What if a trustee transfers, or sells, or gives away for that matter, trust property to a third party? And then the trustee resigns or no longer serves as trustee….. Can a trust beneficiary “go get” the trust assets which are now in the hands of the third party? Can a trust beneficiary sue the former trustee?
These are some of the trust issues which the Nevada Supreme Court dealt with, literally days ago, in a case involving trust litigation over a former trustee and a family limited partnership. There are lots of legal “actors” or players, and some interesting technical, trustee, personal jurisdiction and trust property subject matter jurisdiction issues regarding trusts and trustees, as well as trust property, which won’t be discussed in depth here. For a copy of the trust court’s opinion, please email michelle@pankauskilawfirm.com.
The trust issues before the court concerned “trust property that was transferred from the trust to a limited partnership for consideration and by consent of all of the trust beneficiaries.” One thing not discussed in great depth, but which is important for Florida trust law, is the consent of the beneficiaries. If the beneficiaries of a Florida trust consent to an action of a Florida trustee, that can be binding on the beneficiaries. If a Florida trust beneficiary consents to an action of the trustee, and that consent is with full knowledge and given voluntarily, we say that that consent “binds” the trust beneficiary, and after that, a trust beneficiary can’t complain about that matter to the trustee : or a trust court.
In 1979, a married couple, created an inter vivos trust, which they amended in 1983 and again in 1993. Certain assets were transferred to the inter vivos trust including real estate and a restaurant. In Florida, we call those trusts revocable trusts or Florida living trusts. Long story very short: the trustees transferred those assets to a limited partnership in exchange for a partnership interest. Then, the partnership took some of those assets and transferred them to a third party. The question before the court was: could the “in rem” jurisdiction of the court, which gave the court the legal ability to hear cases about the trust assets, the trustee and the trust beneficiaries, extend to the third party that received the assets from the partnership. Nevada said, in this case, “no.” The court did not have jurisdiction over some third parties who received/got trust assets, in the present action, which were by then partnership assets, from the partnership. Florida has “in rem jurisdiction” regarding trusts and real estate. For Florida trusts, and Florida real estate, Florida courts, including Florida trust courts or Florida probate courts, have jurisdiction over the property or the “thing”– “in rem.”
The trust beneficiaries argued three things: 1) the transfer of the trust assets to the partnership was not proper 2) they wanted a money judgment against the former trustees because they transferred trust assets to the partnership and 3) the trust beneficiaries wanted a version of a “freeze” on the assets which now were in the hands of a some third parties: what was called a constructive trust. A constructive trust is an equitable remedy, which is also available in Florida . When a trust beneficiary, or any other litigant, for that matter, seeks a constructive trust, that beneficiary is asking the court to declare that the third party holding the assets in dispute is holding them for someone else. A constructive trust is a remedy of fairness, where a court recognizes that, somehow, assets or property got into the wrong hands and should go elsewhere.
In this case, the trustees have a family trust which transferred the trust assets to a limited partnership. And then, later on, the general partners of the limited partnership transferred the assets to a Nevada Corporation. This Nevada corporation was the third-party which the court was trying to determine whether or not it had jurisdiction over —-as well as the assets of the corporation. The Nevada Corporation evidently paid for the assets in the form of a promissory note.
There were a couple of interesting aspects of this case. One was the number of family members involved in this matter. They included a married couple who created the trust, their four children, in-laws, multiple trustees, a revocable trust, the family limited partnership, and a Nevada Corporation. Lots of “legal actors” and entities. And as I’ve written before, anytime you mix blood and money, people who are related by blood, and fighting over money, you end up having an inheritance war. Put another way, take the in-laws, the adult children, add some trust assets, some real estate and some entities like a limited partnership and the trust, and you’re throwing family members into a financial bloody Mary, all mixing around and swirling in litigation. Secondly, what was odd, was that the trust beneficiaries seemed to be complaining about something they already agreed to: the transfer of the trust assets, by the trustees, to the limited partnership in exchange for the trust having an investment in the limited partnership. If you are a trust beneficiary, and you agree to something, consent to a trust action by a trustee, on a Monday, you generally cannot complain about it on a Tuesday.
But this recent trust case also brings to the attention of the reader three other important points regarding trust litigation and trust lawsuits. First, the use of entities, for estate planning reasons, the use of corporations, and limited partnerships, can be appropriate to own real estate or other investment assets. Many Florida estate planning attorneys use corporations and form partnerships to pass on wealth for Florida residents. If done properly, the client, and the family, can save a lot of money in estate taxes. Florida, very recently, just created, or an enacted, a completely new statute, or chapter, on limited liability companies. Many Florida estate planning attorneys use Florida limited liability companies to hold family assets and then transfer or shift wealth to family members by giving away or selling shares in the Florida limited liability company. The shares of the Florida limited liability company are called “member interests” or “membership interests”. Two, it appears that one of the reasons this trust lawsuit may have started was because a trustee did not provide an accounting. In Florida, a trustee has an absolute requirement to provide an accounting on an annual basis, or more often, if ordered to by a Florida probate court. Third, this case discussed remedies, and legal rights, which a trust beneficiary may have in a court of law, and under trust law. In Florida, trust beneficiaries may sue for money damages against their Florida trustee. Florida trust beneficiaries may also sue for “equitable relief”, including asking a court to create or declare a “constructive trust.”
Before this case got to the Nevada Supreme Court, a lower court, a trial court, entered a money judgment. The judgment was entered against the prior trustee regarding the assets that were now in the Nevada Corporation. The legal, or technical, issue before the Nevada Supreme Court was whether the trial court entered that money judgment properly, and whether it had jurisdiction over the corporation’s assets.
In Florida, there is a new trust statute, a new Florida trust law, that was passed very recently, regarding trust jurisdiction issues. This new Florida trust law dealt with who, and what, may be subject to the jurisdiction of a Florida trust court. This Florida statute, which affects Florida trustees and Florida beneficiaries, tells us when a Florida probate court has jurisdiction over various legal actors relating to a Florida trust. In other words, this Florida trust law tells us when a Florida probate court may hear cases and decide lawsuits which involve Florida, and non-Florida, legal actors, including out-of-state trust beneficiaries, out-of-state entities or persons who provided services to a Florida trust, and non-Florida trustees. This new Florida trust law is very important for trust litigators, and for trial lawyers who handle trust litigation and trust disputes in Florida.