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Florida Court Applies Common Law To Modify Irrevocable Trust

There are certain situations where an irrevocable trust can be modified under Florida law.  In the May 2020 case of Demircan v. Mikhaylov, Florida’s Third District Court of Appeal determined that the Florida probate court appropriately applied Florida’s common law of trusts to modify an irrevocable trust.

The Facts of The Case

The settlor, Igor Mikhaylov, created the Igor Mikhaylov 2015 Irrevocable Trust (“Trust”) to fund a business venture involving the development of a shopping mall and to benefit his children.  Initially, the trust appointed Genna Demircan as the trustee and named Anatoly Zinoviev as the only person with the power to remove the trustee.

The Civil Action

Disagreements arose between the settlor, Demircan, and Zinoviev.  The settlor halted all funding from the Trust for the business venture.  The settlor and beneficiaries filed suit in the civil division to strip Zinoviev of his powers and to remove Demircan as trustee.  Zinoviev and Demircan successfully moved to dismiss the action.  The settlor and beneficiaries amended the complaint but eventually dismissed the lawsuit.

The Probate Action

The same day that the civil action was voluntarily dismissed, the settlor and beneficiaries refiled their lawsuit in the probate division, but did not name Zinoviev as a defendant.  The plaintiffs became aware that Zinoviev had appointed Nelson Rincon as the current trustee, and the plaintiffs amended their complaint to add Rincon as a defendant and sought his removal as well.

At the final hearing, Rincon argued that Zinoviev was an indispensable party who had not been joined, that the beneficiaries’ consent to the modification was not sufficiently shown, and that common law modification required consideration of factors other than consent, as reflected in chapter 736, Florida Statutes.

The trial court allowed modification of the trust, noting the settlor and all beneficiaries’ consent, pursuant to the common law rule expressed in Preston v. City National Bank of Miami, 294 So. 2d 11 (Fla. 3d DCA 1974).

Does A Current Trustee Have Standing To Appeal The Modification Of A Trust?

Yes, a current trustee has standing to appeal a trial court’s modification of the trust. Standing is having “a sufficient stake in an otherwise justiciable controversy to obtain judicial resolution of that controversy.”

The court reasoned:

The trust here gave the trustees “all powers given to [them] by applicable law.” Such trust provisions confer upon the trustee the standing recognized by statute or the common law. Reid v. Temple Judea, 994 So. 2d 1146, 1150-51 (Fla. 3d DCA 2008) (construing clause “the Trustee has the powers now or hereafter provided by law” as giving trustee standing to seek modification of trust). In Florida, a trustee shall not only “take reasonable steps to enforce claims of the trust and to defend claims against the trust,” section 736.0811, Florida Statutes (2016), but “[a]ny person interested as . . . trustee” may also have a declaration of rights to “determine any question relating to the administration of the . . . trust, including questions of construction . . . .” § 86.041(3), Fla. Stat (2016). …Here, where the trust conferred upon the trustee standing to seek its modification or sue for a declaration that he cannot be removed, it necessarily conferred standing to oppose modification on appeal, despite the current trustee’s success below in the matter of his removal.

Who Is An Indispensable Party In A Florida Trust Action?

“Generally, the only indispensable parties to a trust action – including modification – are the trustee, the settlor, and the beneficiaries.” Demircan v. Mikhaylov at *6.

Here, the defendant urged that Zinoviev (the person with authority to remove a trustee) was an indispensable party to the action.  An indispensable party is “one whose interest will be substantially and directly affected by the outcome of the case…where the subject matter is such that if he is not joined a complete and efficient determination of the equities and rights between the other parties is not possible.”  The court determined that Zinoviev was not indispensable because a complete and efficient determination of the equities and rights was possible without joining him.

Modification of An Irrevocable Trust Under The Florida Trust Code

The trustee argued that the probate court did not make the requisite findings required by section 736.04113 of the Florida Trust Code.  The Florida Trust Code allows judicial modification of irrevocable trusts where not inconsistent with the settlor’s intent, and upon required findings of the present practicability, materiality, and substantial impairment of the trust’s purpose, stating:

(1) Upon the application of a trustee of the trust or any qualified beneficiary, a court at any time may modify the terms of a trust that is not then revocable in the manner provided in subsection (2), if:

(a) The purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill;

(b) Because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust; or

(c) A material purpose of the trust no longer exists.

Can You Modify An Irrevocable Trust Under Florida Common Law?

Yes, if the settlor and all beneficiaries agree to modify the irrevocable trust, Florida common law permits modification.  Common law trust modification under Preston v. City National Bank is neither abrogated nor controlled by the requisite findings contained in section 736.04113 of the Florida Trust Code.  “Judicial modifications at common law are different from – and have so far survived – judicial modifications under chapter 736.”

In Preston, the Court stated:

The terms of a trust may be modified if the settlor and all the beneficiaries consent. Having the power to terminate, they obviously have the power to create a new trust or to modify or change the old. In Florida, this principle has long been recognized.

Therefore, if the court is presented with a complaint seeking modification through the joint agreement of the settlor and all beneficiaries, it may allow modification without the need to make findings pursuant to Chapter 736.  The parties’ agreement is the only finding compelling the result.  This makes sense, because if all of those beneficially interested in the irrevocable trust desire its termination, there is no reason to keep the trust in existence.

In harmonizing the common law of trusts and the Florida Trust Code on the requirements for modification of an irrevocable trust, the Court stated:

Although it substantially represented a “major shift from the common law regarding judicial modification, under which the intent of the settlor was paramount,” the code also authorizes a court to “give greater consideration to the interest of the beneficiaries as long as the modification conforms to the extent possible with the intention of the settlor.”  Brian J. Felcoski & Jon Scuderi, The Administration of Trusts in Florida § 8.3 (10th ed. 2019). The Preston exception is in clear harmony with such a purpose, since it provides for the actual and joint intent of settlors and beneficiaries to be presently realized. The code’s enactment has not altered the idea that “[t]he settlor and beneficiaries of a trust can consent to its modification.” Id. The exception in Preston, therefore, continues to be part of Florida’s common law despite its subsequent enactment of the code.

The key point in this case was that modification of the irrevocable trust was agreed to by the settlor and the beneficiaries.  Therefore, under the common law of trusts, the probate court could modify the trust without making the requisite findings under section 736.04113 of the Florida Trust Code.  “[W]here a settlor and all beneficiaries consent, the trustee has no reason in law or equity to successfully oppose modification.”

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