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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.

How to Protect Yourself as 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.

Attorney Julie Ickes Joins ShuffieldLowman

Attorney Julie Ickes Joins ShuffieldLowman

ORLANDO, FLORIDA – ShuffieldLowman recently announced that attorney Julie Ickes has joined the firm, working in the Orlando office. A former business owner and judicial clerk for both the U.S. Bankruptcy Court and the U.S. District Court, Ickes brings these experiences and an advanced law degree in taxation to her practice in the areas of estate planning, trusts and estates.

Ickes is a graduate of Smith College, with a B.A., in Economics and French Studies and University of Florida Levin College of Law where she earned her J.D., cum laude, and LL.M. in Taxation. While in law school she served as the Executive Research Editor of the Journal of Technology Law & Policy and the Research Editor of the Florida Journal of International Law. In addition, she also attended the Duke-Geneva Institute in Transnational Law in Geneva, Switzerland where the late Supreme Court Justice Antonin Scalia was an instructor.

She is conversational in French and German, is a member of The Florida Bar’s Real Property, Probate and Trust Law Section, the Tax Law and the Elder Law Sections and is active in the Florida Association of Women Lawyers, where she held a leadership role in the St. Johns County chapter.

ShuffieldLowman’s four offices are located in Orlando, Tavares, DeLand and Port Orange. The firm is a 40 attorney, full service, business law firm, practicing in the areas of corporate law, estate planning, real estate and litigation. Specific areas include, tax law, securities, mergers and acquisitions, intellectual property, estate planning and probate, planning for families with closely held businesses, guardianship and elder law, tax controversy – Federal and State, non-profit organization law, banking and finance, land use and government law, commercial and civil litigation, fiduciary litigation, construction law, association law, bankruptcy and creditors’ rights, labor and employment, and mediation.

What the Tax Cut and Jobs Act Means for Your Estate Plan

What the Tax Cut and Jobs Act Means for Your Estate Plan

Congress recently passed the Tax Cut and Jobs Act (“TCJA”) earlier this year, the largest revision to the tax code in thirty (30) years.  Among the many changes are significant increases in the Estate, Gift, and Generation-Skipping Transfer (GST) tax exclusion amounts.  In effect, this means that fewer families will be subject to such transfer taxes and that many estate plans will need to be updated to properly address the new law.  The changes under the TCJA present an important opportunity for high net-worth individuals and families to review their current estate planning documents and ensure that their plan is properly tailored to achieve their goals.

 

Overview of Changes
The most significant change is the doubling of the unified Estate and Gift tax exclusion amount – the combined amount that individuals can give away during life or at death before paying transfer taxes – from $5.59 million to $11.18 million per person.  The new tax law also preserves “portability,” a surviving spouse’s ability to retain any estate or gift exclusion unused by a deceased spouse, meaning that for married couples, the exclusion is effectively $22.36 million. This exclusion is inflation adjusted, but current law provides that this doubled exclusion sunsets December 31, 2025, after which estate taxes are slated to revert to current levels.

The new law also increases the amount each person can make exempt from the GST tax.  As with the estate and gift tax exclusion, the new GST exclusion will increase from $5.59 million to $11.18 million per person (in 2018 as indexed for inflation).  Unlike with the estate and gift tax, however, there is no “portability” for GST taxes.  Thus, each spouse must use their own GST exclusion before they pass.

In addition to the changes made by the new tax bill, 2018 also brings a routine increase in the annual exclusion from the Gift tax to $15,000 per person, per year.  This annual exclusion allows each individual to make a gift of $15,000 to any other individual (and in some cases trusts) without reducing their lifetime Estate and Gift tax exclusion amount.

Review of  Your Estate Plan

The changes in the Estate, Gift and GST tax law mean that many estate plans should be revised to take advantage of tax changes, ensure existing tax formulas still achieve the intended results, or simplify complex planning that is no longer necessary and shift a focus towards income tax planning for beneficiaries. There are also certain planning opportunities that you may want to explore.

First, the increased exclusion amount may be an opportunity to unwind complex planning that may no longer be needed to minimize transfer taxes.  For instance, many estate plans created under assumptions of prior law provide that at the death of the first spouse, the deceased spouse’s assets are divided into two (2) separate trust shares: a Marital Trust for the benefit of the surviving spouse and a Credit Shelter Trust that may benefit the surviving spouse, your children and/or grandchildren, or combinations of those people. For married couples with large estates, this technique defers payment of any Estate tax until the passing of the second spouse.  The trade-off is that the Credit Shelter Trust may not benefit the surviving spouse solely and the income tax basis of the Credit Shelter Trust is locked into place upon the first spouse’s death.   Many couples who used such techniques to minimize Estate tax prior to the new increased exclusion amounts will prefer for the surviving spouse to retain greater control of assets and plan for the remainder beneficiaries to receive a step-up in income tax basis for all of the assets upon the surviving spouse’s passing. ShuffieldLowman can assist you with weighing that control over the asset protection and the certainty of the Credit Shelter Trust to determine what is best for each family.

As mentioned above, another scenario involving Marital and Credit Shelter Trusts may play out in other plans containing “formula gifts.”  Certain estate plans leave assets up to the Estate tax exclusion amount to a Credit Shelter Trust for the benefit of children or grandchildren and leave assets in excess of that amount to a Marital Trust for the benefit of the spouse.  Because the Estate tax exclusion amount is now so large, this could mean unintentionally disinheriting the spouse and leaving all assets to the Family Trust or just leaving significantly less to the surviving spouse than intended.

Next, we do not know if the federal increased exclusion amounts will not be extended and will in fact expire in 2025, which is what the TCJA provides.  Under a subsequent administration the exclusion amounts may even return to the lower levels of the past that existed for most of the 2000s.  If either of these events does indeed occur, then the current increase in the exclusion amounts provides a temporary, “use it or lose it” opportunity to transfer assets outside your taxable estate, thereby “locking in” the current exclusion amount before it is reduced and freezing values from future appreciation.  This estate tax planning might involve increased contributions to Irrevocable Trusts such as Irrevocable Life Insurance Trusts, Intentionally Defective Grantor Trusts (IDGTs), sales to these types of trusts, forgiveness of intra-family promissory notes, or other wealth transfer vehicles.  You may want to consider further planning using the increased exemption amounts to remove assets from the estate.

Finally, some clients may even wish to use the increased exclusion amount to unwind prior planning and bring assets back into their gross estate to obtain a step-up in basis in those assets to fair market value at the time of their death.  This type of planning is geared toward reducing income tax liability of your beneficiaries upon the sale of the inherited assets.

These are just a few examples of the many ways in which the TCJA may affect your estate plan.  The TCJA makes significant changes to the Estate, Gift and GST tax regimes. If your estate plan was implemented under previous law, it would be beneficial to review your plan to ensure it accomplishes your current goals in light of these changes. If you would like a comprehensive review of your estate plan, contact ShuffieldLowman today.

 

A Quick Reminder That Some Filing Dates Have Changed for Several Forms in 2017

A Quick Reminder That Some Filing Dates Have Changed for Several Forms in 2017

This year will be the first to see the implementation of new filing deadlines for many forms. The first new deadline, that will occur shortly, is for filing W-2’s, which is now January 31 instead of the previous February deadlines. March 15 is the new deadline for Form 1065 (partnership returns) and Form 1120 (S-corporation returns). This includes the K-1s. Each is extendable to September 15.

Next comes April 15. Forms 1040 continue to be due on this date, but FINCEN 114 (Report of Foreign Bank Account) is now due at the same time instead of June 30, as in the past. Form 1041 (Income Tax Return for Estates and Trusts) and Form 1120 (Corporate Tax Return) are due on April 15 and are extendable to September 30 and September 15, respectively.

Other forms, such as Form 5471 (Report of Foreign –Owned Corporations), that are due at the same time as some of the income tax returns, will change their due dates to correspond to the new due dates of these returns. Caution is advised in checking all deadlines and not simply relying on past experience.

New Tax Regulations Attack Family Business Planning

New Tax Regulations Attack Family Business Planning

As you know, the Internal Revenue Service closely scrutinizes transfers between family members of stock, units, and partnership interests (“Stock”) in any corporation, limited liability company, or partnership that is family-owned (a “Family Business”).  The Service has announced proposed regulations that eliminates the use of valuation discounts that would otherwise decrease the estate and gift tax value of such Stock when transferred by sale or gift to family members.  If you are considering a gift or sale of Stock in a Family Business, you may want to consider taking action right away to implement your planning.

When Stock in a Family Business is transferred between family members, valuation discounts are commonly applied for, among other things, lack of marketability and lack of control.  The lack of marketability discount is based on the fact that a Family Business cannot easily be sold on the open market and is not publicly traded; so, the true value of the Stock is actually worth less than a pro rata portion of the total value of the underlying assets.  The lack of control discount is based on the fact that a non-voting interest or a minority interest that does entitle the owner to a vote (but not unilateral control of the entity) is worth less to an arm’s length purchaser than if they could control the entity.  These discounts are designed to reflect the true economics of a Family Business from the view point of a third party purchaser.

Valuation discounts have been an effective tool to reduce or eliminate federal estate and gift taxes on transfers of Stock in Family Businesses for many years.  The Service, however, has long sought to limit the benefit of this tool.  This has been especially true when the Service determines that the Family Business in question has no legitimate “business purposes.”  The proposed regulations address the Service’s concerns by eliminating all discounts.  We expect attorneys, accountants, appraisal experts, and other planners to comment in the next ninety (90) days about the validity and public policy implications of the proposed regulations.  However, the very real possibility is that the proposed regulations will be effective when the final version is published, which might occur in as little as one hundred and twenty (120) days.

The new regulations do basically two (2) things.  First, when valuing Stock in a Family Business certain restrictions on liquidation rights are disregarded when such rights lapse after a transfer (for instance if the General Partner of a partnership dies) or if after a transfer the restrictions may later be removed by the transferor or the transferor’s family.  Second, any lapse of voting or liquidation rights is deemed to be a transfer to the other family member/owners in the Family Business.  Both rules only apply if one (1) or more members of the family has control of the Family Business both before and after the transfer or lapse.  Control may occur when certain voting or equity thresholds are met; furthermore, ownership by a particular family member will be attributed to related family members, making it hard not to pass the threshold of control.  In plain English, this means that valuation discounts will no longer be available for transfers of Stock in a Family Business to family members.

Existing Family Businesses would not be “grandfathered” under the proposed regulations.  Only gifts or sales completed prior to thirty (30) days after the effective date of the final regulations would be exempt from the new rules.  It is also very likely that regardless of how broad or narrow the final regulations may be, the ultimate validity of the regulations will be determined through taxpayers litigating this issue in the Tax and Federal Courts.  Therefore, once the new regulations are made final, we may not have any certainty in this area for the next several years while legal battles are fought with the Service.

Because of the uncertainty of the new proposed regulations, we recommend that our clients who may be inclined to transfer Stock in a Family Business, whether by gift, sale, or both, consider all of their planning options as soon as possible to determine if they should go ahead with some transfers prior to the issuance of the final regulations.  We would be happy to sit down with you and discuss all of your planning options.