Florida Bar Journal

The Trust Beneficiary’s Right of Access to Information

Oftentimes, a trustee’s refusal to provide beneficiaries with information related to the administration of a trust leads to consternation among the beneficiaries. A beneficiary has the legal right to know certain information about his or her beneficial interest in the trust and the assets held by the trust. When information is not provided by the trustee, beneficiaries often assume the worst about the fiduciary’s administration of the trust, and significant legal fees can quickly begin to accrue. A trustee may not necessarily refuse to provide information to a beneficiary, rather, the trustee may be ignorant of his or her responsibilities to the beneficiaries. For example, clients regularly select a family relative to serve as a successor trustee of the client’s trust. However, a relative usually has little or no experience in serving as a trustee of a trust. Unfortunately, it will likely be the blind leading the blind in the administration of the trust until competent legal counsel is retained. This could leave beneficiaries frustrated and cause them to hire legal counsel just to sort out the basics of a trust administration.

Other times, however, a trustee and beneficiary may both be represented by competent legal counsel and a trustee may refuse to provide information the beneficiary has requested. The beneficiary may believe the information is important to determine his or her interest in the trust or the information may be helpful in determining if the trustee has breached his or her fiduciary duty in administering the trust. In some circumstances the beneficiary has become so jaded and upset they may want to challenge the validity of the trust itself.

This article provides a summary of the information a beneficiary is entitled to receive under the Florida Statutes, as well as how a beneficiary may be able to obtain estate tax returns and gift tax returns, as well as any related information, directly from the Internal Revenue Service (IRS), and a multi-state discussion of the ability of a beneficiary to compel the trustee to provide information when the governing document contains an in terrorem clause.

The Beneficiary’s Access to Trust Information and the Trustee’s Duty to Furnish

F.S. Ch. 736 contains the Florida Trust Code, which sets forth the duties and powers of the trustee, and the corresponding rights of the beneficiaries to receive access to information. A brief summation of those duties and rights follows. A trustee must administer a trust in good faith, and solely in the interests of the beneficiaries.^[1] Much has been written on, and litigated, regarding the bounds of the duty of loyalty, but this duty is not the topic for today. As such, the duty of loyalty should be kept in mind while considering the furnishing and access to information, and preparation of that information. The trustee must exercise reasonable care, skill, and caution in administering the trust as a prudent person would.^[2]

The trustee must keep accurate records of the trust property and provide accurate information and accounting concerning the property. In keeping the beneficiaries reasonably informed, the trustee must:

1) Give notice to the qualified beneficiaries^[3] within 60 days of acceptance, of the fact of the acceptance of the trust, the full name and address of the trustee, and that the fiduciary lawyer-client privilege applies with respect to the trustee and his attorney^[4];

2) Give notice to the qualified beneficiaries within 60 days of the creation of an irrevocable trust or the date a formerly revocable trust has become irrevocable,^[5] of the trust’s existence, the identity of the settlor, the right to request a copy of the trust instrument, the right to accountings, and that the fiduciary lawyer-client privilege applies with respect to the trustee and his attorney^[6];

3) Provide a complete copy of the trust instrument to any qualified beneficiary who requests one^[7]; and

4) Provide an annual accounting and relevant information about the assets and liabilities of the trust to each qualified beneficiary.^[8] Note that a qualified beneficiary can, in writing, waive his or her right to an accounting, and such waiver is revocable.^[9] As a further note, while a trust document may (and many do) purport to provide a waiver of the duty to account, F.S. §736.0105 provides that, while the terms of the trust generally prevail over this chapter, such is not the case with respect to the duty to account.^[10] The waiver of a duty to account contained in the governing document is not an effective waiver.

With respect to the affirmative duty to provide annual accountings, such must be rendered in a reasonably understandable report, identifying the trust, the trustee, and the time period covered.^[11] While a trustee has some discretion with respect to the organization and ultimate form of the accounting, accountings are generally a chronological presentation showing each receipt and disbursement. As each beneficiary’s rights will vary from each other (i.e., income beneficiary versus remainder beneficiary), a trust’s accounting must classify the trust’s receipt and disbursements as income or principal.^[12]

A trustee’s duty to account does not arise until the trust becomes irrevocable.^[13] Failure to prepare an accounting is a breach of trust.^[14] When the trustee fails to account or fails to properly account, he can be ordered to do so by the court.^[15] Effort should be made, prior to resorting to judicial intervention, to amicably resolve the perceived breach. Further remedies include reduction or denial of compensation or removal of the trustee.^[16] When there are co-trustees, it has long been established that a trustee has standing to bring a cause of action, including to compel an accounting, against a co-trustee.^[17]

The trustee is responsible for preparing and filing the trust’s tax returns, which includes issuance of the Schedule K-1 to the beneficiaries. However, occasionally the beneficiary requires greater access to the trust’s tax information than simply receiving the Schedule K-1. If the trustee is unwilling to provide additional information, the beneficiary may need to seek it directly from the IRS.

Obtaining Tax Return Information from the IRS

If a fiduciary refuses to provide a copy of the Form 706 U.S. estate tax return, Form 709 gift tax return, or a Form 1041 income tax return, then a beneficiary may be able to get a copy of the tax returns for which he or she is a beneficiary directly from the IRS. The authority is found in I.R.C. §6103.

I.R.C. §6103(e)(1)(E)(ii) provides that the return of a person shall, upon written request, be open to inspection by or disclosure to — in the case of an estate — any heir at law, next of kin, or beneficiary under the will of a decedent, but only if the secretary finds that such heir at law, next of kin, or beneficiary has a material interest that will be affected by information contained therein. In the case of a trust, the return must be disclosed to the trustee or trustees, jointly or separately, and any beneficiary of such trust, but only if the secretary finds that such beneficiary has a material interest that will be affected by information contained therein.^[18]

I.R.C. §6103(e)(3) provides the return of a decedent must, upon written request, be open to inspection by or disclosure to any heir at law, next of kin, or beneficiary under the will, of such decedent, with a material interest. This section of the statute would cover a Form 709 gift tax return if the donor is deceased and the person satisfied the requirements of I.R.C. §6103(e)(3).

I.R.C. §6103(e)(1)(F)(ii) provides the IRS may provide access and/or information in the case of the return of a trust to any beneficiary of such trust, but only if the secretary finds that such beneficiary has a material interest that will be affected by information contained therein. The meaning of “return” and “material interest” are discussed in the following paragraphs.

The term “return” is defined in I.R.C. §6103(b)(1) to mean any tax or information return, declaration of estimated tax, or claim for refund required by, or provided for or permitted under, the provisions of this title that is filed with the secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, including supporting schedules, attachments, or lists that are supplemental to, or part of, the return so filed. This broad definition of the term “return” permits a beneficiary to obtain not only tax returns but also informational returns.^[19]
The term “material interest” is not defined in I.R.C. §6103, but it is discussed in the Internal Revenue Manual (IRM) §11.3.2.4.7:

Any heir at law, next of kin, or beneficiary who establishes a material interest which will be affected by the return or return information may also receive returns and return information. A material interest is an important interest and is generally, but not always, financial in nature.

The IRM gives the example of the submission of a copy of a will by a beneficiary who is described in the will as entitled to “x%” of the decedent’s gross estate, together with a statement that the decedent’s return is needed to assist the beneficiary in determining whether he or she has received a proper share of the estate, would generally be sufficient to permit disclosure.^[20]
Further, the IRM provides any heir at law, next of kin, beneficiary under the will, or a donee (recipient) of property may receive the returns and return information of a deceased individual. Such person must have a material interest that will be affected by the requested information. A material interest is an important interest and is generally, but not always, financial in nature.^[21]
There is not a lot of caselaw regarding direct requests for tax returns and related information from the IRS. However, in Goldstein v. Internal Revenue Service, 279 F. Supp. 3d 170 (D.D.C. 2017), a son sued the IRS for not providing him with the estate tax return of his father’s estate as well as certain related “return information,” including the entire estate tax examination audit file conducted by the IRS’s of his father’s estate.^[22] The son made the initial request of the IRS under the Freedom of Information Act (FOIA).^[23]

The court held that the son, not the IRS, had the burden to prove he had a “material interest” in his father’s estate.^[24] The court held the son did not meet the burden to show he had a material interest in the estate’s tax records during the years before his father’s death; however, the son did show he had a material interest in the fiduciary income tax returns for his father’s revocable trust.^[25] To obtain the trust’s income tax returns, the court analyzed the following to determine whether the son had perfected his FOIA request: 1) Was the son a beneficiary of his father’s revocable trust; and 2) did he have a material interest in the trust’s fiduciary tax returns.^[26] The IRS argued the son was not a beneficiary of his father’s revocable trust because he was not individually a direct beneficiary of the revocable trust, rather assets of the revocable trust were to be held in a separate trust created under the revocable trust for his benefit until his death.^[27] The court rejected the IRS’s argument that the son was not a beneficiary of his father’s revocable trust.^[28] The I.R.C. does not define “beneficiary” for purposes of I.R.C. §6103(e) so the court determined under state law that the son’s beneficiary interest in the trust vested at his father’s death, and so, at the time he requested the revocable trust’s tax returns (i.e., after his father’s death), the son was a beneficiary of the trust under state law, regardless of the fact he was designated to receive the trust’s assets through an intermediate trust created for his benefit.^[29] The court stated the IRS had already determined that the son had a material interest in his father’s estate’s fiduciary income tax return, and so it stood to reason that the son would have a material interest in his father’s revocable trust’s fiduciary income tax returns.^[30] While the Goldstein case may not be a shining example of a cost-efficient means of obtaining fiduciary tax returns and related information due to the multiple interactions with the IRS and court cases filed, it is important for a practitioner to understand that using I.R.C. §6103 to obtain tax returns and related information could be a powerful tool in a practitioner’s toolbelt.

The Intersection of In Terrorem Clauses and Beneficiary’s Rights to Information

In terrorem clauses have a rich history and usually state that a beneficiary forfeits his or her rights to inherit by mounting any contest to the terms of the trust. Florida has statutorily invalidated no-contest clauses in wills and trusts^[31] and refers to any attempt as a penalty clause for contest.^[32] However, many states allow the inclusion of, and subsequent enforcement of, in terrorem clauses, although what action is considered to constitute a contest runs the gamut. Such clauses become of particular interest in application to access to information and the applicability of in terrorem clauses to beneficiary’s access to information is considered herein. In most states, a suit to construe the instrument is not deemed to be a challenge sufficient to trigger the no-contest clause. A nonexhaustive survey is included below.^[33]

In Massachusetts, for example, in the case of Capobianco v. Dischino, 98 Mass. App. Ct. 1101 (July 9, 2020), a beneficiary sought to remove the trustees and appoint himself as the only trustee, enjoin the trustees from depleting trust assets and requested an accounting, he was deemed to have violated the no-contest clause. The court held that in seeking to remove the acting trustees and place himself in such office, the beneficiary triggered application of the no-contest clause by seeking to change the succession of trustees — a change to the terms of the trust. However, had he simply sought an accounting, the no-contest clause would not have been applicable. The court cited Briggs v. Crowley, 352 Mass. 194, 200 (1967), which essentially stated that a trust provision waiving the trustees’ duty to account was against public policy and, therefore, the trustees were required to render the accounting sought by the beneficiary. The petitioner demanded an accounting, which was refused, such that the petitioner “was unable to determine whether the trust has been properly administered by the respondents and whether the trust res is intact.”^[34] Further, the court stated, “[E]ven very broad discretionary powers are to be exercised in accordance with fiduciary standards and with reasonable regard for usual fiduciary principles,” citing In Boston Safe Deposit & Trust Co. v. Stone, 348 Mass. 345. A finding that a beneficiary cannot compel a trustee to account without violating the no-contest clause would certainly seem to be facially against public policy. Under such circumstances, a trustee could run rampant over the rights of beneficiaries, who would be held hostage by the no-contest clause. Fiduciary negligence or impropriety would be encouraged under such system. Mazzola v. Myers, 363 Mass. 625 (1973), further reinforces the principal that a suit in equity for interpretation is not violative of the in terrorem clause — “in seeking an interpretation of the will, the plaintiff has not attached or challenged the will or any part of it.”

In a 1952 New Hampshire case, Burtman v. Burtman, 97 N.H. 254 (1952), it was established that “a beneficiary who contests the will will forfeit his [or her] share in accordance with a provision of the will therefore.” However, by statute, New Hampshire carves out from enforcement an action brought to determine whether a proposed action would be in violation of the no-contest clause.

In an Ohio case^[35] in which the beneficiary sought to ensure the executor’s actions complied with the testatrix’ instructions concerning the timing and manner of an option to purchase, the court found no violation of the no-contest clause, as her action sought clarification or construction of the will, and not a challenge to the will’s provisions.

Georgia courts seem to have taken the approach that a declaratory action for interpretation of the will or trust will not violate the in terrorem clause. However, the challenging party’s desired outcome will affect the analysis.^[36]

In New York, the clause is strictly construed and the intent of the testator is of foremost importance in carrying out the in terrorem clause. “The probable intention of the writer, as indicated by extrinsic facts, may not prevail over the plain meaning of the written word, nor have any force whatever, unless the words incorporated in the writing are susceptible of a meaning which expresses the intent thus disclosed.”^[37]

Texas and Rhode Island both favor strict construction of the no-contest clause and avoid forfeiture when possible. The “right to challenge a fiduciary’s actions is inherent in the fiduciary/beneficiary relationship.”^[38] Texas has enacted a good-faith statutory exception to enforcement of in terrorem clauses.

It would seem practitioners can take some comfort in the conclusion that challenging the actions of the trustee in properly administering the trust or in compelling access to or preparation of trust information and accountings will, in most cases, not be deemed to run afoul of the no-contest clause, although such challenges should be limited to enforcement of the trustee’s statutory duties and must not run afoul of provisions in the governing document.

Conclusion

While the Florida Trust Code requires the trustee to keep the beneficiary reasonably informed regarding the trust’s status and administration, there are circumstances under which the trustee must be compelled to act or an external administrative remedy may be available.

This column is submitted on behalf of the Tax Section, Dennis Michael O’Leary, chair, and Taso Milonas, Charlotte A. Erdmann, and Jeanette E. Moffa, editors.