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Trustee Must Provide Notice to All Qualified Beneficiaries Before Invading Principal

By:  Jeffrey Skatoff, Esq.

In Harrell and Dake v. Badger, (Fla. 5th DCA 2015) the Florida court reversed a final judgment discharging the Trustee and awarding attorneys’ fees.  Badger, the trustee, among a litany of breaches of the fiduciary duty he owed to the Trust, failed to comply with section 736.04117 of the Florida Trust Code by not providing notice to the qualified beneficiary of the trust of a forthcoming invasion of the principal.

The Facts of the Case

David Wilson (“Wilson”), the adopted child of Rita Wilson (“Rita”), and biological son and nephew to appellants Dake and Harrell, respectively, was named as the beneficiary of Rita’s pour-over will. After resignation of Rita’s sisters as trustee following Rita’s death, Wilson’s consented to Harrell’s substitution of trustee.

Following disputes with Harrell, Wilson successfully petitioned the Court to remove Harrell and appoint Badger, Wilson’s neighbor, as trustee.

Badger failed to post a court-ordered bond for nearly 13 months and filed only one accounting as trustee.  Badger sought court approval of his wife to serve as realtor for the sale of Rita’s home-the Trust’s sole remaining asset.  An order approving this request was never entered.  Badger also sought the retention of Ross and Linda Littlefield. The latter Littlefield was retained as counsel for the Trust, who created a sub-account of Florida Foundation for Special Needs Trust (“FFSNT”), with her husband to serve as trustee.
Following Wilson’s death, the FFSNT would receive the remaining funds in the sub-account.

A couple of months later, Badger sold the house, with his wife as the realtor and wired the proceeds to the FFSNT. Badger did not provide notice to Appellants of the agreements, the sale of the house, or the transfer of all remaining Trust assets to the FFSNT. The Littlefields then transferred all funds from the FFSNT into another trust—the JNN trust—without consent from Wilson, Badger, or anyone associated with Wilson’s subaccount.  In 2010, the Littlefields were arrested, convicted, and sentenced to prison for the misappropriation of funds in the JNN Trust.

Notice is Required to All Qualified Trust Beneficiaries

FS FS 736.04117, provides, in part:

(1)(a) Unless the trust instrument expressly provides otherwise, a trustee who has absolute power under the terms of a trust to invade the principal of the trust, referred to in this section as the “first trust,” to make distributions to or for the benefit of one or more persons may instead exercise the power by appointing all or part of the principal of the trust subject to the power in favor of a trustee of another trust, referred to in this section as the “second trust,” for the current benefit of one or more of such persons under the same trust instrument or under a different trust instrument; provided:

1.      The beneficiaries of the second trust may include only beneficiaries of the first Trust.

. . .

(4)      The trustee shall notify all qualified beneficiaries of the first trust, in writing, at least 60 days prior to the effective date of the trustee’s exercise of the trustee’s power to invade principal pursuant to subsection (1), of the manner in which the trustee intends to exercise the power. A copy of the proposed instrument exercising the power shall satisfy the trustee’s notice obligation under this subsection. If all qualified beneficiaries waive the notice period by signed written instrument delivered to the trustee, the trustee’s power to invade principal shall be exercisable immediately. The trustee’s notice under this subsection shall not limit the right of any beneficiary to object to the exercise of the trustee’s power to invade principal except as provided in other applicable provisions of this code.
Id. at *6-7(emphasis supplied).

The Court held that the statute clearly required a trustee to provide notice to “all qualified beneficiaries” of an intent to invade the principal of a trust at least 60 days before the invasion.

Badger’s invasion of the Trust’s principal without notice to appellants prior to the transfer was an improper exercise of his power. In addition, Badger’s decantation of the Trust’s principal was impermissible.  As noted above, section 736.04117(1)(a)(1) permits decantation only where the beneficiaries of the second trust “include only beneficiaries of the first trust.” Wilson was included as the primary to both trusts; however, appellants were removed as the contingent beneficiaries following the decantation and the FFSNT was named contingent on the sub-accounts. “The second trust clearly included beneficiaries not contemplated by the original Trust, rendering Badger’s decantation of all assets from the original Trust invalid.” Id. at *7-8.

Finally, the Court noted, in its reversal of the trial court’s decision below, that the award to Badger for attorney’s fees and costs was an abuse of discretion.  The trial court ruled that appellants “presented absolutely no evidence” in support of their claims.  The Fifth District’s ruling invalidated the lower court’s finding.  In turn, the award of attorney’s fees was an abuse of discretion.

This decision serves as yet another reminder that the statute governing the notice requirement of a trustee in anticipation of an invasion of a Trust’s principal is clear, unambiguous, and requires strict compliance.  All qualified beneficiaries must be given notice at least 60 days prior to an invasion. In addition, decantation is limited by statute to include only those beneficiaries contemplated by the original trust.

Jeffrey Skatoff is a Florida probate attorney.  To have Mr. Skatoff review your case free of charge, please go to his website.

Jeffrey Skatoff Esq

Jeffrey H. Skatoff, Esq.

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