After death does us part: surviving spouse as fiduciary and beneficiary.

AuthorSveum, Catrina A.

Spouses commonly name each other as fiduciaries in their estate planning documents. Even in intestate estates, Florida law recognizes a preference for the surviving spouse to be a fiduciary. (1) This statutory preference exists even when the deceased spouse leaves adult children not of the marriage. When a surviving spouse serves as a fiduciary, some conflict of interest is inevitable because he or she is almost certainly also a beneficiary. In blended families, (2) this conflict may very well be exacerbated, and a great deal of tension between a surviving spouse and the decedent's children may exist, particularly after the "glue" that kept the family united is gone. Thus, it may be preferable in blended families to appoint an independent fiduciary (such as a bank or trust company) to serve with the surviving spouse. Although naming an independent fiduciary can be costly, it may ultimately save familial relationships and avoid possible litigation throughout the initial estate administration and ensuing trust administration.

This article examines some situations in which a surviving spouse's dual role as fiduciary and beneficiary can be particularly tricky, such as electing portability of the decedent's unused applicable exclusion amount, the use of disclaimers post-mortem, tax elections (such as QTIP elections), and the petition for certain statutory entitlements under Florida law.

Basic Fiduciary Duties and Functions of a Personal Representative and Trustee

A personal representative (PR) is the legal representative of a decedent's estate. The PR marshals the estate assets, obtains values for the assets and reports them on an inventory for the court and estate beneficiaries, pays the debts of the decedent, prepares and files an estate tax return (and any other related tax filings), if necessary, and handles the ultimate distribution of the estate property. Once the estate's debts have been paid, the estate tax closing letter has been received (if an estate tax return was filed), and the assets have been distributed properly, the PR is discharged by the probate court and released from liability. (3)

When a surviving spouse is PR, several fiduciary duties can create additional tension with beneficiaries. First, the PR must be represented by counsel. (4) The choice of attorney and other advisors may be questioned by beneficiaries. Second, the PR may need to sell estate assets to raise cash to pay debts and taxes of the decedent and expenses incurred during estate administration. Apart from statutory restrictions on sales involving real property (5) or when a PR has a conflict of interest, (6) a PR has broad discretion to sell estate assets. Exercise of this discretion may cause discord with beneficiaries, particularly if the PR wants to sell family heirlooms with sentimental value to other beneficiaries. Finally, the ultimate distribution of estate assets may create tension, as the PR has no duty to distribute assets on a pro rata basis (subject to the duty of impartiality). (7)

The fiduciary duties of a trustee are similar. In fact, the Florida Probate Code provides that a "personal representative is a fiduciary who shall observe the standards of care applicable to trustees." (8) A trustee's duties and responsibilities exist for as long as the individual is serving as trustee (and considering the fact that Florida's rule against perpetuities period is 360 years, an individual can be a trustee for many years). A trustee has concurrent duties to administer the trust in good faith and with loyalty (which involves administering the trust in the interest of the beneficiaries) and impartiality. (9) This can be particularly tricky when the surviving spouse is both a trustee and beneficiary because of the natural propensity to act in one's own interest. The themes of loyalty and impartiality are emphasized throughout the Florida Trust Code. (10)

The dichotomy that exists when a surviving spouse is also a beneficiary is illustrated in the use of a credit shelter trust, which is designed to receive a decedent's unused applicable exclusion amount so that the decedent's estate (and, possibly, generation-skipping transfer tax) exemption is used. These trusts generally exist during the life of a surviving spouse and are often administered as one trust for multiple beneficiaries (generally, the surviving spouse and the decedent's children). They may include provisions that the surviving spouse's needs shall be paramount. Upon the death of the surviving spouse, the trust is typically divided into shares for the children of the decedent. If a surviving spouse is the trustee of this trust, the other beneficiaries may question the surviving spouse's investment strategy and discretion over distributions, particularly because the surviving spouse is also a beneficiary.

One way to address this issue during the estate planning phase is to give the surviving spouse a limited power of appointment to leave the assets remaining at his or her death to charity or a limited class of persons. Generally, if the power is not exercised, the assets in the trust at the surviving spouse's death will be divided into shares for the decedent's descendants. Including a limited power of appointment alerts those descendants that they may not receive the assets upon the death of the surviving spouse and may serve as a "hammer" to ensure that the descendants don't attempt to thwart the decedent's intentions. In addition, if the surviving spouse is not the sole trustee, he or she may represent and bind persons whose interests are subject to the power for...

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