How to Protect Yourself as A Trustee
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:
The interpretation or construction of the terms of the trust;
The approval of a trustee’s report or accounting;
The direction to a trustee to perform, or refrain from performing, a particular act; or
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.