Shedding Light on Keeping Beneficiaries in the Dark
A trustee has a fundamental duty to keep beneficiaries informed of the administration of a trust.1 However, many estate planning clients are surprised to learn of the disclosure requirements imposed on a trustee by the Florida Trust Code. F.S. §736.0813 provides that a trustee must keep the qualified beneficiaries of a trust “reasonably informed of the trust and its administration.” For example, the trustee must provide the qualified beneficiaries with his or her contact information, notice of the establishment of an irrevocable trust, notice of the right to receive a copy of the trust instrument, and notice of the right to receive accountings. Specifically as to accountings, typically the most problematic disclosure for settlors seeking privacy, the trustee of an irrevocable trust must provide an accounting to each qualified beneficiary at least annually, on termination of the trust, and on change of the trustee.2
Surprisingly, for many clients who are not familiar with trust law, the definition of the term “qualified beneficiary” and, thus, the group of persons to whom disclosure must be made, includes not only those beneficiaries who are eligible to receive a distribution from an irrevocable trust when it is first established, but also the first-line remainder beneficiaries.3
For one reason or another, the settlor may desire to withhold information from one or more qualified beneficiaries. In many states, the settlor may do so for a certain period of time without providing for an alternate recipient if the settlor includes such a provision in the trust instrument.4 Florida is not one of those states. Rather, the representation statutes of the Florida Trust Code resolve the dichotomy between the settlor’s desire for privacy and the beneficiary’s right to information by shifting the identity of the person to whom the trustee is required to provide disclosure.
The representation statutes, located in Part III of the Florida Trust Code, allow a person to represent and bind a beneficiary and to receive notices, information, accountings, or reports on behalf of a beneficiary. The persons who can bind others under the representation statutes fall within five categories, as follows: The holder of a power of appointment; fiduciaries and parents; a person having a substantially identical interest as a minor, incapacitated, or unborn individual or a person whose location or identity is unknown and not reasonably ascertainable; a court-appointed representative; and a designated representative.5 For purposes of preparing a trust instrument when a settlor desires to keep information from a beneficiary, this article focuses on representation by a designated representative and representation by the holder of a power of appointment.
Representation by a Designated Representative
The designated representative concept is not found in the Uniform Trust Code (UTC). A designated representative is a person nominated in the trust instrument who can represent and bind a beneficiary and receive any notice, information, accounting, or report on behalf of the beneficiary. The trust instrument may also designate one or more persons, other than a trustee, to nominate a designated representative.6
As such, the trust instrument could give a person or committee the power to appoint a designated representative for one or more beneficiaries. The trust instrument could provide a set period of time during which a designated representative would serve for a beneficiary; for example, until the beneficiary reaches a certain age or until the beneficiary graduates with a bachelor’s degree. Alternatively, the trust instrument could set forth a discretionary approach for appointing a designated representative; for example, by providing that the person or committee nominated must appoint a designated representative when they determine that disclosing trust information to the beneficiary would not be in a beneficiary’s best interests. Such a provision would essentially allow the person or committee nominated to turn on and off the flow of information to one or more beneficiaries of the trust depending on the circumstances at the time.
The designated representative statute has several limitations, which the trust instrument cannot alter.7 The trustee and the designated representative cannot be the same person. Also, a designated representative cannot be a beneficiary unless the designated representative was named by the settlor or the designated representative is the beneficiary’s spouse or a grandparent or descendant of a grandparent of the beneficiary or the beneficiary’s spouse. Lastly, the trust instrument must specifically provide for a designated representative in order for a designated representative to serve.8
A designated representative is not a fiduciary and is not liable to the beneficiary whose interests are represented or to anyone claiming through that beneficiary for actions taken or omissions to act made in good faith.9 The trust instrument could provide for a higher standard of care, but doing so may discourage someone from serving as a designated representative. Furthermore, it is unclear whether the default and mandatory rules of F.S. §736.0105 allow a settlor to remove the good-faith requirement to which a designated representative is held. In any event, however, doing so may leave the beneficiary with little recourse.
A designated representative is not prevented from binding a beneficiary or receiving notices on behalf of a beneficiary when a conflict of interest exists between the interests of the designated representative and the interests of the beneficiary. A conflict of interest could occur, for example, when the designated representative is the first-line remainder beneficiary preferring an investment strategy favoring growth versus income. The designated representative’s actions in acquiescing to the investment strategy or omissions in not taking action to correct the investment strategy could be deemed to violate the designated representative’s duty to act in good faith. However, the identity of the party making an assertion that the designated representative acted in bad faith is unclear because the beneficiary would presumably be unaware of the conflict of interest.
In some instances, the only other party besides the designated representative who may be aware of a conflict of interest involving the designated representative is the trustee. A trustee who has knowledge of the conflict may decide to seek instruction from the court as to the manner in which to proceed, although this course of action is unlikely if the trustee has him or herself breached the duty to act in good faith, for example, by favoring the designated representative beneficiary. As an alternative, the trustee could simply disclose the conflict of interest to the beneficiary who is being represented since the trustee would incur no liability for doing so.10
On a related note, a trustee, especially a corporate trustee, may refuse to serve when the trustee could be deemed to have a duty to monitor the actions taken by the designated representative. As such, the trust instrument could provide that the trustee has no duty to determine whether the designated representative’s actions and omissions to act were made in good faith. In addition, the trust instrument may hold harmless and indemnification language for the trustee’s reliance on the actions of the designated representative to encourage a trustee to serve while a designated representative is also serving.
To mitigate the risk of conflicts of interest when appointing a designated representative, the trust instrument could prohibit any beneficiary from serving as a designated representative. Furthermore, the trust instrument could require that more than one designated representative serve at one time or that the trustee and designated representative make disclosure of any matter involving a conflict of interest with a designated representative to a trust protector.
Lastly, F.S. §736.0306 does not address compensation for the designated representative. As such, the trust instrument should provide whether the designated representative is entitled to compensation for services rendered and, in any event, should provide for reimbursement of reasonable expenses incurred in serving as designated representative.
Representation by the Holder of a Power of Appointment
Another method that can be utilized in a trust instrument to shift the trustee disclosure requirements away from a beneficiary is through the use of a power of appointment. F.S. §736.0302 provides that, “the holder of a power of appointment may represent and bind persons whose interests, as permissible appointees, takers in default, or otherwise, are subject to the power.” Additionally, “[t]he takers in default of the exercise of a power of appointment may represent and bind persons whose interests, as permissible appointees, are subject to the power.”11
U.T.C. §302 is the counterpart to F.S. §736.0302 with some major differences. U.T.C. §302 allows for representation only by the holder of a general testamentary power of appointment. In contrast, the Florida statute does not require that the power of appointment be a testamentary power or a general power for representation purposes, thereby providing more flexibility than the UTC provision.
Furthermore, the UTC allows for representation only to the extent there is no conflict of interest between the power holder and the persons represented as to the particular matter. The comment to U.T.C. §302 states that without the conflict of interest limitation, the power holder could act to enhance the power holder’s income interest to the detriment of the appointees or takers in default.
The Florida statute governing representation by a power holder does not adopt the broad limitation on conflicts of interest found in §302 of the UTC. Rather, the Florida statute addresses conflicts of interest in two ways. First, it restricts the power holder from binding others while serving as the sole trustee. As such, the Florida statute restricts a trustee from being in a position to approve his or her own actions.12 Secondly, it provides that representation by the power holder does not apply to any matter that the court determines involves fraud or bad faith by the trustee.13
It should be noted that the default and mandatory rules of F.S. §736.0105 do not restrict a settlor from altering or even eliminating the limitations applicable to representation by the holder of a power of appointment. As such, the settlor is free to change the restrictions set forth in F.S. §736.0302 to achieve his or her intended result. However, providing in the trust instrument that the holder of a power of appointment may bind others while serving as sole trustee would certainly put that trustee in a perilous situation, unless, perhaps, there is at least one beneficiary in the same class as the takers in the default subject to the representation to whom notices and accountings are provided.
Practical Considerations of Representation by the Holder of a Power of Appointment
A power of appointment can be a useful tool for a settlor that seeks to restrict the flow of information to a beneficiary. For example, many clients in a first marriage do not want to provide financial information of the marital trust to their children or to anyone else for that matter. Providing a testamentary power of appointment to the surviving spouse over the marital trust assets, and thereby restricting the flow of information to the remainder beneficiaries, could be the deciding factor causing a couple to create a marital trust rather than provide for an outright distribution to the surviving spouse. However, including a power of appointment in a trust instrument without informing the settlor-client of the power holder’s ability to bind the takers in default could impede the settlor’s intent and have unintended negative consequences for the family.
As such, the first step is to determine to what extent, if any, the settlor desires to use the power of appointment for representation purposes. Once the intent of the settlor is known, the drafting attorney must be cognizant of the ways in which the power of appointment will cause the representation statutes to affect the trust instrument. In any case, the trust instrument should indicate how representation is intended to apply to avoid uncertainty, as demonstrated by the following examples:
• The settlor may want to provide a beneficiary with a power of appointment, but not intend that the power holder bind the permissible appointees and takers in default of the power.
• The settlor may desire to use representation to bind only one beneficiary or one class of beneficiaries or only for a certain period of time or only as to certain actions. More specifically, for example, a settlor may seek to limit accountings, but allow the beneficiary to participate in other decisions, including trustee succession.
• A trust instrument could give a “majority of the children” the power to select a successor trustee, rather than a “majority of the beneficiaries,” for example. The application of the representation statute may not be clear as to the former since the status of a person as a child is not subject to the exercise power of appointment whereas the status of a person as a beneficiary is subject to the exercise of a power of appointment.
• A trust instrument could name a power holder as the sole trustee with the intent that the representation statute will not apply, but inadvertently allowing for the appointment of a co-trustee, thereby defeating the settlor’s intent.
Another point for consideration is the breadth of the representation through the use of the power of appointment. For example, a client may want to give a beneficiary a power of appointment over only half of the trust assets. In other instances, a practitioner may include a contingent power of appointment, such as for generation-skipping tax benefits. The representation statute applies only to bind persons whose interests are subject to the power of appointment.14 If only half of the trust assets are subject to the power of appointment, for example, it follows that the power holder could not represent the takers in default as to their entire interest and, therefore, that the takers in default would be entitled to receive notices and accountings. Similarly, if the trigger for a contingent power of appointment has not occurred, then there is no power holder and no representation, which may not be consistent with the settlor’s intent as to representation. A beneficiary who has a Crummey power could not be represented by the power holder under F.S. §736.0302 as to his or her Crummey power because the withdrawal right interest is a present interest not subject to the power of appointment.15 Lastly the class of permissible appointees should be large enough so that representation is not defeated by the death of all of the permissible appointees subject to the power of appointment.
As to the identity of the power holder, the settlor could choose to give a special power of appointment to an individual not a beneficiary of the trust. For example, a client may give a friend, family member, or advisor a special power of appointment thereby allowing the power holder to bind the beneficiary, receive notices on that beneficiary’s behalf, and deflect assets away from the beneficiary. In a marital trust qualifying for the qualified terminable interest property election, however, no person including the surviving spouse can have the power to appoint assets during the surviving spouse’s lifetime.16
Even if the trust instrument accurately reflects the settlor’s intent and considers all of the ways in which the representation statutes may affect the other provisions of the trust instrument, another hurdle may come from the power holder’s unwillingness to represent and bind another beneficiary. The holder of a power of appointment has a right to represent the takers in default, but is not required to do so.17 Thus, unless altered by the trust instrument, the power holder determines to what extent the permissible appointees and takers in default will receive notices and accountings. Furthermore, because the power holder has a right, but not an obligation, to bind the takers in default and permissible appointees of the power, a trustee should obtain a written statement from the power holder as to whether and to what extent the power holder will exercise his or her right to represent the permissible appointees and takers in default.
Lastly is the issue of delegation. F.S. §736.0703(5) provides that a co-trustee may not delegate to another co-trustee the performance of a function a settlor reasonable expected the co-trustees to perform jointly.18 Further, a trustee must exercise reasonable care to prevent a co-trustee from committing a breach of trust.19 Therefore, a co-trustee should be especially cautious if delegating powers and duties to a co-trustee who is representing others as the holder of a power of appointment. First, there is a question as to whether the power holder could bind the permissible appointees and takers in default since he or she could technically fall within the sole trustee limitation of the statute. Secondly, a beneficiary could argue that the settlor reasonably expected the co-trustees to perform jointly because the statute restricts a power holder acting under the representation statutes from serving as sole trustee. As such, delegating the performance of a trustee’s functions to a co-trustee who is also acting by representation to bind one or more beneficiaries may subject the delegating trustee to liability. However, if the settlor does intend that a trustee have the ability to delegate to a co-trustee notwithstanding representation, the trust instrument should specifically provide as such.
Representation by a Designated Representative Versus the Holder of a Power of Appointment
There are several main differences between representation by a designated representative and by the holder of a power of appointment that may cause a client to choose one over the other. First, a power of appointment holder may only represent and bind persons whose interests are subject to the power.20 Thus, if a settlor seeks to prevent the flow of information to a first-line remainder beneficiary, for example, representation by the holder of a power of appointment will suffice. However, if a settlor seeks to prevent the flow of information to a current income beneficiary, a designated representative will be required because, at that point, the beneficiary’s interests are not subject to the power of appointment.
Another difference between representation by a designated representative and by a power of appointment holder is the permissible identity of the designated representative versus the power holder. For example, a designated representative cannot serve as a trustee, a requirement that cannot be altered by the trust instrument, whereas a power holder can serve as a co-trustee or sole trustee.21 Also, the designated representative is subject to a good-faith requirement whereas the representation statutes do not impose any requirement on the power holder.22 Rather, the power holder’s ability to represent and bind others is inapplicable to actions a court determines involve fraud or bad faith by the trustee.23 Thus, a person may be willing to represent a beneficiary through the use of a power of appointment, but not as a designated representative for liability reasons. An additional consideration is that a designated representative may expect to receive compensation, whereas compensation would typically not be provided to the holder of a power of appointment.
Regardless of whether representation by a designated representative or the holder of a power of appointment is utilized, it is important to note that, unless changed by the terms of the trust instrument, the trustee is not liable for giving notice, information, accountings, or reports to a beneficiary who is represented by another person.24 Furthermore, unless changed by the terms of the trust instrument, the trustee is not prohibited from giving notice, information, accountings, or reports to a beneficiary who is represented by another person.25 As such, if the settlor seeks to ensure that the trustee does not provide notice to one or more beneficiaries who are represented by a designated representative or the holder of a power of appointment, the settlor should specifically restrict the trustee’s ability to give notice to such represented beneficiaries in the trust instrument. As an alternative, if the settlor is concerned about the family’s privacy generally, as opposed to just keeping information from the beneficiary, the trust instrument could require that the trustee and the beneficiary subject to the representation enter into a confidentiality agreement before the trustee discloses any information regarding the trust to the beneficiary.
Conclusion
A trustee’s duty to notify qualified beneficiaries, to account to qualified beneficiaries, and to respond to the request of a qualified beneficiary cannot be eliminated in a trust instrument.26 However, through the use of the representation statutes found in Part III of the Florida Trust Code, a settlor can shift the trustee’s disclosure requirements from one or more qualified beneficiaries to a designated representative or the holder of a power of appointment. In doing so, the settlor and drafting attorney should carefully consider how the representation provisions in the trust instrument will affect and be affected by the other provisions of the trust instrument.
1 U.T.C. §813 (2010).
2 Fla. Stat. §736.0813.
3 Fla. Stat. §736.0103(16); U.T.C. §103.
4 U.T.C. §105(b)(8), (9).
5 Fla. Stat. §§736.0302-736.0306.
6 Fla. Stat. §736.0306.
7 Fla. Stat. §§736.0105(2)(h), 736.0306.
8 Fla. Stat. §736.0306.
9 Id.
10 Fla. Stat. §736.0301(4).
11 Fla. Stat. §736.0302.
12 The term “power of appointment” as used in Fla. Stat. §7365.0302, does not include a power of the trustee to make discretionary distributions of trust property. This also addresses the concern that a trustee not have the ability to approve his or her own actions.
13 Fla. Stat. §736.0302.
14 Fla. Stat. §736.0302.
15 Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968).
16 I.R.C. §2056(b)(7).
17 Fla. Stat. §736.0301(1).
18 Fla. Stat. §§736.0703(5), 518.112. For investment functions, delegation may only be made of investment functions that a prudent investor of comparable skill might delegate under the circumstances and requires that a fiduciary exercise “reasonable care, judgment and caution in selection an investment agent, in establishing the scope and specific terms of any delegation, and in reviewing periodically the agent’s actions in order to monitor overall performance and compliance with the scope and specific terms of the delegation.”
19 Fla. Stat. §736.0703(7)(a).
20 Fla. Stat. §736.0302.
21 Fla. Stat. §736.0302, 736.0306, 736.0105(2)(h).
22 Fla. Stat. §§736.0302, 736.0306.
23 Fla. Stat. §736.0302(3)(a).
24 Fla. Stat. §736.0301(4).
25 Id.
26 Fla. Stat. §736.0105(2)(r)-(t).
Cindy Basham is an associate in the Private Wealth Services group of Holland & Knight’s Ft. Lauderdale and Miami offices. She is a graduate of Stetson University College of Law and practices primarily in the areas of estate planning (domestic and international) and trust and estate administration.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael Allen Dribin, chair, and David Brittain and Kristen Lynch, editors.
