Understanding the Fiduciary Duties of a Trustee

Understanding the Fiduciary Duties of a Trustee

ShuffieldLowman partner, Alex Douglas, also contributed to this post.

Once a trustee accepts trusteeship of a trust, there are certain fiduciary duties to the trust beneficiaries, according to the Florida Trust Code. Some of these fiduciary duties cannot be modified, regardless of how the trust is written.

What does it mean to accept a trusteeship? A written document expressly acknowledging his acceptance is the most obvious example. However, trustees should understand that acceptance of trusteeship can occur in other ways too.  This means a trustee is “on the hook” to comply with his fiduciary duties if he accepts trusteeship by substantially complying with a method of acceptance provided in the terms of the trust, or if the trust does not provide a method for acceptance of trusteeship, if he accepts delivery of trust property, exercises powers or performs duties as a trustee, or otherwise indicates acceptance of trusteeship. 

Once a trustee has begun acting as a trustee, he has a mandatory duty to administer the trust in good faith and in accordance with the terms and purposes of the trust, and in the interests of the beneficiaries.  The Florida legislature made a recent change to the definition of “interests of beneficiaries” to make it clear that the settlor’s wishes, as expressed in the trust, should be considered. This means that beneficiaries generally cannot circumvent a settlor’s wishes by claiming that their interest is best served some other way. For example, if a settlor expressed in the trust that he only wants a beneficiary to receive lump sum distributions at certain lifetime milestones (e.g., graduating from college, getting married, etc.), the beneficiary cannot alternatively demand trust distributions on a monthly basis.

Similarly, a trustee’s mandatory duty of loyalty requires him to administer the trust solely in the “interests of the beneficiaries,” and to avoid conflicts and self-dealing. Actions by a trustee involving a conflict of interest that are not specifically authorized by the trust or the Florida Trust Code, or otherwise approved by the Court, are voidable and may subject a trustee to liability to the trust beneficiaries.

Another fiduciary duty owed by a trustee is the duty of impartiality.  This does not necessarily mean that all beneficiaries should be treated equally.  Rather, the trustee should consider the facts and circumstances of each request or action, as well as the terms in the trust, when deciding the best way to proceed.  A trustee should not favor one beneficiary over another in conflicts that are merely between beneficiaries and do not relate to the validity of the trust.  In the case of Barnett v. Barnett, 340 So. 2d 548, 550 (Fla. 1st DCA 1976), a trustee’s litigation fees were denied because the trustee took a partisan stance and argued the side of one or more of the claimants.

In the event someone contests the validity of the trust, the trustee has an obligation to defend the trusts’ validity surprisingly, while there is no statute. A trustee also has a duty to keep clear, distinct, and accurate records.  As part of this duty, a trustee should also make sure that he is keeping trust property separate from his own property. If inadequate recordkeeping results in any obscurities or doubts, all presumptions are against the trustee. It is important for trustees to document each decision made and why the decision was made. 

Trustees should also consider making and keeping records simultaneously with the actions taken to avoid any doubt concerning accuracy. If a trustee is seeking compensation, he or she must keep accurate time records. If the trust does not specify how the trustee should be compensated, the trustee is entitled to compensation that is reasonable under the circumstances. The burden will be on the trustee to show the reasonableness of his or her fees.

If there is a lack of documentation, there is a presumption of impropriety against the fiduciary. Even saying that a hurricane blew away your records is not an excuse! Really! In Traub v. Traub, the Court held that, because the trustee failed to keep accurate records, even though the records were allegedly destroyed, the burden shifted to the trustee to show that the trust money expended was proper.

Next, a trustee has a duty to keep beneficiaries informed regarding the administration of the trust and to provide accountings. Initially, a trustee must notify qualified beneficiaries of the existence of the trust, identify himself as the trustee, and explain the beneficiaries’ right to receive trust accountings. Other mandatory duties of the trustee are to provide a complete copy of the trust and to account to qualified beneficiaries by providing a trust accounting at least once annually. Additionally, if a qualified beneficiary of an irrevocable trust requests relevant information about the assets, liabilities, or particulars relating to the trust administration, a trustee has a mandatory fiduciary obligation to provide the requested information. However, as long as a trust is revocable, the trustee’s duty is only owed to the settlor (the person who made the trust) of the trust.

Another important fiduciary duty is the duty of prudent administration.  There is no “winging it” when it comes to trust administration.  A trustee must administer the trust as a prudent person would, by considering the purposes, terms, distributions, requirements, and other circumstances of the trust.  Trustees must exercise “reasonable care, skill, and caution.”  If a trustee is unsure whether certain action (or inaction) is the best choice, he should investigate and seek all information necessary to make an informed decision.  This is good advice even if all beneficiaries consent to the action or inaction– trustees still need to make sure their discretionary actions make sense and are in the best interest of the beneficiaries as defined by the trust.

During the course of prudent administration of the trust, the trustee should only incur reasonable expenses.  A trustee should consider what is reasonable for him to do on his own, versus what is better for a professional to do.  If a trustee is hiring an outside vendor to perform a task (e.g., accountants, attorneys, etc.), he should negotiate a reasonable fee for the work needed. If a trustee has his own set of special skills, he will be expected to use that set of skills. A corporate fiduciary will be held to a higher standard than an individual.  Fair compensation should be based upon the trustee’s particular skills.

When it comes to hiring third parties, a trustee must choose wisely. He should investigate the background of all professionals and agents hired, including attorneys, accountants, investment advisors or other agents.  Generally, a trustee may act on the recommendations of such persons without independent investigations.

Finally, when it comes to claims of creditors, a trustee has a mandatory obligation to file a notice of trust upon the settlor’s death.  A trustee must also pay expenses and obligations of the settlor’s estate, in the event the assets of the settlor’s estate are not sufficient to satisfy valid creditors’ claims. 

Navigating this process can get complicated, so should you have any questions regarding the duties of a trustee, feel free to contact one of our highly-qualified and experienced trust attorneys.   

Learn about protecting yourself as a trustee in our other blog post: How to Protect Yourself as a Trustee.

Understanding the Fiduciary Duties of a Trustee

How to Protect Yourself as a Trustee

ShuffieldLowman attorney, Nicole Copsidas, also contributed to this post.

In the event that a problem develops in the trust administration of an irrevocable trust (a trust that cannot be amended by the person who created the trust), or if there is an ambiguity in the trust document itself, or there are allegations by the beneficiaries that the trustee is not serving the interest of the beneficiaries, the first safe harbor to consider  is a non-judicial settlement agreement.  This is an agreement that is signed by the trustee and the beneficiaries that have a present income or beneficial interest in the trust, and from the beneficiaries that get the rest of the trust (i.e. the “residual” or “remainder” beneficiaries) when the persons who have the present income or beneficial interest die (these persons are also called the “qualified beneficiaries” under the trust code). You may not use a non-judicial settlement agreement to produce a result not authorized by other provisions of Florida’s Trust Code, or that could not be properly approved by the court.  These types of agreements may cover:

  1. The interpretation or construction of the terms of the trust;
  2. The approval of a trustee’s report or accounting;
  3. The direction to a trustee to perform, or refrain from performing, a particular act; or
  4. The liability of a trustee for an action relating to the trust.

Another safe harbor is to obtain the consent and release from all of the qualified beneficiaries.  When obtaining a consent and release from the qualified beneficiaries, the trustee should give full disclosure of the relevant facts.  Alternatively, a trustee may ask the court to provide the trustee direction which is also called “declaratory relief” or “declaratory action”. Any interested person can invoke the court’s jurisdiction to obtain declaratory relief, and the proceeding can relate to construction, validity, administration, or distributions of trust.  A declaratory action can also be utilized to have the court review a trustee’s fees, review and settle interim trust accountings or final trust accountings, determine any right or duty of the trustee, seek instruction by the trustee, or determine any other matters involving trustees or beneficiaries.

            For instance, let’s say a family relative dies and leaves a trust for you and your siblings so you can pursue a “college or higher education degree” and the bank is the trustee. Let’s also assume that your child wants to go to a technical school to become a mechanic and wants the trust to pay for this education. The trustee may raise a concern that the technical school will not result in a “college degree” and therefore could file an action with the court to ask the court to interpret the trust or permit the trustee to use trust funds to pay for the technical training. The trustee alternatively could obtain the written consent of all of the trust’s qualified beneficiaries (assuming they are of age or have their parent’s consent) to use the trust funds to pay for the technical training.

Finally, a trustee who is considering exercising a discretionary power may seek judicial approval before acting if there is concern that a beneficiary may object. In such circumstances, the trustee should file a petition that describes the proposed exercise or non-exercise of the discretionary power and sets forth sufficient information to inform the qualified beneficiaries of the reasons for the proposal, the facts upon which the trustee relies, and explains how other beneficiaries will be affected. The burden is then on the objecting beneficiary to show why the proposed exercise or non-exercise of the power by the trustee is an abuse of the trustee’s discretion.

For example, if a trustee is allowed to distribute trust funds in any amount that the trustee deems just and proper for the benefit of three beneficiaries, and one beneficiary has a greater financial need because of a disability than the other two, the trustee before making the distribution can seek judicial approval to favor the beneficiary that has more financial needs over the other two beneficiaries. Otherwise, without court approval or consent of the beneficiary, the trustee could be exposed to allegations that the trustee inappropriately favored one beneficiary over another and otherwise that the trustee breached his or her duty of good faith.

The facts and circumstances governing trust administrations differ on a case-by-case basis.  ShuffieldLowman has an experienced team of trust attorneys that can guide trustees through the trust administration process to ensure they are complying with their mandatory fiduciary duties. Our attorneys can also assist trust beneficiaries with understanding their rights and recognizing breaches of fiduciary duty by a trustee who has veered off course.

Learn more about the duties of a trustee in our blog post: Understanding the Fiduciary Duties of a Trustee.

Florida Landlord Laws on Abandoned Property in 2019

Florida Landlord Laws on Abandoned Property in 2019

After a tenancy has been terminated or expired, and the premises have been vacated by the tenant through eviction, surrender, abandonment, or otherwise, a landlord may find himself in possession of abandoned personal property which remains on the premises.  Although a landlord may be tempted to immediately sell or dispose of the abandoned property, he may be subject to liability if he does not follow the proper procedures outlined by Florida law.  The Disposition of Personal Property Landlord and Tenant Act provides the necessary guidance to avoid liability under these circumstances.  See § 715.10, F.S., et  .

Any personal property left behind should be left on the premises or stored safely by the landlord.  A landlord has a duty to exercise reasonable care in storing the property, but he is not liable to the tenant or owner of the property for any loss.

 

Florida Abandoned Property Notice – How to Use

The first step a landlord should take to properly dispose of personal property is to notify the tenant, and any other person the landlord reasonably believes to be the owner of the abandoned property, that such property remains on the premises.  The notice should be in writing, and it should describe all of the property left behind.  The description should be detailed enough so that the owner of the property can identify it.

The notice should also notify the owner of the property where the property is being stored (if not remaining on the leased premises), and that reasonable costs for storage may be charged before the property is returned.  There should be specific information as to where the property may be claimed and the date before which claim must be made.  Such date must be a minimum of ten or fifteen days away, depending on how the notice is served.  The Florida Statutes provide sample notice forms that should be used.

If the owner of the property, or anyone reasonably believed to be the owner, pays the costs of storage and acts to take possession of the property on or before the date specified in the notice, the landlord should release the property.

 

When is Property Considered Abandoned in Florida?

If the owner of the property does not respond within the time frame allotted, the landlord may take action to sell or dispose of the property.  If the abandoned property is estimated to be worth less than $500.00, the landlord is free to dispose of it however he would like.  If the estimated value of the abandoned property exceeds $500.00, the landlord should arrange for a public sale of the property at the nearest suitable place to where the property is held or stored.  Before the sale may occur, notice should be published once a week for two consecutive weeks in a newspaper of general circulation where the sale is to be held.  The advertisement should include the name of the former tenant, a description of the property to be sold, and the time and place of the sale.

A landlord is permitted to bid at the public sale.  The successful bidder’s title to the property is subject to ownership rights, liens, and security interest which have priority by law.  After the costs of storage, advertising, and the sale have been deducted from the proceeds of the sale, the balance may be claimed by the tenant or property owner within thirty (30) days.  If the funds are not claimed, they must be paid into the county registry.  At that time, the landlord should be relieved of all further obligations regarding the abandoned property.

There may be similar circumstances where someone is looking to dispose of personal property even when the parties are not connected through a traditional landlord-tenant relationship.   Although Chapter 715, Florida Statutes, does not expressly state whether this procedure applies in a situation not involving a landlord and tenant, it would seem reasonable to follow this procedure before disposing of unwanted property in order to avoid liability.  It should also be noted that Florida law provides a separate procedure for items abandoned on public property, which involves law enforcement taking possession of the items and auctioning them.  See Chapter 705, Fla. Stat.

This article provides an overview of the process for a landlord to dispose of property left at the premises by a former tenant.  You should contact an attorney to determine whether this process is appropriate for your individual situation, and to obtain all of the information necessary to ensure compliance with applicable Florida law.

Florida Landlord Laws on Abandoned Property in 2019

Enforcing a Settlement Agreement in Florida

Under Florida law and as a matter of public policy, settlements are highly favored and will be enforced whenever possible.  Settlement agreements are governed by the rules of contracts, and the existence of an enforceable contract is contingent upon the Parties’ agreement to the essential terms of the agreement.  What happens when you think you have a settlement agreement, but the other party refuses to sign a formal written settlement agreement?

Is a formal written agreement required to enforce a settlement in Florida?

Creating an enforceable settlement requires agreement to the essential terms of an agreement.  What constitutes a material or essential term varies from cases to case.  Nevertheless, once the parties reach an agreement on the essential terms, a formal written agreement is not required in order to enforce a settlement.  Numerous courts in Florida, both state and federal, have enforced agreements reached through a series of emails between attorneys.

For example, in Warrior Creek Development, Inc. v. Cummings, 56 So. 3d 915 (Fla. 2d DCA 2011) the attorneys involved negotiated a settlement over e-mail.  Their emails set forth the “essential and material terms” of the agreement between the parties.  The attorneys subsequently drafted a written settlement agreement, which one party refused to sign, stating “the deal is off”.  The Second District Court of Appeals affirmed the trial court’s order enforcing the settlement, finding that the “parties had agreed upon all of the essential and material terms for settlement and that those terms were reflected in the November e-mail.  Similarly, in Miles v. Northwestern Mut. Life Ins. Co., 677 F. Supp. 2d 1312, 1315-1317 (M.D. Fla. 2009) the Court held that a written settlement agreement is a mere formality where the parties act with the intent to follow the settlement and the written agreement is essentially what was already agreed upon.

Negotiating a settlement over email – the considerations

These cases illustrate the risks inherent in negotiating a settlement over email.  A party who wants to avoid being bound in the absence of a written settlement agreement should consider making any offer conditional upon the execution of a mutually agreeable settlement agreement and release.  Conversely, setting out the essential terms of an agreement in a written communication can result in a settlement that is enforceable against a party who has gotten cold feet.

Get to Know the Income Tax Benefits of NEW Qualified Opportunity Zones

Get to Know the Income Tax Benefits of NEW Qualified Opportunity Zones

ShuffieldLowman attorney Jordan Horowitz also contributed to this post

In December of 2017, the U.S. Congress established the Qualified Opportunity Zone (“QOZ”) program, designed to help economically-distressed communities where new investments, under certain conditions, may be eligible to generate preferential tax treatment for investors.  Investments made in these designated QOZs through a qualified legal entity referred to as Qualified Opportunity Fund (“QOF”) are intended to provide much-needed new investment and capital into economically depressed communities throughout the United States and Puerto Rico.  In short, the QOZ program is an economic development tool designed to spur economic development, revitalize communities in need, and create jobs in distressed communities by attracting new investments in exchange for select income tax benefits.

In general, here is how the QOZ program operates.  If an investor disposes of assets (e.g., stocks, real estate, an operating business), on or after Dec. 22, 2017, which triggers taxation of capital gains to the investor, then such investor may seek to utilize the QOZ program.  The investor can either create or locate a QOF to invest a portion of its transaction proceeds (e.g., cash) within 180 days of the divestment (sale) transaction date.  Once capitalized, the QOF must, in turn, invest a certain minimum amount of its assets (directly or indirectly) into an operational business or real property located in a QOZ.  The QOF oversees and manages the investment in the QOZ until the QOF decides to divest from the QOZ investment at a future date.  In exchange for this QOZ investment, the QOF receives certain income tax benefits that it passes along and up-the-chain to its owners and investors.

As you can imagine, the rules and regulations governing QOZs and QOFs are complicated and require detailed analysis; the previous paragraph is a rather simple summary of a QOZ transaction.  Below is a list of some very important highlights to keep in mind when considering an investment using the QOZ program.

  • The QOZ program is designed to provide three (3) tiers of income tax benefits to investors:
  1. The investors can defer income taxation on prior capital gains that are invested in a QOF until the earlier of December 31, 2026 and the date on which the investment in a QOF is relinquished (known as the capital gain deferral piece).
  2. If the investor holds the investment in the QOF for longer than 5 years then there is a 10% bonus exclusion of the deferred income taxation on the prior capital gains. If the investor holds the investment in the QOF for longer than 7 years then the bonus exclusion bumps up to 15% (known as the tax basis step-up piece).
  3. If the investor holds the investment in the QOF for no less than 10 years, then the investor is eligible to liquidate or cash-out from the QOF free of income taxation on any new tax gains generated from appreciation of this QOF investment (known as the non-recognition of new taxation piece).

  • Only capital gains (although both long-term and short-term) are eligible for deferral under the QOZ program. Ordinary income (non-capital gains) is not eligible for deferral under the QOZ program.  However, all capital gains are eligible for roll-over into a QOF.  The QOZ program is not limited to gains from real estate, stocks or any specific asset or transaction, and a pot of various sources of capital gains can be used to invest in a QOF.  In other words, an investor can dispose of many different assets in various transactions and trigger capital gains from these items, and then invest all (or a portion of) these capital gains into a QOF to receive the income tax benefits.
  • An investor can defer payment of capital gain taxation to the latest date of Dec. 31, 2026, so long as such prior capital gains are invested into a QOF within 180 days of the divestment (sale) transaction that triggered the tax gain. The S. Internal Revenue Service (“IRS”) clarified that the clock for the 180-day period for investing the capital gains in the QOF begins for most taxpayers on the date the capital gains would be recognized for U.S. federal income tax purposes.  For individuals, this rule means the date on which the dispositions of assets trigger capital gains taxation.  For partnerships, the 180-day period begins to run on the date the partnership disposes of assets triggering capital gains taxation.  But, if the partnership does not reinvest its capital gains in a QOF, then the partners may reinvest their allocable share capital gains, and the 180-day period for each partner begins on the last day of the partnership’s tax year in which such disposition of assets occurred.  This partnership rule also applies to S corporations (but not C corporations).
  • Only the amount of the capital gains must be invested into a QOF to defer all the income taxation related to them. There is no requirement that all cash received by an investor from the disposition of assets must be reinvested in a QOF to receive the income tax benefits; just an amount of assets (e.g., cash) equal to the amount of the prior capital gains.

  • Think of a QOF as an investment vehicle, whether a partnership or a corporation, that acts as the funnel for the various investors to collect money and other assets to invest it into the QOZs. The QOF can be a new or existing entity, and could be an entity created by the investor solely to invest its money and assets.  A QOF becomes qualified with the IRS by self-certifying that it is a QOF and filing IRS Form 8996 (Qualified Opportunity Fund) with its federal income tax return.  For example, a QOF could be a newly-formed Florida limited liability company that is organized by the investor, capitalized by the investor and at least one other person, taxed as a “partnership” for U.S. federal income tax purposes, and invests its money by acquiring QOZ property.
  • The QOF must acquire, own and hold QOZ property to generate the income tax benefits. However, the QOF is not required to utilize all its cash and assets to acquire, own and hold QOZ property, but there is a minimum threshold that must be satisfied by the QOF.  Also, there are strict limitations and rigorous requirements surrounding the QOZ property acquired, owned and held by the QOF.
  • Current operating income generated from an investment in a QOF is subject to income taxation, and does not receive any special tax exceptions or tax exclusions.
  • An investor does not need to live, work or have a business in a QOZ to receive the income tax benefits. All the investor must do is invest prior capital gains into a QOF and elect to defer the taxation on such capital gains pursuant to the U.S. federal tax code.
  • For an investor to receive the full array of QOF taxation benefits, the latest date (according to the current S. federal tax code requirements) by which capital gains must be invested into a QOF is Dec. 31, 2019.
  • For an investment to comply with and satisfy the requirements of the QOZ program, the investment must be an equity ownership interest in the QOF. Loaning money to a QOF (i.e., debt instruments) is not an eligible investment for purposes of the QOZ program.
  • The income tax benefits generated by the QOZ program are not mutually exclusive of other tax benefits under the S. federal tax code, such as New Markets Tax Credits (NMTCs), Low-Income Housing Tax Credits (LIHTCs), and section 1031 like-kind exchanges (assuming some capital gains are triggered by the transaction). The QOZ program could be combined with other programs.
  • The QOZs were designated by the Governor of Florida prior to March of 2018, and QOZs represent specific “census tracts” located within low-income communities. Here is a website link to a map showing the various QOZs within the State of Florida:

https://deolmsgis.maps.arcgis.com/apps/webappviewer/index.html?id=4e768ad410c84a32ac9aa91035cc2375

As you can see, the rules and regulations governing QOZs and QOFs are complicated and require very detailed analysis.  All facts and circumstances should be taken into consideration when considering, and prior to making, an investment into a QOF using the QOZ program.  Should you have any questions regarding the QOZ program, please feel free to contact Nathaniel Dutt, Esq. at ndutt@SLLaw.com or Jordan Horowitz, Esq. at jhorowitz@SLLaw.com, or either at 407-581-9800.

Enforceability of Association Parking Restrictions Related to Public Streets

Enforceability of Association Parking Restrictions Related to Public Streets

Many community association declarations contain restrictions on the parking of vehicles on streets located within the community.  For communities that contain private streets maintained by the association, it seems clear that these restrictions would be enforceable.  However, for communities that contain public streets, the enforceability of those restrictions is not so clear.

There appears to be no reported decision by a Florida appellate court dealing with the issue of whether a community association can enforce restrictions purporting to prohibit parking on public streets.  However, that may soon change.

A trial court, in Pinellas County, has ruled that a homeowners association cannot enforce such parking restrictions relating to public streets.  That case arose from the filing of a lawsuit by the impacted owners which sought the entry of an injunction prohibiting the association from enforcing a parking restriction relating to public streets.  The trial court granted that injunction.  The association that was a party to that case filed an appeal with the Florida Second District Court of Appeal.  In Woodfield Community Association, Inc. v. Ortiz by and through Ortiz, 2018 WL 3403387 (Fla. 2d DCA 2018), the appellate court set aside the injunction, but only on the basis that the trial court’s order failed to include certain information needed to support entry of an injunction.  The appellate court did not discuss the underlying issue of whether the injunction would have been sustained, on its merits, had the trial court listed the necessary information.  Instead, that issue would need to be presented to the appellate court by the filing of a new appeal after the trial court enters a new order.

If such an order is entered by the trial court and the association files another appeal, Florida’s Second District Court of Appeal will be in a position to author the first Florida appellate court opinion as to the enforceability of parking restrictions relating to public streets.

There are at least 3 reported decisions, from out-of-state appellate courts, that have addressed this issue. In one of the cases, Raintree of Albemarle Homeowners Association, Inc., 413 S.E. 340 (Va. 1992), the court ruled that such restrictions could not be enforced.  In the other two cases, Maryland Estates Homeowners’ Association v. Puckett, 936 S.W. 2d 218 (Mo. Ct. App. 1996); and Verna v. The Links at Valleybrook Neighborhood Association, Inc., 852 S. 2d 202 (N.J. Super. Ct. App. 2004), the courts ruled that such restrictions could be enforced, at least as to owners in the community.

The argument to support a finding that these restrictions are not enforceable is that an entity, such as a community association, does not have the authority to control access to or the use of a road that is owned by a municipality.  The argument to support the enforceability of these restrictions is that parties, such as an association and its owners, are free to enter into a contract (the recorded deed restrictions) containing restrictions that would impose greater limits on an owner’s use of property than those imposed by governmental restrictions.