Trustee’s Duties Upon The Settlor’s Incapacity

PROBATE CORNER

By: David M. Garten, Esq.

ARTICLE: Trustee’s Duties Upon The Settlor’s Incapacity

As a general rule, a revocable trust becomes irrevocable upon the settlor’s death. In addition, a revocable trust may become irrevocable prior to the settlor’s death. For example, the trust may provide that it becomes irrevocable upon the settlor’s incapacity, or that the settlor can only revoke the trust with the consent of the non-settlor trustee. For obvious reasons, irrevocability is of critical importance to both the qualified beneficiaries of the trust and the successor trustee who needs to know where his or her duties lie.

Pursuant to the Florida Trust Code, Florida trusts are revocable by default.[1] That is, unless the trust instrument states that the trust is irrevocable, the trust may be amended or revoked by the settler. See §736.0602(1), F.S. A trust is revocable if it is revocable by the settlor without the consent of either the trustee or a person holding an adverse interest. See §736.0103(17), F.S. While a trust is revocable, the duties of the trustee are owed exclusively to the settlor. See §736.0603(1). An irrevocable trust is created when the right of revocation terminates. See §736.0802(5)(f)2.c., F.S.

 

In addition, §736.0207(2), F.S. reads: “An action to contest the validity of all or part of a revocable trust, or the revocation of part of a revocable trust, may not be commenced until the trust becomes irrevocable by its terms or by the settlor’s death. If all of a revocable trust has been revoked, an action to contest the revocation may not be commenced until after the settlor’s death. This section does not prohibit such action by the guardian of the property of an incapacitated settlor.” [Emphasis added]

Settlor’s Intent: A revocable trust may become irrevocable pursuant to the terms of the trust.  For example, in Jervis v. Tucker, 82 So. 3d 126 (Fla. 4th DCA 2012), the settlor of a revocable trust was adjudicated incapacitated and her right to contract was removed. The following year, the settlor/ward, without the knowledge and consent of her guardian and without a court order, executed an amendment to her trust. The settlor/ward subsequently died and the trust beneficiaries sued to vacate the trust amendment. The appellate court, in affirming the lower court’s order that the trust amendment was invalid, reasoned:

Here, the first amendment to Meikle’s trust contains language which provides for the suspension of rights “[i]f, at any time during the continuance of [the] trust, Grantor is adjudicated incapacitated by a court of appropriate jurisdiction.”

The Grantor’s powers and those of Grantor/Trustee may be restored either by virtue of an order of an appropriate court having jurisdiction over Grantor, or upon the issuance and receipt by the Trustee of a written opinion from the physician or physicians on whose opinion the Trustee relied regarding the Grantor’s capacity or if none are available, then two other licensed physicians who have examined the Grantor.

The plain meaning of the document shows that Meikle’s capacity must have been restored by the court in order to amend her trust once she was adjudicated incapacitated and the right to control her property was removed and the responsibility of her property became Jems’, as her trustee. Without a court order restoring her rights, she must have obtained two opinions by licensed physicians.

Revocation: Can an incapacitated settlor revoke his or her trust? This question was answered in the negative in Genova v. Fla. Nat’l Bank, 433 So. 2d 121l (Fla. 4th DCA 1983), approved Florida Nat’l Bank v. Genova, 460 So. 2d 895 (Fla. 1984), wherein the court held that the settlor cannot terminate his trust if he is incapacitated. The court cited to the Restatement (Second) of Trusts § 339, comment a, page 171 (1957), which reads:

If the settlor is not under an incapacity at the time when he creates the trust, but he subsequently becomes under an incapacity, he cannot thereafter terminate the trust. Thus, if the settlor becomes insane or is judicially declared a spendthrift, he cannot terminate the trust. The mere fact, however, that he is a person who is unable wisely to manage or dispose of his property does not preclude him from terminating the trust and compelling the trustee to re-transfer the trust property to him if he is the sole beneficiary of the trust; and it is immaterial that his purpose in creating the trust was to put the management of his property out of his own hands, because of his fear that he would mismanage it, and to protect himself against his own incompetence, wasteful habits or intemperance. He can terminate the trust, if he is not under an incapacity, because he is both the settlor and the sole beneficiary of the trust.

Accord Scott, The Law of Trusts, § 339, p. 2699 (3d); Macintyre v. Wedell, 12 So. 3d 273 (Fla. 4th DCA 2009); Brundage v. Bank of Am., 996 So. 2d 877 (Fla. 4th DCA 2008) (“While a settlor can consent to any actions regarding the revocable trust, including termination, that ability ceases if the settlor becomes incapacitated”, citing Genova).

• 736.0603, F.S. v. UTC §603(a): Sec. 736.0603, F.S. is modeled, in part, after the Uniform Trust Code. UTC §603(a) reads: “While a trust is revocable [and the settlor has capacity to revoke the trust], rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.” The Comments to UTC 603 read in relevant part:

This section recognizes that the settlor of a revocable trust is in control of the trust and should have the right to enforce the trust. Pursuant to this section, the duty under Section 813 to inform and report to beneficiaries is owed to the settlor of a revocable trust as long as the settlor has capacity.

If the settlor loses capacity, subsection (a) no longer applies, with the consequence that the rights of the beneficiaries are no longer subject to the settlor’s control. The beneficiaries are then entitled to request information concerning the trust and the trustee must provide the beneficiaries with annual trustee reports and whatever other information may be required under Section 813. However, because this section may be freely overridden in the terms of the trust, a settlor is free to deny the beneficiaries these rights, even to the point of directing the trustee not to inform them of the existence of the trust. Also, should an incapacitated settlor later regain capacity, the beneficiaries’ rights will again be subject to the settlor’s control.

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Concluding that uniformity among the states on this issue is not essential, the drafting committee has decided to place the reference to the settlor’s incapacity in Section 603(a) in brackets. Enacting jurisdictions are free to strike the incapacity limitation or to provide a more precise definition of when a settlor is incapacitated….

In a number of UTC states, the legislatures have stricken the reference to the settlor’s capacity, meaning that in those state the trustee’s duties are owed exclusively to the settlor even if the settlor is incapacitated. See Manon v. Orr, 856 N.W.2d 106, 289 Neb. 484 (Neb. 2014). In contrast, in those states that have not stricken the reference to the settlor’s capacity, the trustee may owe a duty to the beneficiaries if the settlor is incapacitated. See Drake v. Pinkham, 217 Cal. App. 4th 400 (Cal. App. 2013), citing Rest. 3d of Trusts, §74, which is essentially the same as UTC §603(a).

Florida: Although §736.0603(1), F.S. does not reference the settlor’s capacity, it is still not clear whether the trustee’s duties are owed exclusively to the settlor. There is no case law or legislative history on point, and if an irrevocable trust is created when the right of revocation terminates [§736.0802(5)(f)2.c.], then logic dictates that the trustee owes the trust beneficiaries a duty upon the settlor’s incapacity, conditioned upon the settlor regaining capacity. During the period of incapacity, the contingent remainder beneficiaries[2] should have standing to challenge the trustee’s duties and may be guilty of laches if they fail to do so. See Drake, supra.

[1] This is a change from prior law whereby trusts were irrevocable by default.

[2] Although a contingent remainder beneficiary’s interest may never “vest in possession or enjoyment,” it is already “vested in interest” and in legal contemplation. See, Barley v. Barcus, 877 So. 2d 42 (Fla. 5^th DCA 2004); Richardson v. Richardson, 524 So. 2d 1126 (Fla. 5th DCA 1988).