In McCormick v. Cox (3rd DCA 2013), the Florida appellate court dealt severely with a a breach of trust and breach of fiduciary duty by a trustee, and the result was a hefty surcharge.
Arthur McCormick, a Florida trusts and estates attorney, drafted a will and trust for his friend Robert Cox. Mr. McCormick named himself as trustee, and named his sons as successor trustees.
Mr. Cox passed away with the trust owning a single asset – a valuable piece of real estate reported on the estate tax return for $2.5 million. During the trust administration, the trustee sold the real estate for $12 million and did a like kind exchange to defer income taxes.
During the pendency of the trust administration, as found by the trial court, Mr. McCormick committed a number of breaches of fiduciary duty, including the failure to account, underreporting the value of trust assets to the IRS, and taking a seven figure trustee fee without prior disclosure.
Failure to Account
The appellate court made short work of the failure to timely account.
A fiduciary is obligated not only to make prudent decisions, but also to file the annual accountings to keep the beneficiaries informed of income, expenses, and fluctuations in value of the trust assets. Each beneficiary had an enforceable right to receive an accounting from the trustee. Weiss v. Courshon, 618 So. 2d 255 (Fla. 3d DCA 1993); §§ 737.303, .3035, Fla. Stat. (2002).
Payment of Excessive Trustee Fees – “Flagrant Breach of Trust”
The trustee took as a trustee fee over $1.2 million in trustee fees, without prior disclosure of the fees.
The trustee’s unilateral payment to himself of a seven-figure fee from trust monies—without prior disclosures of alleged entitlement and amount to the beneficiaries or the court—also constituted a flagrant breach of duty. Lees v. Pierce, 648 So. 2d 839 (Fla. 5th DCA 1995). Once the trustee paid the section 1031 like-kind exchange costs, invested in the shopping center property, and paid himself over $1,200,000.00 in “trustee’s fees,” the trusts’ cash and cash-equivalent assets were severely depleted. The evidence at trial demonstrated that the family trust was unable to pay Mr. Cox’s widow all of the principal, some $873,000.00, that she was entitled to receive under the trust agreement, without incurring substantial capital gains taxes.
Removal of Trustee and his Sons
On this record, it is apparent that the trial court did not abuse its discretion in removing McCormick as trustee, and in granting the beneficiaries’ preemptive request to preclude McCormick’s sons from serving as a successor trustee. In the absence of such a ruling, McCormick IV and Brad McCormick (in that order) would have succeeded McCormick under Article IV of the trust agreement (as to both the family trust and the bypass trust). Count VII of the second amended complaint essentially sought a declaration that McCormick IV and Brad McCormick should be disqualified from the otherwise self-executing succession provisions because of their participation with their father in MM&M and their knowledge of, or acquiescence in, the breaches of duty at issue in the lawsuit. The court’s power to remove a trustee and to appoint a special trustee is well settled. §§ 736.0706, 1001(2)(g), Fla. Stat. (2013).
Underreporting Value of Trust Property
The probate court found, as affirmed by the appellate court, that the trustee had seriously undervalued trust property as reported to the IRS on the estate’s estate tax return. On the estate tax return, the reported value was $2.5 million, and the trial court received testimony that the date of death value was $10.5 million. Although the remedial measures that were taken to correct the underreporting were not entirely specified in the opinion, the probate court found, as affirmed by the appellate court, that the trustee should be surcharged for $2.1 million in expenses incurred in remediation. One expense that was mentioned were the fees incurred in doing a like kind exchange, which was necessitated by the underreported value of the property.
Trustee Surcharge Breach of Trust
The appellate court affirmed an award of $2.1 million of surcharge against the trustee for breach of trust, disgorgement of $1.3 in attorney and trustee fees, and interest, totaling over $5.3 million. Trustees owe a fiduciary duty to the beneficiaries, not to themselves – a very expensive lesson learned.