Some of you may have heard of decanting in the wine world. Apparently, sediment from the fermentation process can produce an undesirable taste in wine. The wine is decanted to separate the wine from these sediments.
In the trust world, a trust can be “decanted” from one trust to another trust which may be helpful to take advantage of different administration provisions, different beneficiary needs, etc. Decanting actually had its start in the early case of Phipps v. Palm Beach Trust Co., 142 Fla. 782 (1940). Recently many states, including Florida, have passed statutes regarding decanting. The Florida statute is Section 736.04117 of the Florida Statutes.
A recent Florida case, Harrell v. Badger, Trustee interpreted the decanting statute in the context of a purported decanting from one trust to a “special needs trust” to qualify for medicaid planning. The facts are somewhat convoluted so I will give a timeline.
1. Rita Wilson dies with a will and a trust which benefited her son, David Wilson, for his life (all income and principal for his support, maintenance and education at the Trustee’s sole discretion). At David’s death, the remaining principal would be distributed to his sisters, Joann Harrell (“Harrell”)and Barbara Dake (“Dake”).
2. Trust appoints Rita’s sisters as trustees.
3. Rita’s sisters resign as trustees.
4. Harrell is appointed as trustee with David Wilson’s consent.
5. August 16, 2006- after a dispute Harrell is removed and Badger (Wilson’s neighbor) is appointed as trustee. The court requires a bond and semi-annual accountings to be prepared for the beneficiaries.
6. February 16, 2007- Badger files a motion seeking reimbursement of personal expenses of $34,021 and approval from the trial court to employ his wife as the realtor for the sale of Rita’s house. The trial court never enters an order.
7. Badger approaches the Littlefields with the intent of transferring all the Trust assets into a special needs trust to qualify Wilson for government benefits.
8. September 12, 2007- Badger obtains a bond, only provides one accounting to the beneficiaries, and employs his wife as a realtor to sell the Rita’s house (the only remaining asset of the trust).
9. October, 2007- David A. Wilson signs an agreement to create a sub-account of the Florida Foundation for Special Needs Trust (“FFSNT”) , a pooled trust administered by the Littlefields. Mr. Littlefield was the trustee of FFSNT and Wilson was named the beneficiary of the sub-account. At Wilson’s death any remaining funds in the sub-account would be held in FFSNT and used for the beneficiaries of the pooled trust. Harrell and Dake were not listed anywhere nor noticed of any of these proceedings.
10. Badger, as trustee for Rita’s trust, retains Mrs. Littlefield as his attorney, .
11. October, 2007- Badger, Badger’s wife and Wilson sign an October 2007 care agreement, whereby the intent appears to be that Badger’s wife will take care of Wilson and she would receive compensation.
12. January, 2008- Badger sells Rita’s house, with Badger’s wife receiving a 5% commission. The net proceeds are wired to FFSNT.
13. The Littlefields transfer all funds from FFSNT to their own trust and are later arrested, convicted and sentenced to prison for the misappropriation of funds.
14. September 21, 2011- Badger files a motion to terminate the trust which is when he FIRST notifies Harrell and Dake of the FFSNT, the sale of the homestead, the transfer of the trust funds and the payment of the real estate commissions to his wife.
15. Harrell and Dake sue Badger for breach of fiduciary duty and attorney fees. The lower court determines that Badger could invade the trust for any reason in the best interest of Wilson and because Badger relied on his attorney did not breach any fiduciary duty to the trust. The court also awards $85,005.50 in attorney fees to Badger!
16. Harrell and Dake appeal and on appeal Badger loses with the court finding that decanting the trust into the special needs trust did not meet the requirements of the Florida statute and the appellate court found that the lower court abused its discretion in awarding attorney fees to Badger.
While the court determined that Florida law permits a decanting, the decanting in this case was invalid because Badger did not comply with Florida law.
Under Florida law the beneficiaries of the second trust can only include the beneficiaries of the first trust. FFSNT was NEVER a beneficiary under Rita’s trust. Further, a decanting can only take place if the trustee notifies all qualified beneficiaries of the first trust, in writing, at least 60 days prior to the date of the trustee’s exercise of the trustee’s discretion to invade the principal. The case was reversed and remanded with instructions.
ADVICE: The decanting statute is fairly new and should be carefully reviewed prior to attempting to decant any trust. Most of the time the best time to decant is not necessarily to omit or change beneficiaries but for administrative provisions or to move the trust to a more favorable situs.
New Word…In terrrorem clause (or a no contest clause)…An in terrorem clause is a clause, usually in a will or trust, that is designed to omit an otherwise named beneficiary in a trust or will IF they contest the will or trust. In terrorem clauses are not enforceable in Florida but MAY be enforceable in other states.
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