Disclosure Requirements for Trusts

By James W. Mallonee

In 2007 the Florida Legislature re-wrote the trust code which is now known as Chapter 736. In that sweeping change, the lawmakers included two sections dealing with limitations and disclosure related to challenging a Trustee’s action or inaction.

Limitations is known as the length of time a person has to file a lawsuit (traditionally known as statute of limitations). Under normal circumstances, the limitations period for trust breaches is 4 years provided the Trustee has adequately disclosed a matter. The limitations period will begin to run once a beneficiary has received the disclosure document. However, the legislature also provided an Abbreviated Limitations Period which limits the filing of a lawsuit against a Trustee to six months. Once again there must be adequate disclosure of the issue at hand. An Abbreviated Limitations Period begins to run upon the earlier of receipt of the disclosure document or receipt of the limitations language found in Florida Statute 736.1008(2).

The problem for the Trustee is what is adequate disclosure and a trust disclosure document. A trust disclosure document is generally thought of as a formal accounting or a written report by the Trustee to the beneficiaries as to the status of the trust. In addition, the Trustee must make certain the beneficiary received the accounting or report. What commonly occurs is the sending of the accounting or report by certified mail or electronic delivery with return receipt. Trustee’s, however, are not off the hook against being liable for a breach of their fiduciary duties unless all of the above procedures occur including adequate disclosure of the health of the trust or other issues that may affect a beneficiary’s interest in a trust.

So just what is adequate disclosure? The courts have begun to change “adequate disclosure” to “full disclosure.” Adequate disclosure is determined to be a document which provides sufficient

information such that the beneficiary knows of a claim or reasonably should have inquired into the existence of a claim with respect to a given matter. Thus, to fulfill the adequate disclosure requirement, a Trustee must meet two thresholds: 1) the disclosure must provide enough information for a beneficiary to recognize the existence of a potential claim against the estate; and 2) does the information being disclosed go far enough to induce a beneficiary to inquire into the existence of a potential claim. The old days of adequate disclosure simply requiring an accounting or report to be reasonably understandable are gone.

The old reasonably understandable report was finally tested and the outcome has shocked the legal community. The essence of the adequate disclosure problem was reported out of the Third District Court of Appeals for the State of Florida in a case known as Turkish v. Brody. In the Turkish case, the facts turned on a promissory note issued by the Grantor to the Grantor’s Trust. The promissory note was worthless from the start and its worthlessness was known by the Trustee. Although the Trustee knew it was worthless, he failed to report its lack of value to the beneficiaries of the Trust or by showing in the accounting its residual value of $0.00.

Fla. Stat. 736.0813 provides language stating that Trustees are to inform and account the value of a Trust to the beneficiaries. What it does not state is the obligation to provide an exhaustive report of a trust’s assets (e.g. stability of an asset and liabilities, general status of markets where trust assets are invested). All that is required by the statute is an accounting that includes all significant transactions that occurred since the last accounting and the trust’s current assets on hand along with its value. By all accounts, the Turkish case accounting did just that. All that has changed based on the Turkish case; a Trustee must now consider just how much information to disclose in a disclosure document.

Here are some examples of problems that Trustees now face when reporting and the requirements of adequate disclosure. Suppose a trust consists of real property. The properties are rentals generating income. Another 2006 melt-down for real properties occurs and the tenants living in the rentals are either late paying or evicted. Because of market conditions, new tenants cannot afford to move in and start paying. The annual rental income is reduced by 30%; based on these facts do you simply report the income in your accounting with the losses and nothing more, or do you go through the effort to explain the conditions that led up to the overall loss and project when it will turn around.

In another example, consider a person whose Trust is to provide funds to a beneficiary based on an ascertainable standard (health, education, maintenance and support). The grantor of the trust has dementia and a successor Trustee is appointed. Over an extended period of time, the assets of the trust are being reduced because of the need to privately pay for the grantor’s needs in a nursing home. The annual reports by the Trustee reflect the diminishing value of the trust, but not the reason why or the purpose of the expenditures. Six years passes and one of the beneficiaries’ files suit for failure to adequately disclose information in the annual accounting. Since six years has passed, wouldn’t that cause the limitations period to kick in and prevent a breach of fiduciary duty lawsuit against the Trustee? Based on the findings of the Turkish case the answer seems to be “probably not” because of the failure to disclose the purpose of the expenditures.

If you are a Trustee or have been nominated as a successor Trustee, consider the new standards that are arising regarding your duty to disclose and report. It is no longer acceptable to simply paste in the Abbreviated Limitations Period to protect you against a lack of disclosure. You have to do more than simple reporting and the Turkish case points that out. If you feel that you may have a problem with adequate disclosure from a Trustee or as a Trustee you are uncertain about what needs to be disclosed, contact the attorney of your choice and discuss the situation.

James W. Mallonee (Jim Mallonee) is a graduate with a B.A. degree from the University of South Florida and a Master of Science degree from Rollins College in Winter Park, Florida. He obtained his Juris Doctorate from the University of the Pacific, McGeorge School of Law in Sacramento, California. Prior to returning to Florida to practice law, Mr. Mallonee was employed by Intel Corporation for 22 years in such locations as New Jersey, Florida and California.

In addition to being a member of the Florida Bar since 2003, Mr. Mallonee serves on the Charlotte Community Foundation Committee for asset allocation and teaches Business Law at State College of Florida. Mr. Mallonee is also on the Board of Directors for the Military Heritage Museum located in Charlotte County, Florida.

His firm practices law in the following areas: Probate, Wills & Trusts, Guardianships, and Litigation in the areas of Real Estate, Guardianships and Estates. The firm has two locations in Venice and Port Charlotte, Florida.

James W. Mallonee, P.A.
946 Tamiami Trail, #206
Port Charlotte, FL 33953
(941) 206-2223
Facsimile (941) 206-2224

871 Venetia Bay Blvd., #225
Venice, FL 34285
(941) 207-2223