In its second look at the dispute in Siegel v. JP Morgan Chase Bank, No. 4D09-699 (released on October 19, 2011) Florida’s Fourth District Court of Appeal gave personal representatives and corporate trustees plenty of reason to be cautious about invading the principal of a trust during the settlor’s lifetime. The 4th DCA again reversed the trial court’s decision to dismiss the case and strongly implied that the trustee and personal representative exceeded their powers and breached fiduciary duties in depleting the principal of the trust by “lavishing gifts on third parties” while the settlor was incapacitated prior to her death.
Background:
Dorothy Rautbord, the Settlor, appointed JP Morgan Chase as trustee of her trust, allowing it to make payments from principal and income as it deemed appropriate for her “support, maintenance, health, comfort or general welfare.” The remainder was to go to her surviving children, including her daughter (Novack) and sons (the Siegels). The trust document reserved to Rautbord the power of amendment, modification and revocation of the trust, and excluded anyone else from doing so, even if acting under a power of attorney.
Rautbord also executed a power of attorney appointing Novack as her attorney in fact, giving her, among other things, including the power to make gifts so long as they were consistent with her giving history and did not incur gift taxes. Prior to her death in 2002, Rautbord developed dementia.
While her mother was incapacitated, Novack, acting as her attorney in fact, withdrew large significant amounts of the principal in reliance on letters purporting to revoke portions of the trust, and made gifts to third parties. JP Morgan, the trustee, approved those gifts.
In a prior appeal, Siegel v. Novak, 920 So. 2d 89 (Fla. 4th DCA 2006), the 4th DCA had held that the sons had standing to challenge the propriety of Novack’s actions even though they were done while their mother was still alive, because her actions affected the corpus of the trust in which they had a direct interest after their mother’s death.
A Beneficiary’s Standing to Challenge a Trustee’s Conduct is a Separate Question From the Propriety of the Trustee’s Conduct
On remand from the first appeal, the trial court erred in taking up the issue of standing (again) by examining whether Novack’s withdrawals were within her discretionary powers. The resolution of that issue would resolve who was entitled to ultimately prevail on the merits, not whether the Siegels had a right to ask the court to decide the merits in the first instance:
The issue of whether the withdrawals and expenses were appropriate and authorized was not a preliminary standing question but the entire substance of the proceeding, i.e., whether the trustee and attorney-in-fact breached their fiduciary duties. The trial court incorrectly treated the question of whether the withdrawals were appropriate and authorized as a question of standing.
Thus, standing should have been considered a settled question on remand, as the 4th DCA had already found that the Siegels had standing to assert that their interests as trust beneficiaries were impaired by Novack and JP Morgan’s alleged improprieties.
Invading Trust Principal for Third Party Gifts Can Amount to Partial Revocation
The 4th DCA went on to explain that the trial court’s interpretation of the trust documents was wrong, and that the beneficiaries’ claims that the trustee and Novack breached their fiduciary duties could well be meritorious. It held that the trustee had no right to make gifts in its own right, and that the attorney-in-fact had a very limited ability to make gifts.
JP Morgan had no right to make gifts to third parties as such. Its power to dip into trust principal was limited to spending for the Settlor’s maintenance and welfare. The court doubted that gifts to third parties could ever be justified as undertaken “for the support, maintenance, health, comfort, or general welfare of the Settlor.” Even if they could, the trustee would need to justify them as such through an evidentiary showing.
Regarding the personal representative, Novack’s power of attorney empowered her to make gifts on Rautbord’s behalf, but only if they were “reasonably consistent with any pattern of [Rautbord’s] giving or with [her] estate plan” or did “not exceed the annual exclusion available from time to time for federal gift tax purposes.” But the Siegels asserted that the gifts did not comply with these limitations, and the trial court could not conclude that they were proper without an evidentiary record on these points.
The court also found that Novack’s power to make gifts under the PoA did not extend to using trust principal for that purpose. The trust document prohibited anyone other than the Settlor (excluding an attorney-in-fact acting on her behalf) from amending, modifying, or revoking the trust.
This prohibition, combined with the PoA’s statement that the attorney-in-fact was not being given the power “[t]o amend, modify or revoke, in whole or in part, or withdraw any of the principal of, any trust over which I have reserved or have been granted such power,” expressly prohibited Novack from invading the trust principal for any purpose. Under the facts of the case, Novack’s withdrawal of principal was essentially the same thing as partially revoking the trust, the court explained.
If Novack and JP Morgan exceeded their powers in using trust principal to make gifts to third parties, they can be held liable for breaching fiduciary duties to the trust’s beneficiaries. And while the 4th DCA’s decision officially leaves that issue open for trial, it strongly suggests that that fiduciary duties were breached, commenting that if “the gifts were made from substantial invasion of principal,” that fact “at least suggests” that Novack “breached her fiduciary duty.”
The lesson here is that, at least under similar facts, fiduciaries’ distributions of trust principal during the settlor’s lifetime are definitely open to challenge. And such challenges should not be lightly dismissed based on fiduciaries’ broad discretionary powers.