This article addresses attractive options for trust modification and termination by trustees, trust protectors, trust directors, beneficiaries and their counsel under Florida law.
More than 331 million people now live in the U.S. Many Americans are moving to the South, including vast numbers into Florida since 2010, according to the U.S. 2020 census population data released by the U.S. Census Bureau. U.S News & World Report, 2020 Census Shows Fastest-Growing States. Since 2014, no state has added more new residents from other states on an annual basis than Florida, which has outpaced all other states each year since 2014, averaging over 579,000 new residents per year. 2019–2014 American Community Survey State-to-State Migration Flows Table. While Florida is a desirable landing spot for many domestic relocations for its climate, no state income tax and strong protection against creditors, the Florida legislature has recently enacted amendments to the Florida Trust Code that make Florida a desirable location for flexible estate planning and trust administration. One of the tools available to Trusts and Estates attorneys in Florida is the ability to make changes to an irrevocable trust.
While an irrevocable trust, by name and terms, would seem to prohibit amendment of its terms, Florida law provides multiple opportunities for those interested in the trust to make changes—regardless of irrevocability. When a trust is drafted, the person creating the trust and funding it with assets, often referred to as the settlor, determines who controls the trust as trustee and who will receive assets from the trust as beneficiary. What if, after making these decisions, it becomes desirable for someone interested in the trust to make changes to these terms but the trust is irrevocable? Inheritance tax laws may change, beneficiaries’ needs may change, family circumstances may warrant revised distributive provisions, among many other unforeseen future realities. Fortunately, the flexibility of Florida’s Trust Code provides broad opportunity to address the changing needs and desires of trust beneficiaries, trustees and those serving as trust director or trust protector. The Florida Trust Code provides four effective paths for making changes to an irrevocable trust: 1) reformation; 2) non-judicial settlement agreements; 3) judicial modification; and 4) decanting. This article will address each method in-turn because the availability of a given option requires a fact specific analysis on a case-by-case basis.
Reformation allows an interested person, such as a settlor, beneficiary or trustee, the opportunity to correct a mistake in the drafting of an irrevocable trust. Fla. Stat. §736.0415 (2021). Where clear and convincing evidence is presented to the court that the trust as drafted does not reflect the settlor’s intent the trust shall be reformed to achieve the settlor’s intent. Megiel-Rollo v. Megiel, 162 So. 3d 1088 (Fla. 2d DCA 2015). Even where the challenged language of the irrevocable trust is unambiguous, reformation is a useful tool if the person seeking reformation can establish the settlor’s intent and a drafting mistake that fails to accomplish that intent. §736.0415; see also Schroeder v. Gebhart, 825 So. 2d 442 (Fla. 5th DCA 2002).
The use of reformation to modify an irrevocable trust has limitations, particularly when compared to other available options. The burden of persuasion the court must adhere to “clear and convincing” is a high bar to reach. Reformation is also less flexible than other options that may be available because it focuses on remedying a specific error; therefore, it is not a useful tool to address additional modifications, separate from the mistake, that may be warranted in further administration of the irrevocable trust. Additionally, client concerns regarding privacy can be difficult to address because of the judicial nature of the action and public access to court records.
Non-Judicial Settlement Agreements
Non-judicial settlement agreements provide persons interested in an irrevocable trust with the ability to make changes to the trust without commencing a judicial proceeding, subject to statutory restrictions. Fla. Stat. §736.0111 (2021). As a result, this tool provides an opportunity to avoid the extensive time and litigation costs of formal judicial proceedings. An agreement executed between the trustee and the beneficiaries is only valid where the terms and conditions could be properly approved by the court, if such approval were sought. Fla. Stat. §736.0111(3). Additionally, the agreement may not produce a result that is not authorized under the Florida Trust Code. Id. This restriction includes a prohibition on modification or termination of the irrevocable trust that is impermissible under the Florida Trust Code. Id. However, there is no such restriction where the agreement is between the settlor and beneficiaries. The added flexibility in such circumstances acknowledges, impliedly, well-established Florida law that a settlor and all beneficiaries may modify, amend or revoke an irrevocable trust by consent. The non-judicial settlement agreement is also a good option for those clients concerned with privacy because it avoids filings in the public record if court approval is not sought.
While non-judicial settlement agreements give those interested in an irrevocable trust greater flexibility in seeking to make changes to an irrevocable trust, there are limitations. While not a strict limitation, there are specifically authorized changes that can be made. Fla. Stat. §736.0111(4) (2021) (See, e.g., interpretation of the trust; granting a trustee a necessary or desirable power; prohibiting a trustee from taking action otherwise authorized by the trust). While these are not the exclusive matters that may be addressed in a non-judicial settlement agreement, their specific inclusion by the legislature opens the door to attacks on proposed changes that are not specifically authorized.
Judicial modification provides significant flexibility to make changes to an irrevocable trust after the settlor has died. A trustee or beneficiary may commence a judicial modification proceeding to amend or change the terms of the irrevocable trust, terminate the trust, permit the trustee to take action not authorized or explicitly prohibited by the trust, prohibit the trustee from taking actions authorized or specifically required by the trust. Fla. Stat. §736.04113(2). The Florida Trust Code provides the court with broad discretion in judicial modification proceedings. In carrying out its broad discretion, the court must consider the terms and purpose of the irrevocable trust, the facts and circumstances surrounding creation of the trust, and evidence relevant to the proposed changes to the irrevocable trust. Fla. Stat. §736.04113(3). The court must also consider whether the trust imposes restrictions on the transfer of a beneficiary’s interest in the irrevocable trust, commonly referred to as spendthrift provisions. Id. However, the existence of a spendthrift provision does not preclude the court from making the changes sought under the judicial modification. Further, the parties seeking the judicial modification must show that the settlor’s purpose for creating the irrevocable trust is not being fulfilled, Fla. Stat. §736.04113(1), or the changes sought are in the best interest of the beneficiaries. Fla. Stat. §736.04115(1). Under the “best interest” method, the irrevocable trust must have been created after December 31, 2001, or was a revocable trust that became irrevocable after December 31, 2000, subject to limited restriction. §736.04115(3).
Judicial modification under the Florida Trust Code provides trustees and/or beneficiaries vast flexibility and the court with broad discretion to fashion creative changes to irrevocable trusts when the settlor’s purpose for creating the trust is not being fulfilled or where such changes are in the best interest of the beneficiaries. While judicial modification is an effective tool in a broader range of factual settings, it does have drawbacks that must be considered. As a judicial proceeding, the privacy concerns of clients are more difficult to address. Similarly, judicial modification carries with it the likelihood of significant time and legal costs.
Decanting provides a special class of trustee with great flexibility making changes to an irrevocable trust. Decanting, while it provides a trustee with the ability to change the practical effect of an existing trust, is not considered trust modification because it utilizes the trustee’s authority to distribute trust assets from an original trust, which terms remain unchanged, to a second trust wherein terms are changed to achieve the trustee’s purpose. Decanting allows the trustee to remove assets from an irrevocable trust that has undesirable provisions and distribute them to a new trust that is crafted with desirable terms. See Fla. Stat. §736.04117. Decanting is also a good option for those clients concerned with privacy because of its non-judicial nature.
While decanting provides great flexibility and creativity, it is only available to a trustee that is neither a settlor nor beneficiary, that is authorized to distribute trust principal. This special class of trustee is referred to under the Florida Trust Code as an “authorized trustee.” Fla. Stat. §736.04117(1)(b). The trustee’s flexibility to effectuate changes between terms in the initial irrevocable trust, to those crafted in the second trust, is dependent upon the trustee’s power to distribute trust principal under the initial irrevocable trust. Where the trustee’s authority to distribute principal is not limited to a health, education, maintenance and support standard, but rather provides broader discretion, such as the beneficiary’s happiness, comfort or best interests, the authorized trustee will have great flexibility in crafting terms for the new trust, including drastic changes such as the removal of beneficiaries.
Effective use of the tools available to make changes to an irrevocable trust requires in-depth knowledge of the relevant statutory sections and command of Florida common law. The options discussed herein are not available in all circumstances and consideration should be given to client goals that extend beyond the substance of the desired changes themselves, such as a client’s privacy interests and willingness to engage in litigation.
Reprinted with permission from the April 8, 2022 issue of the Daily Business Review. ©2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.