” then the surviving Grantor would have no access to the principal of the Trust even though the trust was established to provide proper care for the McNeills and to allow them to maintain “a style of living to which they have been accustomed.”

Like Article I, Article XV must be construed in accordance with the singular/plural clause. This is consistent, as in Article I, with the overall plan that the Grantors retain control over their assets as long as either of them lived. Nothing in the context of Article XV requires that “Grantors” be construed to mean only the plural form. When construed to include the singular “Grantor,” Louise M. McNeill, as the surviving Grantor, could amend the Trust pursuant to the power to revoke or amend contained in Article XV. Thus, we reverse the trial court’s order granting summary judgment as to count I and determining that the Amendment by Louise M. McNeill was invalid and remand for further proceedings on the Appellees’ complaint.

Vinson v. Johnson, 2006 WL 1650609, 31 Fla. L. Weekly D1659 (Fla. 1st DCA 2006)

Suppose a client with 9! children asks you what’s the best way to provide for the orderly disposition of his 34-acre farm. He wants to ensure that the farm either stays in the family intact, or is sold as a single property, not piecemeal. A simple way to effectuate this type of plan is to put the property in a trust, partnership or LLC and include purchase-and-sale provisions that achieve the desired outcome. The wrong answer is to say: “heck, that’s simple, just say in your will that all of the kids have to agree to a sale.” That’s what the Vinson clan learned in this case. The portion of Vinson Sr.’s will at issue in the case was described as follows by the First DCA:

Hardy Vinson, Sr., executed a will leaving his 34-acre farm and home in Alachua County to his nine living children as tenants in common. The will provided in pertinent part:

The “Vinson Estate” shall not be subject to partition or forced sale by any heir, but shall only be sold upon agreement of all heirs. Taxes and ownership expenses shall be shared equally among the children. Any heir that pays more than his or her share shall be entitled to contribution from the nonpaying heirs upon sale of the property.

When 5 of Vinson Sr.’s 9 children sued for partition of the farm (surprise!?), the trial court ruled in their favor. On appeal the First DCA held that the clause in the will prohibiting partition or sale was an “unlawful restraint on alienation of real property” and upheld the trial court’s ruling. The First DCA explained its rationale as follows:

When real property is conveyed in fee simple, the grantee or devisee acquires a right to sell or dispose of the property as an incident to the right of ownership. The right of alienation is said to be an inherent and inseparable quality of the estate. See 61 Am.Jur.2d Perpetuities, Etc. § 102 (2002); 3 Thompson Real Property § 29.03(b), at 707 (2001). An absolute restraint on alienation is inconsistent with the right of ownership and is therefore invalid. See generally Iglehart v. Phillips, 383 So.2d 610 (Fla.1980) (surveying the case law pertaining to restraints on alienation).

The rule against restraints on alienation applies to restrictions on partition of real property, as well as restrictions on sale. The right to seek partition of property owned jointly in a tenancy in common is an incident to the right of individual ownership. See Richard R. Powell, The Law of Real Property, § 77 846 (1991). While there appears to be no precedent in Florida for the precise issue presented in this case, other states have held that prohibitions against partition or forced sale of property devised in a will are unlawful restraints on alienation.

• Is this it?

“Death is not the end. There remains the litigation over the estate.”

Ambrose Bierce

• Happy families

“All happy families resemble one another, but each unhappy family is unhappy in its own way.”

Leo Tolstoy

• Trusts

"Put not your trust in money, but put your money in trust."

Oliver Wendell Holmes

There is often an inherent conflict of interest between the current and remainder beneficiaries of a trust. There are two ways to address that issue: provide for contemporaneous trust distributions to family members or explicitly override the trustee’s duty of impartiality between current and remainder beneficiaries under F.S. 736.0803. For example, if the trust is created for the life-time support of a client’s child or surviving spouse but the client also wants to allow trust assets to be distributed to each child’s own family, the following clause should be considered:

Distributions to Family. The Trustee shall pay or apply such sums of income or principal from each beneficiary’s separate trust as in the Trustee’s discretion are necessary or advisable for that beneficiary’s health, education, support, and maintenance, or as any Corporate Trustee in its discretion determines to be in that beneficiary’s best interests. After being reasonably assured that the beneficiary has sufficient means for his or her continued support, the Trustee in its discretion also may pay any sums of income or principal that it deems necessary or advisable for the health, education, support, and maintenance of the beneficiary’s descendants, or as any Independent Trustee in its discretion determines to be in their best interests, either individually or collectively.

With respect to the second approach, the following is an example of language explicitly overriding the trustee’s duty of impartiality between current and remainder beneficiaries:

Duty of Impartiality. In exercising its discretion to make distributions to or for the beneficiary of this trust, the trustee shall consider the needs of the remainder beneficiaries to be subordinate to the interests of the current beneficiaries. No good faith decision to invade principal for the benefit of a current beneficiary shall be subject to challenge by any remainder beneficiary.

If the client’s wealth is the product of a family-run business or a single concentrated stock investment, he (and the family) may be reluctant to divest themselves of this asset upon the client’s death. This is an understandable sentiment; unfortunately it runs head on into the general fiduciary duty to “diversify.” The duty to diversify may be waived by the client if he explicitly expresses this intention in the testamentary instrument. The following two sample clauses address this issue:

Original Assets. Except as otherwise provided to the contrary, to retain the original assets it receives for as long as it deems best, and to dispose of those assets when it deems advisable, including any interests in XYZ FAMILY BUSINESS or other affiliated or successor entities, as more specifically set out in Article ___, even though such assets, because of their character or lack of diversification, would otherwise be considered improper investments for the Trustee.

Retention of Stock. I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in XYZ FAMILY BUSINESS, or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as “the company”), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in the company that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called “uncompensated risk”) incurred as a result of this failure to diversify. Nothing in this paragraph will be interpreted in any manner to limit the Trustee’s authority to sell some or all of the interests in the company.

Planners should note that concentrated-stock positions can lead to huge litigation exposure for fiduciaries – especially deep-pocket corporate trustees. In In re Chase Manhattan Bank, 809 N.Y.S.2d 360 (N.Y.A.D. 4 Dept. Feb 03, 2006), a recent high profile case out of New York, the existence of the type of waiver-of-duty-to-diversify clause provided above enabled Chase Manhattan Bank to completely reverse on appeal a $24+ million judgment entered against it at trial. The New York appellate court focused on the following provisions:

The trust was funded with a concentration of Kodak stock. Decedent’s will provided that “[i]t is my desire and hope that said stock will be held by my said Executors and by my said Trustee to be distributed to the ultimate beneficiaries under this Will, and neither my Executors nor my said Trustee shall dispose of such stock for the purpose of diversification of investment and neither they [n]or it shall be held liable for any diminution in the value of such stock.” Decedent’s will further provided that “[t]he foregoing .  .  .  shall not prevent my said Executors or my said Trustee from disposing of all or part of the stock of [Kodak] in case there shall be some compelling reason other than diversification of investment for doing so.”

In those cases where a client wants to provide for a spouse that is not the parent of the client’s children (at the very least to avoid an elective-share claim), Florida law specifically provides a very useful tool in the form of an “elective share trust.” Similar to the QTIP trust now familiar to most estate planners, an elective share trust allows a client to provide for a surviving spouse for life – but retain control over the ultimate disposition of these assets when the surviving spouse passes away. This type of trust is also effective as a “stand by” mechanism to capture any additional estate assets in trust that may be necessary to satisfy an elective share claim. For example:

Despite any other provision of this Trust Agreement, if my wife or her designated representative elects the Elective Share in my estate, any trust created under this Trust and not qualifying for the federal marital deduction in which my wife is a beneficiary will be divided into two parts, with the least amount of that trust as is needed to satisfy the balance of the Elective Share unpaid by other sources under Section 732.2075 of the Florida Statutes being held as a separate trust (the “Elective Share Trust”) and administered so as to qualify under Section 732.2025 of the Florida Statutes (including the right for my wife to require the Trustee to make the trust property productive or to convert it within a reasonable time). Unless the original trust already provides for a qualifying invasion power or a qualifying power of appointment for my wife, the Personal Representative in its discretion may elect to create an invasion power for the Elective Share Trust for purposes of valuation under Section 732.2095 of the Florida Statutes. If an invasion power is created, the Personal Representative shall designate that such a power is to apply by filing a notice with my wife and in the probate court within 6 months after the election by my wife of the Elective Share.