4th DCA: What’s a “qualified beneficiary” and why should trustees care?
Under Florida’s Trust Code there are two classes of beneficiaries, and which class you fall in is a big deal.
As defined in F.S. 736.0103(4), the term “beneficiary” refers to the entire universe of persons who have a beneficial interest in a trust, as well as to any person who has a power of appointment over trust property in a capacity other than as trustee. For purposes of this definition it’s immaterial whether the beneficial interest is present or future, vested or contingent, or whether the person having the interest is ascertainable or even living.
What’s a “qualified beneficiary”?
By contrast, the term “qualified beneficiary,” as defined in F.S. 736.0103(16), encompasses a much smaller — but favored — subset of trust beneficiaries. This class of beneficiaries is limited to current beneficiaries, intermediate beneficiaries, and first line remainder beneficiaries, whether vested or contingent. These beneficiaries are prioritized in two key ways. First, qualified beneficiaries are going to have standing in just about any judicial proceeding involving their trusts. Second, qualified beneficiaries are at the center of all trustee disclosure obligations.
For example, no matter what your trust agreement says, F.S. 736.0105 tells us you can’t waive the duty under F.S. 736.0813 to notify qualified beneficiaries of an irrevocable trust of the existence of the trust, of the identity of the trustee, and of their rights to trust accountings; nor can you waive the duty to provide a complete copy of the trust instrument and to account to qualified beneficiaries; nor can you waive the duty to respond to the request of a qualified beneficiary of an irrevocable trust for relevant information about the assets and liabilities of the trust and the particulars relating to trust administration.
Bottom line, you can’t do your job as trustee if you don’t know who your qualified beneficiaries are.
Miss law school? How about a couple of brain teaser hypotheticals?
And just in case we didn’t get the message that identifying a trust’s “qualified” beneficiaries is critically important (and can be a tricky exercise in real life), the trust code’s 2006 Legislative Staff Analysis (written largely by FSU Law Professor David F. Powell, who was the scrivener for the Ad Hoc Trust Law Committee of the Florida Bar that drafted Florida’s trust code) went so far as to provide hypothetical examples for those of us trying to pin down exactly who falls within this favored class of beneficiaries:
Example 1 — Meaning of Beneficiary. At his death, ninety-year-old D leaves $1,000,000 to T as trustee “to pay the income to D’s spouse S for life, then to distribute trust property to such of D’s descendants as S by will appoints, and in default of appointment in continuing trust to spray income among D’s children from time to time living, and at the death of the last to distribute all trust property per stirpes to D’s then living descendants and if there be none, to D’s alma mater, QB University.” D is survived by S, by two children, C1 and C2, by a grandson Bob (C1’s child) and by a great-granddaughter Fay (Bob’s child). On these facts, the beneficiaries of D’s trust include S, C1, C2, Bob, Fay, QB University, and an indeterminate and unascertainable class of as yet unborn descendants of D. Note that T’s power to spray trust income among D’s children does not make T a beneficiary because T holds that power as a trustee.
Example 2 — Meaning of Qualified Beneficiary. Same facts as Example 1. The qualified beneficiaries of D’s trust, as of his death, include S, C1, C2 and Bob. S is included because she is a permissible distributee. C1 and C2 are included because they would become permissible distributees were S’s interest to terminate at D’s death (i.e., were she to die at that time). Bob is also a qualified beneficiary because he would take the trust property were the trust to terminate at D’s death (because of the death of S, C1 and C2). As of D’s death, neither Fay nor QB University are qualified beneficiaries. Note however, that if Bob were to die after D’s death, Fay would then become a qualified beneficiary because she would be entitled to trust property as a consequence of a hypothetical trust termination at that time. That is, the determination of who is a qualified beneficiary is made as of a specific point in time and can change over time.
Clearly, who’s in and who’s out as a qualified beneficiary isn’t always going to be obvious. You need to apply the statute to a concrete set of facts to make sense of it. And thanks to the 4th DCA we now have two more real life examples. In both cases the 4th DCA makes clear that when in doubt the term “qualified beneficiary” is going to be read expansively, even if the trust agreement was intentionally drafted to reach the opposite result.
Should you assume intermediate beneficiaries die “sequentially” or “simultaneously”?
Hadassah v. Melcer, — So.3d —- 2019 WL 141039 (Fla. 4th DCA January 09, 2019)
In this case the trust agreement left everything to D’s surviving spouse, S, and upon her death to her three daughters, A, B, and C, and when the last daughter dies, to several charities. F.S. 736.0110 extends the rights of a qualified beneficiary to any charitable organization expressly designated to receive distributions from a charitable trust if the organization would otherwise meet the definition of a qualified beneficiary.
D was survived by his three daughters (his wife predeceased him). D’s trustee then filed an action seeking to resign and he named D’s three daughters and the charities as defendants, alleging that they were all qualified beneficiaries of the trust. The daughters argued that the charities weren’t qualified beneficiaries, and thus didn’t have a say in who gets to be successor trustee, because if any one of them died, the surviving sisters would get their share. Thus, the charities weren’t first line remainder beneficiaries. The trial court agreed and entered summary judgment against the charities.
Wrong answer, says the 4th DCA. When you’re defining who falls within the magic circle of qualified beneficiaries you need to assume all intermediate beneficiaries die simultaneously.
The lower court’s order contemplates the sequential termination of the daughters’ individual interests such that A’s interest passes to B and C; then B’s interest passes to C; then C’s interest passes to the charities. This interpretation is contrary to the plain language of the statute.
The statute contemplates the simultaneous termination of the interests of the distributees (“termination of the interests of other distributees or permissible distributees then receiving or eligible to receive distributions”). If the interests of the distributees of the trust were simultaneously terminated, all of the daughters’ interests would terminate and the charities would be the distributees. Therefore, the charities are qualified beneficiaries under the plain language of the statute.
Can you use a “multiple-trust scheme” to draft remainder beneficiaries out of the picture?
Rachins v. Minassian, 251 So.3d 919 (Fla. 4th DCA July 11, 2018)
When it comes to blended families, estate planning can be a special kind of hell, as amply demonstrated by this case, which is now on its second round before the 4th DCA.
In this case D’s trust was for the benefit of his surviving spouse, S, and upon her death for D’s adult children from a prior marriage. D was survived by S and his children. Both D and his estate planning attorney clearly anticipated there was going to be trouble, and tried their best to draft those problems out of existence, as I previously reported here the first time this case made its way to the 4th DCA.
This time around the question was whether a trust agreement that says S’s “Family Trust” terminates when she dies and that at that time new trusts would be created for D’s children, effectively cuts them out as qualified beneficiaries of S’s trust. As explained by the 4th DCA, that was clearly D’s intent.
[I]t appears that the husband settled on the multiple-trust scheme for the very purpose of preventing the children from challenging the manner in which the wife spent the money in the Family Trust during her lifetime.
So did this bit of defensive drafting work? Nope. Here’s why:
[T]he fact that the Family Trust terminates upon the wife’s death does not preclude the children from having a beneficial interest in the Family Trust. Indeed, by definition, a remainder interest in a trust refers to the right to receive trust property upon the termination of the trust.Thus, while the husband may have intended to prevent the children from challenging the manner in which the wife spent the money in the Family Trust during her lifetime, see Minassian, 152 So.3d at 727, the children are qualified beneficiaries under [F.S. 736.0103(16)] and are therefore entitled to the corresponding protections afforded to qualified beneficiaries under the Florida Trust Code.