Defining a Trust in the State of Florida
In simple terms, a Florida trust acts like a container into which money or property goes. The most common type of grantor trust is the revocable trust. In this type of trust, the grantor can change or amend the terms of the trust at any time prior to death. When the grantor dies, the assets held in the trust are transferred to the named beneficiaries of the Trust. The assets held in the trust avoid probate in Florida.
A Florida trust is recognized as a legal and valid entity by Florida law. There are many different types of Trusts one can create under Florida law:
• Revocable Living Trust (also referred to as "Living Trust")
• Irrevocable Trust
• Charitable Lead Trust
• Charitable Remainder Trust
• Supplemental Needs Trust (also referred to as "Special Needs Trust")
• QTIP Trust
• Irrevocable Life Insurance Trust
• Dynasty Trust
• Grantor Trust
• Spendthrift Trust
• Totten Trust
• Totten Trust (also referred to as "POD – Payable on Death")
These are just some of the different types of Florida Trusts one can create. One can create a Florida Trust that will be established upon the death of the grantor , for example a testamentary Trust. Some Florida Trusts can be established during the lifetime of the grantor (inter vivos Trust), such as a Revocable Living Trust.
The Florida Constitution of 1968 authorizes the creation of private and charitable Trusts and the administration thereof for purposes permitted in 1968. Lockwood v. Exchange National Bank of Chicago. (Etc. v. Volusia Cnty., 416 So.2d 45 (Fla.1982)).
Florida recognizes three broad categories of Trusts:
• Private trusts contain substantive rules that a court can enforce between private parties.
• Charitable trusts are defined by statute and generally provide for the management of property for the benefit of unspecified charitable purposes.
• Honorary trusts are noncharitable Trusts that have no ascertainable beneficiary. These are usually for the benefit of pets or other specific purposes.
Requirements for Executing a Florida Trust
At common law, a trust arose whenever a settlor conveyed a "separable interest" of his real property to a trustee for the benefit of a beneficiary. This is still true in the vast majority of states. However, Florida statute systemized the requirements for validly executing trusts, and statutorily requires certain written formalities, including: a writing indicating the name of the settlor; the identity and signature of the trustee (or, if there is no trustee, the means by which the trust property will be managed); the trust property sufficient to enable the trust property to be identified; the beneficiaries; and the age or definite time of payment of final benefit. These requirements are codified in F.S. §736.0401. Failure to meet these statutory formalities may render the trust invalid. According to the Florida Appeals Court, the requirements for establishing a valid trust are twofold: (1) manifestation of intent to create a trust; and (2) res (property) on which the trust can operate. In re Estate of Schaefer, 2009 WL 4125090, at *1 (Fla. 4th DCA 2011). While the courts have not held that it is a requirement that the "terms" of the trust be set out in writing, it is true that the statutory requirements found in section 736.0401(1)(b) (indicating the "identity and signature of the trustee (or, if there is no trustee, the means by which the trust property will be managed)") imply that there must be some writing indicating the intended terms of the trust. Florida law does not create different terms for creditors and beneficiaries. Thus, while the Statute of Frauds applies to inter vivos trusts, it does not apply to wills. In re Estate of Schaefer, 2009 WL 4125090, at *1 (Fla. 4th DCA 2011).
Trustee as the Protector of Your Trust
The Florida Trust Code, Subpart 735.110, discusses the responsibilities and duties of a trustee in executing a trust. The law specifies the power of the trustee over the property contained within the trust. Subpart 110(b) addresses the knowledge of the trustee of the trust terms, such that the trustee of the settlor (the person creating the trust) will not be deemed to have knowledge or notice of the trust terms during their administration of any property of the trust if there have been no distribution orders made by the court, as well as how the trust exists under the law.
Trusts tend to come under less scrutiny than Wills, and many people do not adhere to the terms of the trust document, because the trust will likely not enter the "probate" court system. However, the Florida probate and trust code includes fairly comprehensive sections relating to trusts, and the courts are even more inclined to apply the rules of the probate code, and the overarching principles that interpretations of Florida law often use the same interpretation of terms irrespective of whether the trust is under the purview of the probate department.
The terms of the configuration and distribution of a trust are very important, especially in probate matters where credit institutions (such as Banks) will not deal with trustees without a letter of authority from the probate court. It is imperative that all trust terms be adhered to, and it is preferable to record the trust instrument with the County Clerk so that there is a matter of public record. Once a trust is funded, the trustee needs to commence preparing a distribution schedule, and informing the beneficiaries of the property contained therein. Also, the trustee must never commingle trust property with his or her own, and must keep trust property separate from the trustee’s own property, to the degree that it is possible. This is very important in litigation where a disgruntled beneficiary tries to recover trust property from the trustee.
Florida law also allows for a trust to be revocable or irrevocable. For example, typically, if a beneficiary of a revocable trust dies during the lifetime of the grantor, at least a portion of the trust assets must pass to the living beneficiary’s estate. At the time of the death of the grantor, the terms of the trust must be adhered to, and the trustee must take charge of said trust assets. There is no law prohibiting the trustee from charging a fee in administering said trust, and oftentimes, a retainer is withheld by the trust, against which the trustee can take his or her fees. One must document all time spent on doing the work of the trust.
The Florida Trust Code §736.0813 provides that the trustee has the authority to collect trust assets; to accept or repudiate property or benefits conferred upon the trust, and to hold as additional trust property any property received in satisfaction of indebtedness; to make (and collect) any property offered as a reduction of a claim, and to buy or pay whatever may be necessary to discharge obligations; to set off against the trust property any claim by the trustee against the trust and to satisfy claims against the trust from any property, whether by any action, agreement, or negotiation and to deposit any sums into any trust account from the trustee’s own assets for partial or total payment or in satisfaction of any trust liability; to enter into a lease of any trust real estate for any period of time and on any terms; to settle, release, compromise, adjust, arbitrate, mediate, refuse to assert, and withdraw, any claim at law or in equity; to pay or contest any claim or liability; to pay reasonable compensation and expended for services rendered and other expenses; to pay any taxes, expenses, and attorney’s fees.
The importance of the role of the trustee in executing the trust cannot be understated. Often it is better practice to get court approval of the actions of the trustee, so that the trust can commence functioning perfectly and without the fear that a disgruntled beneficiary will assert claims, and jepardize the trust estate.
Significance of a Properly Executed Trust Document
One of the most common problems with non-probate transfers is that the will or trust document is not properly executed. This has been a traditional source of litigation in Florida probate and trust disputes.
In Florida, the validity of a formal will is determined by Florida Statute 732.505, which provides:
A will executed in substantial compliance with § 732.502 is prima facie valid, and the court shall admit the will to probate unless section 732.503 or s. 732.506 operates to prevent its probate. Florida’s statute on formal wills contains specific language as to the requirements of formal execution (signing and attestation of witnesses). Florida’s statute also has provisions that allow for "substantial compliance" with the Florida Statute.
But where does this leave parties as to the validity of formal documents if "Florida Statute 732.505" is inapplicable under the circumstances (for example, when a litigant has accepted the document as valid by filing it with the Court or otherwise)? How does Florida’s Trust code come in to play in determining the validity of a trust document?
Florida Statute 736.0403 provides:
Execution-A trust instrument, other than a deed to the trustee in an inter vivos trust, must be: (1) Executed in writing; (2) Signed in the name of the settlor by: (a) The settlor; or (b) the settlor’s authorized agent; and (3) At least 2 individuals must sign the trust instrument as witnesses. Florida Trusts must be executed pursuant to the statute, and Florida Courts have routinely held that failure to execute the trust as required by the statute renders the trust document invalid and ineffective.
Florida Statutes 736.0402, titled "Trust executed on or after July 1, 2007, deemed revocable unless expressly made irrevocable," provides that irrevocable trusts must be executed in the following manner in order to be valid:
A trust must be revocable by the terms of the trust instrument unless expressly made irrevocable in the trust instrument. A trust that would otherwise be revocable but is revocable only by the terms of the trust instrument after the death of the settlor’s spouse is deemed revocable in its entirety during the trust settlor’s lifetime for purposes of determining the means test for eligibility for assistance from a governmental entity.
It is imperative to understand Florida law as it involves formalities for executing trust instruments. In Florida, any confusion as to whether a trust instrument has been properly executed has been solved by having the instrument executed by two witnesses. Failure to obtain the proper number of witnesses will cause issues in determining the validity of the trust, as the statutes are clear that in order for trusts to be revocable in Florida, the proper formalities must be followed.
Typical Issues with Executed Trusts
Even when a Florida trust has been properly established and documented, problems may arise during the administration and distribution of trust assets. Issues can range from accounting to breach of fiduciary duty, causing unnecessary stress, uncertainty, or litigation. Some of the most common trust execution problems include:
- Accounting Disputes: Many times individuals and/or beneficiaries of a trust when first notified of the existence of a trust become surprised, shocked, and/or unwilling to accept the terms of the Trust. This can lead to litigation between beneficiaries and/or interested persons. A dispute can be whether a trust is revocable or irrevocable. This can result in a challenge by the beneficiaries or heirs to the validity of the trust at the death of the settlor of the Trust. Other issues can be whether a trust is funded or unfunded; an unfunded trust being created when the settlor failed to put his or her assets into the trust. Another issue which frequently arises is the calculation and/or allocation of the income generated by a trust.
- Breach of Fiduciary Duty: A fiduciary is a person who is designated to act on behalf of another individual. A trustee or personal representative is generally considered a fiduciary and must act in the best interest of those for whom he or she is acting . Although a beneficiary may desire to have a trustee removed, the existence of an irreconcilable relationship with his or her fiduciary is not automatically a sufficient basis for removal. The law requires a showing that the trustee’s actions have harmed the beneficiaries in some manner. If there is no harm to a beneficiary or the trust itself, then the court will refuse to remove the trustee.
- Breach of Fiduciary Duty by a Trustee: A breach of fiduciary duty by a trustee can occur when the trustee fails to administer the trust according to the directions stated in the trust. A breach of trust can be a result of a specific action or failure to act in a reasonable manner by a trustee. Once a Trustee has breached his or her fiduciary duty a Court may hold the Trustee liable to the beneficiaries for the damages caused by the breach, order the Trustee to restore the value of the trust property lost, or to account for any profit made by the breach.
- Liability for Trustee Actions: A Trustee can be liable to the beneficiaries for the breach of a fiduciary duty. Certain protections are afforded to trustees by statute, including the right to be compensated for their service as well as an absolute defense from liability for breach of trust for acts or decisions made in good faith.
Trust Execution in the State of Florida
In Florida, unless the governing instrument expressly prohibits, any trust may be amended by deriving the amendment from the same components as required for the original execution. Any trust can be revoked within the time and manner prescribed by Florida Statutes and the settlor’s intent.
Florida Statute §736.0404 describes the requirements for revocation, modification, and termination of a trust. Reformation of a trust may also be pursued if terms are unambiguous and do not conform to the Settlor’s intent, but upon execution of the instrument were separately agreed upon by the parties. This is an action can be sought by a person interested in the trust.
Florida Statute §736.0402 requires all amendments of revocations of a trust instrument to be executed in the manner required for execution of a trust. Unless the terms of the trust or the trust instrument expressly provide otherwise, the trust may be revoked or a revocation in writing by the settlor is signed and delivered to the trustee. A majority of the trustees may, however, waive the delivery requirement, and the trust can be revoked with a waiver of that specific delivery requirement.
Even in the instance where the terms of a trust contain a provision that it is revocable, this in itself is not reason enough to establish that the trust is revocable. Florida Statute §736.0406 addresses the circumstances whereby a conveyance to an irrevocable trust containing a provision enabling the settlor to revoke or amend it may be held as a valid revocation of such conveyance. This provision applies to both the use of words and syntax in the governing instrument and also to other acts of the settlor.
A conveyance to an irrevocable trust containing a provision permitting a settlor to revoke or amend the conveyance is sufficient to designate that the conveyance into the trust takes effect upon the settlor’s death. This is applicable unless it is apparent that the contrary was intended by the settlor at the time the conveyance was executed.
Consult with an Attorney
The above are just a few of the many traps that can await the unwary in Florida trust execution. However, the above challenges can generally be avoided with a little up front professional legal guidance in preparing the trust instrument. I recommend, at the very least, that you have a Florida licensed attorney retained to prepare the trust, acting as the drafter and being paid for his/her services . This will typically ensure that the instrument is drafted with the intent of the settlor (the person creating the trust) properly memorialized and that the instrument will meet Florida’s requirements of due execution and intent. We all make mistakes, but should the estate/trust find itself involved in litigation, having the drafter available as a witness could prove to be tremendously valuable in that such individual did not simply author the instrument but also is available to testify to the intent of the settlor.
