By: David M. Garten, Esq.

ARTICLE: “Adequate” Disclosure In A Trust Disclosure Document

Section 736.1008(2), F.S. reads: “Unless sooner barred by adjudication, consent, or limitations, a beneficiary is barred from bringing an action against a trustee for breach of trust with respect to a matter that was adequately disclosed in a trust disclosure document unless a proceeding to assert the claim is commenced within 6 months after receipt from the trustee of the trust disclosure document or a limitation notice that applies to that disclosure document, whichever is received later.” [Emphasis added]

What is an “adequate” disclosure? Pursuant to §736.1008(4)(a), F.S., a matter is adequately disclosedif the document provides sufficient information so that a beneficiary knows of a claim or reasonably should have inquired into the existence of a claim with respect to that matter.” Or, as stated in the negative, a disclosure is inadequate if there is insufficient information provided to a beneficiary about a claim or a potential claim against a trustee for breach of trust.

For example, in Turkish v. Brody, 2016 Fla. App. LEXIS 17684 (Fla. 3rd DCA 11/30/16), the court found that the limitation notice was not applicable because the co-trustees failed to adequately disclose a matter in a trust disclosure document.

In Turkish, the Settlor created two trusts: Trust Number One and Trust Number Two. The sole residuary beneficiaries of both trusts were the Settlor’s son and daughter, Arthur Turkish (“Arthur”) and Carole. Arthur and his daughter, Shari Turkish (“Shari”) were the co-trustees of both trusts.

In 2008, the Settlor settled an outstanding $3M gift tax dispute with the IRS and requested that Arthur obtain the money to pay the IRS settlement from Trust Number One, transfer the money to himself, and then personally loan her the money. After the Settlor paid the IRS, she executed an unsecured promissory note evidencing the indebtedness to Arthur, individually. Carole objected to the IRS transaction asserting that the transaction was a breach of the co-trustees’ responsibility because the effect was to give over $1 million to Arthur from Trust Number One which was intended to benefit both Arthur and Carole.

In 2009, Carole received a revised trust accounting for the time period 2005-2007, a Receipt and Release Agreement (“RRA”), and a 6-month limitation notice. In response to Carole’s objections to the IRS transaction, the co-trustees and Carole executed a Supplemental Release Agreement (“SRA”), which provides that the SRA was supplementing the RRA for the 2005-2007 accountings. The SRA provides that the parties were settling all claims arising out of the IRS transaction. The SRA accurately reflects the IRS transaction and Carole’s objections to the IRS transaction. Specifically, the SRA provides that Arthur, individually, was willing to “assign the Note to Trust Number One in satisfaction of any and all claims against him by all beneficiaries of Trust Number One” arising out of the IRS transaction, and that “each interested party . . . waives any right he or she has, might have or has had to object to any action or omission of Arthur Turkish and/or Shari Turkish, individually, or of Arthur Turkish and/or Shari Turkish, as Trustees of Trust Number One.”

The Settlor died on June 2, 2010.  On July 7, 2010, Carole received the 2008 accountings for both Trusts, a RRA, a 6-month limitation notice, and a Summary of Assets which adequately disclosed the value of assets in both Trusts.

On Aril 6, 2011 (more than 6 months after Carole’s receipt of the 2008 accounting), Carole sued Arthur and Shari for breach of fiduciary duty and unjust enrichment. The co-trustees defended, in part, on the basis that Carole’s claims for breach of trust relating to the IRS transaction are barred by Florida’s 6-month statute of limitations because the 2008 accounting adequately disclosed the IRS transaction.

The court conducted an evidentiary hearing on the issues pertaining to the 2005-2007 accountings, the RRA for those accountings, and the SRA pertaining to the IRS transaction. The court found that Arthur, as a co-trustee, failed to disclose to Carole, a beneficiary, material facts pertaining to the matter being settled in the SRA. Specifically, Arthur failed to disclose to Carole that she was agreeing to settle all claims against Arthur and Shari, individually and as co-trustees, relating to the IRS transaction based upon Arthur’s agreement to “contribute” the promissory note executed by Mrs. Trask, which was virtually a worthless piece of paper, to Trust Number One. Prior to Carole’s execution of the SRA, not only did Arthur know that Mrs. Trask had very few personal assets, he also knew, but failed to disclose, that the Bal Harbour condominium Mrs. Trask lived in was owned by the 1980 Trust, not Mrs. Trask; Arthur was the sole beneficiary of the 1980 Trust upon Mrs. Trask’s death; and the Bal Harbour condominium would not become an Estate asset upon Mrs. Trask’s death, but instead would pass directly to Arthur.

In response, the co-trustees argued that even if the SRA was voidable based on Arthur’s failure to disclose material facts to Carole before she signed the SRA, Carole’s claims for breach of trust relating to the IRS transaction are barred by Florida’s 6 month statute of limitations because the 2008 trust disclosure documents, including the 2008 accounting, adequately disclosed the IRS transaction.

The appellate court disagreed.  The court reasoned that “Carole’s claim against the Co-Trustees for breach of fiduciary duty was not based solely on the IRS transaction itself, but also on Arthur’s agreement to resolve Carole’s objections to the IRS transaction by “contributing” the promissory note executed by Mrs. Trask to Trust Number One without disclosing that he knew that the promissory note was virtually worthless.” The court held that the 6-month limitation notice didn’t apply because the 2008 trust accounting failed to disclose that the Note assigned to Trust Number One was essentially worthless because there are no assets in Mrs. Trask’s name.

PRACTICE POINTER:  If you want to take advantage of the 6 month statute of limitations for breach of trust, DISCLOSE, DISCLOSE, DISCLOSE!!!