COMPENSATION OF TRUSTEES WHO ARE ALSO BENEFICIARIES
In a recent Florida Second DCA case, Burgess v. Prince, 25 So.3d 705 (Fla. 2nd DCA 2010), the Court determined that a Trustee of a family trust, who was also a Trust beneficiary, was entitled to compensation for her management of Trust assets, despite the fact that the trust instrument provided that a beneficiary of the Trust could not receive compensation for serving as Trustee. The trial court removed the Trustee and ordered that she may not be compensated for managing a business, which was a trust asset, and all compensation she received would be charged against her distributive share of the Trust. See Id. On appeal, the Appellate Court upheld the removal without discussion but reversed a part of the final judgment which ruled the Trustee could not be compensated for managing the business which was a trust asset. Although the trust instrument provided that a Trustee who is also a beneficiary shall serve as Trustee without compensation, the Appellate Court found that the Trustee received compensation from the trust for operating the business, rather than as compensation as Trustee. In the ruling, the Appellate Court relied on language in the trust instrument which plainly stated that the Trustee can employ various individuals, including any Trustee, if such employment was deemed necessary or desirable and to be paid reasonable compensation for their services. In addition, the trust instrument had language which allowed a Trustee to employ any beneficiary or individual fiduciary in any capacity.
This ruling appears to allow a Trustee, who is also a beneficiary, to hire themselves to administer assets of a trust, held as part of a business owned by the trust under the guise of owning a business or providing a service other than a trust administration. By paying herself as an employee of the trust, she avoids the specific instructions that a Trustee, who is also a beneficiary, not be compensated for their role as Trustee. Oftentimes, parents will appoint one of their adult children to administer and manage a trust after their death to provide for the equal benefit of all of their children. In a scenario such as this, grantors are advised by estate planning attorneys to include language in a trust which indicates such the beneficiary/trustee is not to receive compensation for their serving as Trustee. The thought process is to allow all beneficiaries to remain equal beneficiaries of the trust assets while at the same time avoiding a more expensive corporate or professional Trustee’s involvement. However, based upon the recent finding in Burgess, these beneficiary/trustees now have a potential loophole that allows them to receive an unequal, greater distribution of trust assets by claiming that additional compensation paid to them was for a service other than a trust administration.
Unfortunately, parents believe their children will always get along and treat each other fairly after their passing, and as a result of this thinking, often cut corners when it comes to their estate planning. They fail to include provisions that will reduce or eliminate unforeseen litigation among their children and family, the intended beneficiaries of their estates. Apparently, even when parents attempt to properly plan for equal distribution to their children, they now must consider whether a child will try to skirt the no trustee fee issue by pretending they are not trustees but employees. Remember, while I did not have the luxury of reading this particular trust, one can presume that the section the trustee/beneficiary hired herself under was a boilerplate provision buried deep in the documents that were discussed by no one and ignored by all.
Beneficiaries experiencing an overcompensated sibling charged with the responsibility of managing the trust money should question any compensation paid to the trustee to make sure they are not improperly obtaining a larger piece of the pie. A defense must be presented to support a finding by the Court, that the types of services performed, and for which compensation is sought, are actually trust administration services for which the Trustee should not be paid in excess of that which is contained in the Trust instrument or allowed of trustees for similar administrative responsibilities.
