Court Stops Beneficiaries From Commuting Trust [Florida]

By Chuck Rubin & Jenna Rubin

EXECUTIVE SUMMARY: An income beneficiary of a trust and the trust remaindermen were unable to successfully commute and terminate a trust.

FACTS: A revocable trust became irrevocable at the death of the settlor. The settlor provided for an income interest for her son for his life, with the remainder to pass to three educational institutions at the son’s later death.

The son and the remaindermen entered into an agreement to terminate the trust, and divide the $3 million of trust assets between them based on their actuarial interests. The trustee of the trust was not a party to the agreement, and did not agree to the early termination.

The son filed a complaint against the trustee to terminate the trust in accordance with the agreement, citing Fla.Stats. §§736.04113 and 736.04115. Fla.Stats. §736.04113 allows for judicial modification of an irrevocable trust on petition of a trustee or a qualified beneficiary if: (a) the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill; (b) because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust; or (c) a material purpose of the trust no longer exists. Fla.Stats. §736.04115 similarly allows judicial modification if compliance with the terms of a trust is in the best interests of the beneficiaries, taking into account the intent of the settlor and the current circumstances and best interests of the beneficiaries.

Both parties moved for summary judgment, and the trial court ruled in favor of the son, allowing termination of the trust. The trial court held that the termination was in the best interests of the beneficiaries since it would preserve trust assets by eliminating unnecessary expenses relating to trust administration. On appeal, the appellate court reversed the trial court and directed that summary judgment be entered in favor of the trustee barring the termination of the trust.

COMMENTS: There are few income beneficiaries and remaindermen who would not want to commute their trusts and receive direct and immediate access and ownership over trust assets if given the opportunity. And in fact, this can be accomplished in Florida if the beneficiaries can satisfy a court that it would be in their best interests (for post-2000 trusts) or that trust purposes no longer exis,. have been fulfilled, or have become illegal, impossible, wasteful, or impracticable to fulfill. Fla.Stats. §§736.04113 and 736.04115. Before this decision, the desires of settlors to retain assets in trust for beneficiaries to avoid vesting of significant assets in their hands, to protect them from creditor claims, to have third party or professional asset management, and to achieve the other benefits of trust ownership could be easily thwarted if courts are lenient in applying those statutory provisions... Here though, the appellate court recognized that the settlor’s intent is the polestar of trust interpretation and that early termination of the trust based on common circumstances applicable to many trust administrations would thwart that intent.

The appellate court noted that the trustees’ fees were customary, there were no unusual administrative expenses, and there had been no invasion of principal. It also indicated that market fluctuations did not create a real risk that the settlor’s intent would be thwarted. The court noted “[i]f we were to affirm the trial court's ruling, beneficiaries could have trusts terminated simply by stating that they did not want to pay trustees' fees, administrative expenses, or be concerned with market fluctuations.”

The case is instructive since there is little case law that interprets the specific requirements for judicial modification in the subject statutes. It makes terminating a trust more difficult by holding that barring other circumstances, mere savings on future administrative expenses, and the risk of market fluctuations will not be not enough to meet the requirements for judicial modification or termination.

The case also illustrates the benefits of having the trustee on board when petitioning to terminate a trust. If the trustee and all the beneficiaries reach an agreement, it is more likely than not that a trial court will approve termination when presented with a petition invoking the modification statutes and an agreed order to sign. However, the case also suggests that even with the trustee’s participation, an activist trial court may decline to sign off on the termination based merely on the grounds put forth by the beneficiaries in this case.

If the trustee agrees with the beneficiaries, and the Florida statutory requirements relating to date of the trust and the applicable rule against perpetuities allow it, another route to terminate a trust might be through nonjudicial modification under Fla.Stats. §736.0412. Alternatively, if the settlor is still living, common law modification or termination (judicial or nonjudicial) may be allowable by agreement between the settlor and beneficiaries, without regard to the trustee’s consent.

There are other avenues in Florida that can allow, under proper circumstances, for the modification or termination of a trust. A chart previously prepared by the authors of this posting that summarizes the various approaches (and updated for this case) is available for download here [follow the download instructions to save the file on your computer and then click the file to open it in a browser - it will not open unless you first download it].

Horgan v. Cosden, 2018 WL 2374443 (Fla. 2^nd DCA 2018)

I Forgot to Mention . . .

That to help get the word out, the publisher of Rubin on Florida Homestead is offering a 15% discount for purchases through this opening weekend. When checking out at www.rubinonfloridahomestead.com, use the coupon code “Introduction”. For those of you that already ordered, a credit back for the 15% is being applied to your orders.

Soft Opening – Rubin on Florida Homestead

As I teased a few days ago, I’ve been working on a challenging writing project these past 2-3  years. Today is the day of its release!

As you can tell by the title, it is a book/treatise on Florida homestead law. I took on the project because there are no comprehensive one-stop reference sources out there that cover all aspects of homestead law. There are many excellent sources of information and analysis, but they are scattered among various articles, chapters in books on larger subjects, and other miscellaneous places. Most of them are limited to one aspect of Florida homestead law – but Florida homestead law generally covers three large areas: creditor protection, limitations on gifting and testamentary transfers, and ad valorem taxes (and its corollary Save Our Homes cap on valuation limitations). As anyone who has had to deal with these areas, they involve concepts and planning that is quite challenging to both understand and practically apply. So I have sought to make the book a one-stop resource for all things related to Florida homestead law.

I’ve endeavored to make the book accessible to those who need an introduction to an area, to answer quick questions, or to assist with a detailed analysis. While of interest to those in Florida, it should also be of interest to those outside of Florida who have occasional need to deal with Florida homestead issues for themselves or their clients.

If this is something that interests you, and I sure hope it does, feel free to visit www.rubinonfloridahomestead.com for more information on the book (and of course, how to buy it!).

The book is in PDF format, for viewing on computers and other devices. Perhaps a paper edition may come in the future, but the ability to search contents, access links to cited sources, and my ability to update the book as the law evolves,  makes an electronic version the better way to go in my mind.

This is the first public announcement – I am going to wait a little while until all the kinks are worked out before going wide. If you have any problems with the website or ordering, please email me at crubin@floridatax.com. Comments on the book itself, whether general, suggestions for future coverage areas, or otherwise, are also welcome.

Teaser - New Publication Coming

A heads-up to readers that I will shortly be publishing a treatise that should be of interest to many of you. I have been hard at work on this project for the last 2-3 years, and hope to have it out in the next few weeks. Frankly, if I had known it would take me so long to write I probably would never have started, but I believe it is unique in what it covers and fills a need.

Some of you have asked me about the reduced volume of posting by me in Rubin on Tax (especially in recent weeks), and this is the reason why - there are only so many non-working hours in the day so something had to give. I intend to get the volume back up again, once this project is behind me.

More details to follow soon!

Possible Fix Coming to Charitable Gifting Problem

For many taxpayers, the 2017 tax law changes removed an incentive to many taxpayers to make charitable contributions. As an itemized deduction, charitable contributions provide a deduction only to taxpayers who itemize their deductions. With a much larger standard deduction, and reductions in available deductions for state and local taxes and mortgage interest, many taxpayers who used to itemize will no longer do so. This is especially true for lower and middle income taxpayers. Thus, many charities expect reductions in gifting to them do to the loss of income tax benefits to donors.

A bipartisan bill, the Charitable Giving Tax Deduction Act, has been introduced into the House of Representatives that would address this issue. The Act would make charitable deductions an “above-the-line” deduction. This means that taxpayers can deduct contributions against their income, whether or not they itemize their deductions. The income tax incentive to make charitable gifts would thus be restored, and even enhanced from the pre-2017 tax law changes.

Whether the bill will pass is anyone’s guess at this time. Its bipartisan support and its charitable nature probably gives it more of a shot to pass than most bills.