Florida Court Suggests Withdrawals from Revocable Trust Principal During Settlor’s Life Can Be Viewed as Revocation of Trust and Subject to Challenge After Death by Remainder Beneficiaries
”When things change very rapidly, we have a fiduciary responsibility to review what are the circumstances.”
–Jozef Strauss
Florida is home to many elderly persons with dementia who are vulnerable to financial exploitation by others. Unfortunately, the elderly who are susceptible to undue influence are often victimized by their own family members. All too often, the safeguards that were presumably put in place through estate planning documents are thwarted by unbridled greed. Sometimes, even the placement of trust by the elderly in a national financial institution will not immunize the elderly from abuses.
A recent Florida appellate opinion details a family scenario frequently encountered by Florida probate lawyers who practice in the field of inheritance disputes involving wills, guardianships, estates, and trusts. Siegel v. Novak –So.3d–, 36 Fla.L.Weekly D2329 (Fla. 4th DCA October 19, 2011) involves a dispute between the children of Dorothy H. Rautbord (“Mrs. Rautbord”). Several years ago, Mrs. Rautbord created a will and trust that generally provided that she could use her assets during her life as needed and upon her death, the assets were to be shared among her children and grandchildren. Specifically, the trust contained a provision that during Mrs. Rautbord’s life, the trustee (a corporate trustee) should manage the trust property for the benefit of Mrs. Rautbord, and “at any time…apply so much or all of the net income and principal [of the Trust property] as the Trustee, in its sole discretion, shall deem appropriate or advisable for the support, maintenance, health, comfort or general welfare of [Mrs. Rautbord].
Several years later, Ms. Rautbord developed severe dementia. A power of attorney was signed by Mrs. Rautbord in favor of one of her children. Using the power of attorney, Ms. Rautbord’s child then made withdraws of over $3.3 million from the Trust during Mrs. Rautbord’s life. The corporate trustee approved all of the withdraws, even though it recognized that “Mrs. Rautbord [was] in her nineties [and] quite frail [.]” The corporate trustee concluded that the withdrawals and distributions of trust principal were “questionable” but decided to “ratify” the principal distributions. These approvals were contrary to the practice of the predecessor trustee, who refused to make distributions as gifts because Mrs. Rautbord had been taken advantage of because of her generosity.
After Mrs. Rautbord died and her other children (“the brothers”) discovered the $3.3 million dollars in withdrawals of the trust principal, the corporate trustee sought court approval of its conduct in approving the principal distributions. Two of Mrs. Rautbord’s children (“the brothers”) claimed that the corporate trustee’s and the other child’s (who had the power of attorney) conduct was inappropriate and inconsistent with the terms of the trust. According to the brothers challenging the conduct, the language of Mrs. Rautbord’s trust instrument did not permit the large withdrawals, which were equivalent to revocation of trust, which was permitted only upon the existence of certain circumstances. The trial court told the brothers that they did not have the standing to contest any distributions made prior to their mother’s death. The court reasoned that before Mrs. Rautbord’s death, the trust was revocable so that the brothers had “no present interest in the trust during the time that the decedent was alive.” The decision was appealed and the Fourth District Court of Appeals reversed and remanded the case holding that the brothers were entitled to their day in court. Siegel v. Novak (“Siegel I”) 920 So.2d 89 (Fla. 4th DCA 2006).
After the appellate court’s decision, the corporate trustee again requested the trial court’s judicial endorsement of its decision to ratify the $3.3 million of “questionable” withdrawals and principal distributions from the trust. Once again, the trial court found that the brothers did not have to stand the challenge certain distributions made prior to Mrs. Rautbord’s death. However, on appeal, the Fourth District said that
“The trial court and parties did not interpret Siegel I correctly. Our opinion in Siegel I determined that the Siegels did have the standing to challenge the trustee’s actions because they had a direct interest in the corpus of the trust after their mother’s death.”
The Court stated that “the trial court incorrectly treated the question of whether the withdrawals were appropriate and authorized as a question of standing.” The Court of appeals examined the trust language and emphasized the fact that Mrs. Rautbord reserved to herself the power to revoke the trust. The brothers argued that the withdrawals of principal were in fact revocations of the trust and that the trial court’s ruling on standing prevented the issue from being litigated.
The appellate court agreed with the brother’s argument. In its analysis the Fourth District Court of Appeals looked at the language of the trust and analogized the facts of the Siegel case to another case where it was held:
“In creating a trust, the settlor was not merely designating trustees as conduits through whom a gift could be made to the daughter whenever it would be to her advantage. The trust represented a plan of the settlor that included not only the beneficiary Margaret but also remaindermen. In adding a flexible provision for the invasion of principal for the “best interest” of the beneficiary, the settlor was not injecting a facile means for destroying the trust. “
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By limiting the invasion of principal to those instances where it will be for the “best interest” of the beneficiary, the settlor was, in effect, restricting the power of the trustees, and imposing a duty on them to limit such invasion for such objects and purposes as, in their judgment, would be beneficial to the cestui que trust.”
Important also in the Fourth District’s analysis was there holding that the withdrawals of trust principal were the equivalent of partial revocation of the trust. The Court turned to the Commonwealth of Pennsylvania and adopted that court’s reasoning:
“We are not prepared to recognize a distinction between settlor’s right to withdraw principal from the trust and his right to revoke the trust in whole or in part. Both cause an amendment or partial revocation, and with the same legal effect. For example: If settlor placed $100,000 in an inter vivos trust, with all the reservations hereinbefore discussed, and subsequently concluded to reduce the trust to $50,000, there would seem to be no difference in principle if settlor by written instrument revoked or modified the trust by reducing it by one-half, or exercised his right to withdraw one half from the operation of the trust.” A determination of whether these withdrawals of principal constitute partial revocations of the trust should await the full development of the evidentiary record on each transaction.”
Unfortunately, the court did not discuss the application of Fla.Stat. §736.0603, which provides that while a trust is revocable, the duties of the trustee are owed exclusively to the settlor. However, the Court did remand the case to the trial court again with directions to hold an evidentiary hearing and the brothers must be given the opportunity to present evidence to support their claims of breach of fiduciary duty by both the corporate trustee and their sister.