The West Coast of Florida recently experienced back-to-back hurricanes, four weeks ago. The storm surge from Hurricane Helene wreaked havoc in the Tampa Bay area and then, just two weeks later, the Tampa Bay area faced hurricane-force winds and flooding from Hurricane Milton. Homes and businesses suffered devastating water and wind damage from both hurricanes. Over 40,000 homes were damaged by the hurricanes, and several are held in trust or are part of a probate estate. Trust or estate-owned real property are under the care of a fiduciary, individual, corporate or both. Property damage from hurricanes is an accepted risk living in Florida; however, there are underlying risks to trust-owned real property that fiduciaries should consider and try to mitigate.
Real property damaged by water and/or wind obviously can be uninhabitable. The loss of use for a trust-owned real property can be amplified by considering who is using the property. For beneficiary-occupied properties, there could be additional costs to the trust beyond repairing the real property. It is possible the beneficiary will need to be relocated while the real property is being repaired. If the beneficiary does not have the means to cover the costs of relocating, they may need to request a principal distribution from the trust. If the repairs take several months or more, relocation costs could lead to erosion of the trust’s principal value. If the trust-owned real property is a rental property, the loss of use by a tenant could potentially lead to loss of income to the trust. Should the repairs to the real property take several months, there is a risk of losing the tenant completely. The loss of income risk could be exacerbated if the trust is required to pay income to the beneficiaries. The issue becomes potentially worse if a beneficiary is relying on mandatory income distributions from the trust to cover their living expenses. Further down that rabbit hole, if the trust only allows for income distributions, the beneficiary will not be able to request principal distributions to help offset expenses.
Drafting attorneys and fiduciaries can consider a few options for mitigating the adverse consequences of loss of income or loss of use of real property trust assets. One consideration is to take steps to avoid holding a large concentration of real property as trust assets. Another consideration is to include language in the trust document to allow for principal distributions in the event of damage or loss of use to income producing real property. Finally, explore all possibilities of insuring the real property for flood or wind damage to offset repair costs.
The risk posed to real property held in a probate estate increases the longer the probate proceedings last. In some estates, heirs may choose to take the real property in kind. Real property can only be distributed with the approval of the court. The real property is managed and maintained by the Personal Representative while the probate proceedings are conducted. Properties subject to probate proceedings risk the loss of value should a hurricane, or other act of nature, occur before the real property can be distributed. An heir waiting for an in-kind distribution of real property risks receiving property of a lesser value if an act of nature occurs and damages the real property. Depending on the language of the Will, there may not be the opportunity to offset the loss of value to real property with other estate assets.
The most effective manner of mitigating loss of value of real property held in probate estates is to obtain court permission to sell the property. Should an heir wish to receive real property in-kind, the risk of loss of value should be explained and request the heir to acknowledge that they understand the risks.
Hurricanes are part of living in Florida. If a hurricane hits the Tampa Bay area, there likely will be some level of real property damage. Knowing this and learning from the most recent experiences of Hurricanes Helene and Milton, fiduciaries should consider how best to mitigate the added risks beyond repairing damage.
Contributed by Todd W. Cordell, Senior Vice President – Trust Director
Todd brings 30 years of trust industry experience working in a community bank, mid-size bank and large bank settings. During that time, Todd has been involved in most facets of the trust industry including trust administration, investment management, compliance and operations. He also has a law degree from DePaul University, in Chicago, IL. Todd is thrilled to be here in Tampa and back in the community bank trust department environment.