The Responsibilities Of Being a Trustee with Discretion

Estate Planner Sept-Oct 2001

As a result of a family, personal or professional relationship, you may be asked to serve as trustee for an estate planning trust established for the benefit of someone’s spouse or descendants, or a combination of the two. Before deciding to accept this responsibility, you should understand the distribution authorities and requirements contained in the trust agreement.

As trustee, you may be granted broad or limited authority to make discretionary trust asset distributions. Such distributions generally consist of either income or principal to meet trust objectives (and the trustor’s intent). To properly function as a trustee, you must be aware of the primary distribution requirements you may be called upon to make.

Decisions and Provisions

Usually, no one will interfere with your decisions in the exercise of your discretionary distribution power as long as you don’t act in bad faith or abuse your discretion. But you must understand the trustor’s intent to determine whether the trust agreement clearly satisfies the intent.

The following provisions are often found in estate planning trusts and dictate your ability to exercise discretion in making distributions:

Medical care. What’s involved in a distribution to provide for the healthcare of a beneficiary? Based on the document, what would you do as trustee with respect to: psychiatric care, dental needs, substance abuse clinics, elective medical procedures, medical insurance premiums and nursing home care? Every situation doesn’t need to be spelled out, but the document should generally tell what is expected of you.

Education. Discretion to distribute trust assets for a beneficiary’s education, unless specifically restricted, generally includes college, post-graduate, professional, vocational, language and artistic studies. But a question you may need to consider is: Does the trust cover religious education, private schools, boarding schools or tutorial expenses?

Support. Discretionary distributions normally consider support as day-to-day living expenses including housing, food and healthcare based on the beneficiary’s reasonable standard of living. Support generally includes more than the bare necessities and contemplates distributions for at least basic educational purposes and maintenance in reasonable comfort. But how does the trust account for the support of a person dependent on the beneficiary, such as a spouse, minor child or adult-dependent child?

Best interests. Trusts that authorize discretionary distributions for the beneficiary’s best interest or that provide no standard at all and gives the trustee unrestricted discretion give the trustee comfort because such discretion is so broad and indefinite that it cannot be abused. Accordingly, discretionary distributions may be made for travel (perhaps via first class) or the purchase of a $50,000 automobile (rather than a $20,000 vehicle). If the beneficiary desires to make gifts to friends or family, would distributions for this purpose be in his or her best interests? What would the trustor have wanted you to do?

Standard of living. Using your discretion to make distributions may be limited to distributions in accordance with the beneficiary’s standard of living. But when is that determined — when the trust was created or when the distribution is being considered? You may need guidance to determine what state law provides. What if the beneficiary is living substantially above or below the standard of living he or she can afford? In case of multiple beneficiaries, do you favor the one with the higher standard of living?

Favoring beneficiaries. Generally, a trust will have more than one beneficiary. Two or more beneficiaries could receive current discretionary distributions, or a beneficiary may not acquire an interest until the current beneficiary dies or some other specified event occurs. As trustee, you may have to make disproportionate distributions or allocate all trust assets to current beneficiaries, excluding remainder beneficiaries. The trust agreement should direct you in this area, perhaps authorizing disproportionate or unequal distributions or authorizing trust termination in favor of one beneficiary.

Other resources. You may be required to consider other resources available to a beneficiary in exercising your discretion to distribute assets. If a beneficiary wants a distribution, he or she should give you financial statements and tax returns.

Carrying Out the Trustor’s Wishes

If you serve as a trustee, you will find that your power of distribution discretion will serve to accomplish the trustor’s objective under unknown and changing circumstances. You will be able to implement what you have determined to be the wishes of the trustor. Yet, your duty to act in good faith and not abuse your discretion may at times conflict with other duties imposed on you as a trustee, such as the duty to treat beneficiaries impartially. If you have questions concerning your existing or proposed trusteeship, contact a professional estate planning advisor.