As early as 1957, a Harvard Law Journal article acknowledged a “widely recognized” need for periodically determining and protecting against trustee liability. Beginning in the late 1980s, work on the Restatement Third began, which ultimately permitted trustees to diminish their liability by indemnification agreement.” In 1992, ACTEC assembled a “Trust Task Force” to draft a “turnkey” trust statute that could be used in other states that addressed nonjudicial dispute resolution agreements. Drafting of the Uniform Trust Code (UTC) began at the national level shortly thereafter in 1994. The public policy consideration underlying the implementation of the UTC was that it “strives to keep administration of trusts outside of the courts.”

Since the 1970s, corporate fiduciaries have utilized and relied on Waiver, Release, and Indemnification Agreements (a form of nonjudicial settlement agreement (NJSA)) as standard custom and practice in the administration of private trusts. NJSAs are valid, binding, and reasonably relied upon by national banks engaged in fiduciary services in addressing potential liability associated with discretionary trustee decisions, including distributions.

The UTC was the first effort by the National Conference of Commissioners on Uniform State Laws to provide the states with a comprehensive model for codifying their law on trusts. The drafting committee was assisted by numerous advisors and groups, including the American Bar Association and its Section of Real Property Probate and Trust Law (three advisors), the American College of Trust and Estate Counsel (“ACTEC”), the American Bankers Association, and the California and Colorado State Bars. To gather as much input as possible, the drafting of the UTC was deliberately not placed on the fast track but spanned a period of six (6) years. The final text of the UTC was approved by the Commissioners in August 2000, and by the American Bar Association’s House of Delegates at its mid-year meeting in February 2001. In summary, from 2002 to present, thirty-six (36) states have enacted the UTC, including Florida in 2006.

The UTC recognizes that a court may intervene in the administration of a trust but encourages resolution of disputes by nonjudicial means. Generally, fiduciaries are normally granted broad latitude in rendering discretionary decisions, and courts typically only review such discretionary decisions for an abuse of discretion. According to the UTC, a NJSA can contain any term or condition that a court properly could approve. This standard is less stringent than one requiring that a NJSA contain terms and conditions that the court would have approved, but it still opens the possibility that the parties may achieve more nonjudicially than had they gone to court.

UTC Section 111 broadly enables certain “interested persons” to enter into a binding NJSA with respect to “any matter” involving a trust, provided the NJSA doesn’t violate a material purpose of the trust.11 UTC Section 111 includes a non-exclusive list of six (6) matters that an NJSA can address. Of importance is item 6, “limit trustee liability for an action relating to the trust.” To understand the theory behind a NJSA, its helpful to first look at the very nature of trusts and trustees. A trust is a fiduciary relationship that involves the transfer of legal title to property to a trustee that possesses powers and fiduciary duties and performs them in accordance with the governing instrument in the best interest of the beneficiaries. A NJSA offers a complete set of tools to effectively bifurcate specific areas of trust administration.

Practical Uses of NJSAs

A NJSA can be used to settle bona fide disputes or to accomplish more strategic objectives. The following are several examples of strategic applications of NJSAs without court intervention:

  • A NJSA can eliminate significant impediments, such as the trustee’s concern over liability when exercising discretion without changing, altering, or modifying the trust agreement.
  • A NJSA can be used to limit liability when a trust holds a concentrated position in a single asset, such as stock, closely-held business interests, or real estate. The NJSA can enable a family or trustee to continue to hold an asset and eliminate a conflict with traditional duties, such as the duty to diversify.
  • A NJSA can expressly authorize and direct a trustee to retain or dispose of a particular asset.
  • A NJSA can completely restrict the trustee from exercising any powers related to the disposition, exchange, change in character, lending, borrowing, pledging, mortgaging, leasing, granting options, insuring, abandoning or in any other way relating to the investment of management of the asset for a period of time or until some triggering event.
  • • A NJSA may further specify that the trustee shall have no liability for any action or omission in connection with a specific asset to the fullest extent permitted under applicable law.
  • A NJSA can be used to authorize a trustee to hold a portion of a trust fund in a limited liability company for tax purposes, to direct a trustee to open or fund a discretionary investment or account, to delegate a discretionary or ministerial function.
  • A NJSA may also eliminate some tax concerns associated with trust modification or with the creation of a new trust. Currently, thirty-one (31) states and the District of Columbia have adopted a NJSA statute. In sum, NJSAs are “faster, less expensive, and more predictable than obtaining judicial approval for discretionary actions or modifications of the governing instrument.”

Florida’s NJSA Statute

In a 2023 Special Session, the Florida Legislature passed Florida NJSA, which includes six (6) specifically enumerated matters that may be resolved by NJSA: (a) the interpretation or construction of the terms of the trust; (b) the approval of a trustee’s report or accounting; (c) the direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power; (d) the resignation or appointment of a trustee and the determination of a trustee’s compensation; (e) the transfer of a trust’s principal place of administration; and (f) the liability of a trustee for an action relating to the trust.

Consistent with a public policy of keeping administration outside of the courts, corporate fiduciaries have long used NJSAs as a means of seeking approval for trustee discretionary decision making. NJSAs can also enable a trustee to continue to hold an asset – such as a family business or unique tangible property – eliminating the traditional duty to diversify. Florida law has now caught up with the practices that corporate fiduciaries were already utilizing in administering trusts.

The Duty of Impartiality and NJSAs

Fiduciaries must choose among investments objectives that differ in their risk and return characteristics, with optimal investment risk and return choices that afford consideration to the income beneficiary’s interest in maximizing income over the beneficiary expected time horizon and the remainder beneficiary’s respective interest in principal preservation. First, the fiduciary selects the investment objective based on the terms and purpose of the trust, then determines the risk profile based on the purpose of the trust and the circumstances and time horizon of the beneficiaries. Next, the fiduciary formulates an asset allocation that meets the investment objective and risk tolerance and then implements that asset allocation (e.g., selection of securities in equities, fixed income, alternative investments, and cash).

A trustee who directs third parties to select investments and manage the trust portfolio is charged with supervising the investments in a manner that does not favor one beneficiary at the expense of others. The requirement that trustees discharge their responsibilities with impartial regard for the interests of all trust beneficiaries is one of the fundamental requirements of trustees imposed by the common law and enshrined in state statutes. A trustee must be impartial when dealing with those with conflicting equitable interests. A trustee cannot favor one beneficiary over another, unless authorized to do so by the governing instrument. Even when so authorized, the trustee’s discretionary acts favoring one beneficiary over another must be in furtherance of the intentions of the settlor, not in furtherance of the trustee’s own biases and predilections. The trustee runs a major risk of breaching the duty of impartiality in the context of the competing interests of income beneficiaries and remainder beneficiaries.

Under an Equitable Adjustment (“EA”) method, the trustee has the ability to reallocate the portfolio’s returns if the trustee believes that the initial allocation improperly favors one class of beneficiary over another. This may be accomplished utilizing a NJSA. For instance, if the trustee’s investment decisions yield an inappropriately low amount of income for the income beneficiary, the trustee could distribute a portion of the principal to the income beneficiary to compensate for the shortfall.

Florida’s Unitrust Statute

Alternatively, a trustee could fulfill the fiduciary duty of impartiality by utilizing a NJSA approving the conversion of an income trust to a total return unitrust. A unitrust is a trust that instead of paying all of its income to the income beneficiary, pays a percentage of its net asset value annually. Under the Unitrust Conversion (“UC”) allocation approach, all investment earnings for an accounting period, whether they be in the form of dividends, interest, capital appreciation, etc., are assigned to principal and are then partially distributed as income for that period to income beneficiaries in accordance with a set formula. The formula for determining amounts to be distributed as income to income beneficiaries could be either a fixed percentage of the principal, or a variable rate like the inflation rate plus a certain percent. The UC method represents a slightly more structured and objective apportionment procedure as allocation to beneficiaries are based upon a fixed percentage of the total trust assets. The UC method of allocation also provides much greater limits on trustee allocation discretion as the trustee bound by a specific allocation formula, and thereby limits the potential for the exercise of erroneous, imprudent, or negligent judgment.