Making principal invasions under Florida law when an interested party is serving as trustee.

• Author: Miner, Jeffrey R.
• Position: Estate planning; taxation

There will always be situations when a client will want to name an interested person to serve as trustee of a trust he or she is setting up. There used to be two reasons for concern whenever someone such as a surviving spouse was named as trustee. The first reason related to the possible estate and gift tax consequences depending on the type of powers given the spouse/trustee over the payment of either income or principal.(1) Most Florida attorneys feel that this is no longer a problem in light of the enactment of F.S. [sections] 737.402(4)(a). However, there is at least one situation in which there could still be tax problems notwithstanding this statute, which will be discussed in this article.

The second reason for concern whenever someone such as a surviving spouse is named as trustee involves the conflict of interest that exists when an individual has authority to invade the principal of a trust for his or her benefit. In this respect, one of the fundamental duties that a trustee owes in connection with the administration of a trust is the duty of impartiality.(2) Regarding this duty, a trustee holds the trust estate for the benefit of those entitled to the remainder just as much as he holds it for the persons entitled to immediate beneficial enjoyment.(3) It is this duty of impartiality that is put to the true test whenever an interested person such as a surviving spouse is named as trustee.

Types of Principal Distributions

There are three types of principal distributions from trusts that will be relevant for purposes of this article. The first type are distributions that are clearly within the definition and boundary of the standard used. An example would be a distribution for essential food and clothing under a "support" standard. The only question here might be whether the amount to be distributed is proper.

The second type are those in whichit is uncertain whether the proposed distribution is within the boundaries of the standard used. An example would be a distribution requested for nonessential cosmetic surgery under either a "health" invasion standard or a "best interests" invasion standard. Another example would be a distribution requested for an "around the world cruise" under a "support" invasion standard (when trips of this sort were not part of the beneficiary's lifestyle while the settlor was alive). In either case, there is no guarantee that a court would approve the requested distribution.

The third type of distributions are those in which there is no authority in the trust instrument to make such distributions. Examples include distributions for unquestionably luxury items when the invasion provision permits distributions only for the beneficiary's "support." Another example would be a distribution to allow a beneficiary to make gifts to descendants in which the trust merely allows principal distributions for the spouse's health, support, and maintenance.

Significance of Type of Used Remainder Disposition

The provision of the trust instrument that identifies those individuals other than the spouse to whom the trustee owes a duty of impartiality is the remainder provision. There are two types of remainder provisions relevant for purposes of this article. The first type, "option A," would provide something similar to the following: "Upon the death of my wife the trust estate shall be equally divided among my children who are then living."

The above provision is in contrast to the provision that is used in many contemporary trusts ("option B") which provides that the remainder be distributed: "In equal shares to each child of mine who is then living and the descendants, collectively, of each child of mine who is then deceased."

With the first provision, upon the death of the husband the class of possible remaindermen closes and there is no possibility of additional members being added to the class. With the second provision, however, you are never really sure until the surviving spouse's death of just who will be entitled to the trust remainder. The death of one or more family members prior to the spouse's death can result in grandchildren or even younger descendants becoming entitled to part of the trust remainder.

Statutory Framework

There are two statutes that can apply whenever an interested party is serving as trustee. The first statute, F.S. [sections] 737.402(4)(a), prevents a trustee from exercising certain types of powers when the trustee is also the beneficiary of certain types of trusts. One of the purposes for enacting this statute was to provide protection to Florida attorneys from possible malpractice suits resulting from their drafting of overly broad invasion provisions in most nonmarital trusts. To provide this protection, the legislature tried to use an approach similar to one approved by the IRS in Rev. Rul. 54-153.(4) That revenue ruling held that if there is a state statute that prevents a trustee from exercising a power set forth in a trust instrument, since the statute overrides the trustee's right to exercise the power, the trustee is deemed not to possess the power in question. However, since the legislature did not follow the exact approach approved in Rev. Rul. 54-153, there might be...