PROBATE CORNER

By: David M. Garten, Esq.

ARTICLE: Who Is A Beneficiary/Qualified Beneficiary Of A Trust?

The best way to understand a statute is by example. In Rachins v. Minassian, 2018 Fla. App. LEXIS 9819; 2018 WL 3387236 (Fla. 4th DCA July 11, 2018),[1] we finally have a workable example to assist us in determining who are the beneficiaries/qualified beneficiaries of a trust!

Florida Trust Code: The Florida Trust Code defines a “beneficiary” and “qualified beneficiary” as follows:

“Beneficiary” means a person who has a present or future beneficial interest in a trust, vested or contingent, or who holds a power of appointment over trust property in a capacity other than that of trustee…. See §736.0103(4), F.S.

“Qualified beneficiary” means a living beneficiary who, on the date the beneficiary’s qualification is determined: (a) Is a distributee or permissible distributee of trust income or principal; (b) Would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in paragraph (a) terminated on that date without causing the trust to terminate; or (c) Would be a distributee or permissible distributee of trust income or principal if the trust terminated in accordance with its terms on that date. See §736.0103(16), F.S.

Rachins v. Minassian: In Rachins, the husband (“H”) created a revocable trust (the “original trust”) which became irrevocable upon his death. H and his wife (“W”) were the sole trustees of the trust. H died and the original trust directed that all remaining trust property be distributed to the family sub-trust (“trust”). Pursuant to the terms of the trust, W, as trustee, was authorized to distribute income and principal to herself, in her sole and absolute discretion, for her health, education, and maintenance. Upon the death of W, the trust terminates and the remainder is divided into separate trust shares for their two children. The children filed a complaint against W alleging that she had a substantial gambling problem and was improperly administering the trust. W moved to dismiss the complaint, arguing that her children lacked standing because they were not beneficiaries of the trust. In response, the children argued that they are qualified beneficiaries and therefore have standing to question whether the wife is properly administering the trust.

Who Are TheBeneficiaries Of The Trust? The court found that the children are beneficiaries of the trust because they have a future beneficial interest in the trust. More specifically, the children have a future beneficial interest in any property remaining in the trust after W’s death since any remaining property in the trust will be disbursed to a new trust for the children’s benefit under the terms of the original trust. Stated another way, because any remaining property in the trust would be distributed to a new trust created for the benefit of the children upon W’s death, the children will, at a minimum, have an equitable interest in any property in the trust at that time.

The fact that any remaining principal of the trust would flow into a new trust created for the children, as opposed to being distributed to the children outright, does not preclude the children from being beneficiaries of the trust under the statutory definition. See Brown-Thill v.Brown, 929 F. Supp. 2d 887 (W.D. Mo. 2013) (finding that grandchildren were qualified beneficiaries, even though they were not currently entitled to trust income or principal, “since the principal of [their deceased grandmother’s] trusts will eventually flow into their father’s trust, and finally to them”); see also Mesler v. Holly, 318 So. 2d 530 (Fla. 2nd DCA 1975) (treating great grandchildren as remaindermen of a Florida Trust even though the remainder of the Florida Trust would not be distributed to them outright, but instead would flow to a Massachusetts Trust for their benefit).

Likewise, the fact that the trust terminates upon W’s death does not preclude the children from having a beneficial interest in the trust. Indeed, by definition, a remainder interest in a trust refers to the right to receive trust property upon the termination of the trust. [Citations omitted].

Who Are TheQualifiedBeneficiaries Of The Trust? A qualified beneficiary is a limited subset of all trust beneficiaries. In effect, the class is limited to living persons who are (a) current beneficiaries, (b) intermediate beneficiaries, and (c) first line remainder beneficiaries, whether vested or contingent. SeeJohn G. Grimsley, Florida Law of Trusts, 18 Fla. Prac. § 16:1 (2016-2017 ed.). For example, contingent remainder beneficiaries of a trust are qualified beneficiaries under §736.0103(16), F.S. because of their interest in the distribution of any principal remaining after the death of a lifetime beneficiary. See Harrell v. Badger, 171 So. 3d 764 (Fla. 5th DCA 2015).

The court found that the children are qualified beneficiaries of the trust. As noted above, the term “qualified beneficiary” includes a living beneficiary who “[w]ould be a distributee or permissible distributee of trust income or principal if the trust terminated in accordance with its terms on that date.” §736.0103(16)(c) F.S. Here, the children are qualified beneficiaries because they would be distributees of trust principal if the trust terminated in accordance with its terms (i.e., W died). The definition of “qualified beneficiary” under subsection (16)(c) includes the children in this situation, even though the trust terminates at the wife’s death and even though the children would be distributees of any remaining trust principal in the trust only through a newly-created trust for their benefit. Alternatively, even assuming that the relevant trust is the original trust, the children would be qualified beneficiaries under §736.0103(16)(b) since the original trust would not terminate when W dies. See Rachins, footnote 3.

In support of its finding, the court cited to Brown-Thill v. Brown, 929 F. Supp. 2d 887 (W.D. Mo. 2013), wherein the Missouri court considered whether the settlor’s grandchildren were qualified beneficiaries of his trust under Florida law.

Brown-Thill v. Brown: In Brown-Thill, H created a revocable trust. H later died, survived by his wife, Saurine (“W”) and their two children, Brown and Brown-Thill. The trust provided that upon H’s death, a portion of the principal would be placed into a marital trust for the benefit of W while the remainder would be placed in a separate residuary trust for the benefit of W and her descendants. The residuary trust permitted discretionary distributions to W’s descendants, but only during her lifetime. After W died, Brown and Brown-Hill became co-trustees of the trusts. The assets of both trusts were to fund two separate residuary trusts for Brown and Brown-Thill. Brown’s children were discretionary income and principal beneficiaries of Brown’s separate trust. On those facts, the court found that Brown’s children were qualified beneficiaries under Florida law as defined in §736.0103(16), F.S. The court reasoned, in part, as follows: “None of the beneficiaries are currently entitled to trust income or principal, given that Saurine’s estate has not been terminated and discretionary disbursements could have been made only during her lifetime. Assuming the interests of Saurine, who is the only distributee under subsection (a) [of §736.0103(16)], terminated, Brown would be a qualified beneficiary under (b), as would Brown’s children under (c). If the separate trusts had already been created, Brown’s children would be permissible distributees under (a), and his children under (b). Under any of the above circumstances,…their interest is in the proper administration of the trust before and after Saurine’s trusts terminate, since the principal of Saurine’s trusts will eventually flow into their father’s trust, and finally to them.”

[1] A Motion for Rehearing was filed on 07/25/2018.