Although some individual trusts can be highly complicated, the fundamental concept is fairly straight-forward. After creating and signing a “declaration of trust” or “trust agreement” setting forth the terms under which the trust will operate, the person establishing the trust (the “grantor,” or “settlor”) formally transfers assets into the trust. Once transferred, the “trustee” appointed by the grantor manages the trust assets on behalf of named “beneficiaries.” The trustee holds legal title to the assets in the trust’s name and periodically makes disbursements to beneficiaries as directed in the declaration of trust. However, the trustee in Florida is bound to those powers which are specifically defined in the trust agreement itself as well as the Florida trust code. These collective powers are known as the powers of trustees in Florida and generally other states and this article focuses on learning more about these various powers and options.
A “trust,” then, is not a physical lockbox but a legal relationship that exists between the parties—somewhere between a contract and a business entity. The key person for making the relationship work (for a Florida trust) is the trustee in Florida, who stands in a position of high responsibility toward both the grantor and the beneficiaries. The grantor is entrusting property to the trustee’s care with the expectation that the trustee will act appropriately, and the beneficiaries rely on the trustee to look out for their best interests.
In some revocable trusts in Florida, the grantor, trustee, and beneficiary can be the same person (at least at first). In that case, there’s not much of a leap of faith involved in choosing a trustee. But, if you name someone else as Florida trustee or successor trustee, you should select someone honest, dependable, and competent—because the success of a trust is entirely dependent on the actions of the trustee.
Florida Trustee Powers and Fiduciary Duties
Unsurprisingly, both the common law and Florida statutory law hold trustees to a high standard, known as a “fiduciary duty.” In general, a fiduciary duty basically means looking out for the beneficiaries’ best interests and managing trust assets in accordance with the terms and intent of the trust. Florida’s trust statute emphasizes trustees’ obligations of loyalty and prudence. Loyalty means avoiding conflicts of interest or self-dealing. Prudence means exercising the care, skill, and caution that would be expected from a reasonably prudent person under the circumstances—managing the trust at least as carefully as you would manage your own property.
The reason for the high fiduciary duty, and for the significant liability if it is breached, is the considerable power granted to trustees. As a wise man once said, “with great power comes great responsibility.” And, once property is in a trust, the trustee has the power to take almost any action in relation to the property that the trustee could take if he or she owned it outright.
General Powers of Florida Trustees
For the most part, a trustee’s powers come from one of two places: the declaration of trust or trust agreement or the relevant statute as mentioned above. A strong declaration of trust or trust agreement can provide detailed instructions to the trustee as to exactly what the grantor is trying to accomplish and how the trustee is expected to make that happen. Conversely, a declaration or agreement can be drafted more generally and allow the trustee wide latitude to act as he or she sees fit, subject only to the statutory duties and maybe a few additional restrictions. Importantly, trustees are required by law to make a good faith effort to accomplish the grantor’s objectives for the trust.
Florida law generally authorizes trustees to take control over and protect trust property in Florida or elsewhere. Unless limited by the trust instrument, a trustee can take any action to secure and preserve trust assets that any other owner could take. If the trust includes valuable personal property, the trustee can take physical possession, secure the property is kept in a safe location, and obtain insurance coverage. If real estate is involved, the trustee arranges for regular upkeep and maintenance and makes sure any property taxes and utilities are paid.
Trustees are also generally empowered to act on behalf of their trusts in legal and contractual matters. They can defend or settle claims asserted against the trust or its assets and prosecute and enforce the trust’s own claims. If the trust owns real estate, this might mean settling a premises liability action or collecting delinquent rent from a tenant.
Among a trustee’s most important powers is the power to make distributions—or to pay out assets to beneficiaries. Grantors commonly provide a range and schedule for distributions—such as an instruction to distribute trust income and up to five percent of principal annually—but can also leave distributions entirely within the trustee’s discretion so long as they accomplish the trust’s purpose. A trustee’s distribution power can be either mandatory (i.e., the trustee must make the distribution precisely as described in the declaration of trust) or discretionary (i.e., the trustee has some flexibility in deciding how to make distributions). Under Florida law, discretionary distribution powers provide added protection against beneficiary creditors, as creditors cannot attach or force distribution if the trustee has discretion.
A declaration of trust may, but does not have to, confer on the trustee the power to modify or terminate the trust. If the power is conferred, the modification or termination must be accomplished in accordance with the trust’s terms and should further the general intent of the trust. For instance, if a trust is created to fund a beneficiary’s education, and the trustee has authority to modify the trust in furtherance of that goal, a trustee might make a modification to accommodate a course of study that the grantor hadn’t initially anticipated.
Specific Powers of Trustees in Florida
Specific powers of a trustee can be thought of as the precise steps the trustee can take in furtherance of the general powers and objectives of the trust. So, for example, because a trustee has the general power to take control of and protect trust property, the trustee might have the specific power to use funds placed in the trust to open a bank account to pay trust expenses. Florida’s statute dealing with specific powers of trustees (Fla. Stat. §736.0816) describes numerous powers ranging from buying, selling, and trading trust property to conducting business operations on behalf of a trust that holds an ownership interest in a business.
Financial accounts provide a good illustration of the wide-ranging specific powers afforded to trustees. Let’s say a grantor funds a testamentary trust in Florida (i.e., a trust created by a will) with $200,000 and instructs the trustee to manage the funds on behalf of a minor beneficiary. The trustee is directed to distribute trust assets for the beneficiary’s education expenses until he or she reaches age 25, at which point the trust terminates and the balance is distributed in full.
In administering the trust, the trustee can open an investment account for the trust and purchase stocks, mutual funds, bonds, and the like. The trustee has a duty to invest prudently, so he or she will want to ensure investments are adequately diversified. Alternatively, the trustee can delegate the power to choose investments to a financial adviser. If any of the acquired securities have voting rights, the trustee votes on behalf of the trust’s shares. When the beneficiary needs tuition money, the trustee can liquidate trust assets and pay the school from the proceeds.
When the trust earns income, the trustee is responsible for filing a tax return and making sure the taxes are paid. Or, the trustee can hire an accountant using trust assets. When the beneficiary reaches age 25, the trustee is responsible for winding down the trust and transferring the assets. If necessary, the trustee can hire an attorney or tax professional to help determine the optimal way to transfer trust assets to the now-adult beneficiary.
In this example, the trustee had pretty wide latitude in deciding how to invest—as long as the investments were prudent and in the best interests of the beneficiary. But the grantor could have provided instructions or restrictions on investments. If, for example, the grantor only wanted the funds invested in environmentally friendly and/or domestic companies, the trustee would have had a duty to try in good faith to make that happen. If the trustee delegated investment decisions to an adviser, the trustee would be required to periodically review the investments to ensure they are within the proper scope.
Specialized Trustee Powers
Some trusts provide trustees with specialized powers arising from the specific function of the trust. A Qualified Subchapter S Trust (“QSST”), for example, is designed so that the Florida trust can hold shares in an S Corp. An S Corp (as opposed to a C Corp) is a corporation that allows for pass-through taxation, which means profits and losses are recognized on the owners’ personal tax returns, rather than on a corporate return. This arrangement avoids “double taxation” of corporate profits and shareholder dividends.
To qualify as an S Corp, a company can only be owned by individuals and certain qualified trusts, like a QSST. And, to qualify as a QSST, the trust must (among other things) have only one beneficiary and must distribute to that beneficiary 100% of income as it is received. Critically, the trustee must be empowered to make a QSST election with the IRS, must actually make that election, and must distribute income in the required manner. Failure to do so not only destroys the pass-through taxation for the trust’s beneficiary, but for every other owner of the company, too.
An Electing Small Business Trust (“ESBT”) works similarly to a QSST but can have more than one beneficiary and more flexibility in income distribution. Like a QSST, and ESBT’s trustee must make the election with the IRS.
Farmers and ranchers have increasingly discovered the utility of trusts as a means of transferring valuable real estate to the next generation, and, when applicable, minimizing the estate taxes that can be crippling to small farms. A common approach is to transfer the farm and related equipment to a trust, with the farm-owner or a trusted friend or relative appointed as trustee. The trustee is empowered to carry on the farm’s operations (a massive undertaking in some cases). The trustee may also make income distributions derived from the farm’s profits to the retired farmer. At death, the trustee transfers title to the farm to the named beneficiary outside of probate.
With larger farms, an irrevocable trust in Florida can be used to keep the real estate’s value out of the farmer’s taxable estate. To be effective, though, the farmer must not exercise control over the farm after the transfer.
Specialized irrevocable Medicaid planning trusts in Florida are also excellent tools for Florida Medicaid planning. With proper planning, a Medicaid applicant can reserve income from property transferred to the trust, and ensure the trust assets are eventually inherited by chosen heirs, without running the risk of Medicaid disqualification. As an example, Miller trusts or Qualified Income Trusts (QITs) in Florida can be used with income-producing assets, such as rental properties and retirement accounts. The trust receives the income produced by the property, and the trustee is empowered to make disburements in a way that ensures continuing eligibility. The asset itself remains in the trust until the Medicaid recipient’s death, at which point it transfers to his or her heirs free from any Medicaid claims.
Trusts are among the most popular and effective tools in estate planning. Unfortunately, though, not everyone who could potentially benefit from a trust is familiar with the advantages they offer, and the misconception persists that trusts are only useful for the super-rich. If you think a trust may be beneficial in your situation, you should consult with an experienced Florida trust and estate planning attorney.
Steve Gibbs, Esq.