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Wednesday, December 30, 2015

Improper Decanting [Florida]

In a case of first impression, Florida’s 5th District Court of Appeals interpreted Fla.Stats. §736.04117 relating to the ability of a trustee to decant a trust into a new trust arrangement. A trustee transferred the funds of a trust held for the current beneficiary (the settlor’s son) into a special needs trust also held for the current beneficiary of that same beneficiary. The trustee could do this since the trustee had the right under the first trust agreement to distribute all or part of the principal to the son in his absolute discretion.

The appellate court found two deficiencies with the decanting. First, Fla.Stats. §736.04117(1)(a)1. requires that the “beneficiaries of the second trust may include only beneficiaries of the first trust.” Under the special needs trust the remaindermen after the death of the son were other beneficiaries of the pooled trust. Such other beneficiaries were not beneficiaries of the first trust – instead, the remaindermen under the first trust were other relatives of the settlor. So the new trust arrangement included beneficiaries that were not beneficiaries of the first trust. While not explicitly addressed, this finding implies that the focus on same beneficiaries includes both current beneficiaries, and future beneficiaries such as remaindermen.

The second deficiency was that the trustee did not provide the 60 days adanced notice of the intent to decant to the qualified beneficiaries, as required by Fla.Stats. §736.04117(4).

Pursuant to these violations, the appellate court ordered the funds of the special trust returned to the original trust.

An interesting question is whether failing to give the requisite 60 days notice is enough to void the new trust funding in all events – the statute does not explicitly provide what the penalty is for a violation of that notice provision. This case will not answer that question, since there was also the other violation of including new beneficiaries so we don’t know if the 60 day notice violation would have been enough by itself to void the new trust funding.

Harrell and Dake v. Badger, 5th DCA, Case Nos. 5D14-1145 and 5D14-3469 (2015)

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