The new Florida Trust Code.

• Author: Powell, David F.
• Position: Part 2

Part VIII of the Code: Duties and Powers of Trustee

As its title suggests, Part VIII of the New Florida Trust Code covers the duties and powers of a trustee. The following discussion tracks the Code, beginning with duties, moving on to powers, and winding up with a few miscellaneous matters.

Duties of a trustee

In a series of separate sections, the Code codifies all of the fundamental common law duties of a trustee, as well as several other more specifically targeted duties relating to the collection, management, and distribution of trust property. A comprehensive list of statutory duties, all of which are consistent with existing Florida decisional and statutory law, includes:

* A mandatory duty to administer in good faith (1) and to inform and account. (2)

* With some important exceptions discussed further below, the duty to redress breaches of former trustees. (3)

* The duty of loyalty (i.e., to administer the trust solely in the interests of the beneficiaries) (4) and of impartiality (i.e., to administer the trust impartially giving due regard to the respective interests of the beneficiaries). (5)

* The duty to administer prudently (i.e., as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by exercising reasonable care, skill, and caution). (6)

* The duty to incur only reasonable expenses; (7) use special skills; (8) control and protect trust property; (9) keep accurate records; (10) enforce and defend claims; (11) and administer pending the outcome of a contest or other proceeding. (12)

* The duty not to commingle and to earmark (i.e., to cause the interest of the trust to appear in any records maintained by third parties); (13) ascertain marketable title (but only when it is required for a specific sale or conveyance); (14) and expeditiously distribute trust property on termination (subject to the right to retain a reasonable reserve for the payment of debts, expenses, and taxes). (15)

Three of the duties on this list--the duty to inform and account, the duty to redress former breaches, and the duty of loyalty--merit further elucidation. Turning first to the duty to inform and account, [section] 736.0813 of the Code requires that a trustee must keep the qualified beneficiaries of an irrevocable trust reasonably informed of the trust and its administration. Note this duty extends only to qualified beneficiaries. It includes, but is not limited to, a mandatory duty to:

* Notify them of the trustee's acceptance of the trust and the full name and address of the trustee within 60 days after the trustee's acceptance;

* Notify them of the existence of the trust, the identity of the settlor, the right to request a copy of the trust instrument, and the right to accountings within 60 days after the trustee acquires knowledge of the creation of an irrevocable trust or that a formerly revocable trust has become irrevocable;

* Upon reasonable request, furnish them with a complete copy of the trust instrument;

* Once a trust becomes irrevocable, furnish a trust accounting to them annually as well as on termination of the trust or on a change of trustee; and

* Upon reasonable request, provide them with relevant information about the trust's assets and liabilities and the particulars of the trust administration.

With respect to the duty to redress former breaches, [section] 736.0812 states generally that a trustee must take reasonable steps to redress a breach of trust known to the trustee to have been committed by a former trustee. This duty is qualified, however, by [section] 736.08125, which details several instances where a successor trustee has no personal liability for actions (16) of a prior trustee. As the section is substantively similar to F.S. [section] 737.306(3)-(6), it will not be further detailed here, except to note that the section speaks only to the personal liability of successor trustees. Nothing in the section affects the liability of a prior trustee or the right of a successor trustee or any beneficiary to proceed against the prior trustee.

Last, with respect to the duty of loyalty, Code [section] 736.0802 provides that as between the trustee and the beneficiaries, a trustee has a duty to administer the trust solely in the interests of the beneficiaries. As is detailed further in the section, this means, among other things, that in the absence of a contrary provision in the trust instrument, a court order, or a specific statutory exception, a trustee may not engage in any sale, encumbrance, or transaction for its own personal account that involves a conflict between the trustee's personal and fiduciary interests. Nor may a trustee usurp an opportunity properly belonging to the trust. And, in voting shares of stock or in exercising powers of control over interests in other enterprises, the trustee must act in the best interest of the beneficiaries.

In general, an offending transaction entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's personal and fiduciary interests is voidable per se by an affected beneficiary. (17) This is a change in Florida law, as similar transactions have been held to be void rather than voidable in at least one Florida case. (18) The significance of the change is that under the Code, the right of an affected beneficiary to void a transaction is subservient to the protection the Code affords persons dealing with the trustee in good faith. (19) Further, a beneficiary's action can be precluded by an effective consent, ratification, or release, (20) or by a failure to commence the action within the applicable limitations period. (21)

In contrast to transactions involving the trustee personally, transactions between the trustee and persons who have close business or personal ties to the trustee are only presumed to be affected by a conflict between the personal and fiduciary interests of the trustee. (22) As such, they are voidable only if the presumption is not rebutted. Factors relevant to this determination include the fairness of any consideration involved and whether the other terms of the transaction are similar to those that would be found in a transaction involving an independent party.

Assuming an investment otherwise complies with the requirements of F.S. Ch. 518, (23) the Code provides two important exceptions to the presumptively voidable rule that apply exclusively to corporate trustees. First, the Code continues the existing provision permitting corporate trustees to invest in a mutual fund to which the trustee or its affiliate provides services in a capacity other than as trustee. (24) If the trustee receives compensation from the mutual fund for its services, it must fully disclose the compensation to all qualified beneficiaries in writing.

The second exception appears in [section] 736.0802(5). By any standard, this subsection is long, detailed, and complex. A full examination of its provisions would require a separate article. At its core, however, subsection (5) provides that no presumption of a conflict between the personal and fiduciary interests of a corporate trustee arises when a corporate trustee invests in investment instruments as defined in F.S. [section] 660.25(6) (25) that are owned or controlled by the trustee or its affiliate, or from which the trustee or its affiliate receives compensation for providing services in a capacity other than as trustee. In each case, however, the trustee must comply with certain notice and disclosure requirements set out in the subsection. (26)

The investment authority granted by subsection (5) is new to Florida law. Under Ch. 737, similar investments would constitute a breach of the trustee's duty of loyalty. The new subsection applies to irrevocable trusts created on or after the effective date of the Code if the trust instrument expressly authorizes the investments by specific reference to the subsection. (27) Importantly, it also applies by default to all other irrevocable trusts, including those created before the effective date of the Code, unless the qualified beneficiaries make an effective election to opt out of the subsection. In most cases, the opt-out election will require a written objection by a two-thirds majority of either those qualified beneficiaries who are current permissible distributees of trust property or those qualified beneficiaries who are firstline remainder beneficiaries. (28)

The two exceptions discussed above are directed at regulated trustees. In the interests of a fair, effective, and efficient trust administration, the Code also includes several more broadly applicable exceptions to the basic duty of loyalty. Notwithstanding the potential presence of a conflict between the personal and fiduciary interests of a trustee, the trustee's duty of loyalty does not preclude any of the following:

* Payment of reasonable compensation to the trustee or an agreement between a trustee and beneficiary relating to the appointment or compensation of the trustee; (29)

* Transactions between the trust and another trust, a decedent's estate, or a guardian of the property of which the trustee is a fiduciary or in which a beneficiary has an interest; (30)

* A deposit of trust money in a regulated financial-service institution operated by the trustee; (31)

* An advance by the trustee of money for the protection of the trust; (32) or

* The employment of persons, including attorneys, accountants, investment advisers, or agents, even if they are the trustees or are associated with the trustee, to advise or assist the trustee in the performance of its administrative duties, (33) or the employment of agents to perform any act of administration, whether or not discretionary. (34)

Trustee Powers

Part VIII of the Code also contains several provisions dealing with the powers of a trustee. Section 736.0815 provides generally that a trustee's...