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Sunday, May 28, 2017

Florida Eliminates the Benefit-of-the-Beneficiary Rule

Historically, the settlor’s intent is the key item in guiding the administration of a trust. Further, a settlor has a pretty free hand in crafting how a trust will operate, subject to some public policy limitations and legal doctrines (such as the Rule Against Perpetuities).

Knowingly or unknowingly, Florida may have elevated the interests of the beneficiaries of a trust over the settlor’s desire and intent, when it adopted provisions from the Uniform Trust Code into the Florida Trust Code. In adopting these UTC provisions, the Florida Trust Code adopted the benefit-of-the-beneficiary rule. That rule is a mandatory, nonwaivable requirement that a trust and its terms be for the benefit of the trust beneficiaries. The rule can be interpreted to swing the balance in the enforcement of trust provisions away from what the trust settlor desired and towards what is deemed to be in the best interests of the beneficiaries.

What are the potential implications of the benefit-of-the-beneficiary rule? If priority is given to benefitting the beneficiary instead of allowing full dispositive freedom to the settlor to construct a trust as he or she desires, then perhaps spendthrift clauses become unenforceable. Perhaps a court may find a direction not to diversify trust assets as not benefitting a beneficiary, and refuse to enforce it (or worse, holding a trustee liable for failure to diversify after the fact). Other provisions in a trust that a court deems unreasonable or that do not to benefit a beneficiary may be likewise modified by a court or determined to be unenforceable - these may include provisions barring modification or early termination of a trust, or provisions that provide a tax benefit to the settlor but not to the beneficiary. And aside from the possible change or enforceability of trust provisions, there will likely be an increase in litigation as beneficiaries seek to press these issues, rightly or wrongly.

Both the comments to the Uniform Trust Code and in the Restatement (Third) of Trusts note the swing, and the potential in the disruption in the administration and interpretation of trust  documents by that swing, so these concerns are more than just barking at shadows by those who have raised them.

Principally because of these issues, in a recent bill (HB 277) that cleared both houses of the Florida legislature and is awaiting the governor’s signature, the benefit-of-the-beneficiary rule was removed from the Florida Trust Code. Below are the key changes to the statute (items in bold have been added, and strike-out language has been removed:

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