Slides Chapter 10 Flashcards
Distribution Provisions: Rights of Beneficiaries
Overview of Distribution Provisions
What is the standard?
Guiding principle will be the settlor’s intent
Look to language of trust and all other evidence of intent at time of execution
Distinction between mandatory and discretionary distributions
Spray (discretion among beneficiaries) or sprinkle
(discretion re: a single beneficiary) distributions
Who are the beneficiaries and what are their rights:
to income?
to principal/corpus during trust administration?
to property (remainder) on termination?
Ascertainable vs. Nonascertainable Standards
Ascertainable: Health, Education, Maintenance, Support (HEMS) and likely Emergency and Hardship - Terms of this type are considered objective and quantifiable.
Nonascertainable: Comfort, Happiness, Welfare, Best interests - Terms of this type lack objective quality and are less quantifiable.
No standard: In trustee’s absolute/sole/unfettered discretion, for any purpose.
Interpreting Discretionary Standards of Distribution
Judicial Review of Trustee’s Exercise of Discretion: Reasonableness and Good Faith
UTC §814. Discretionary Powers
Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as “absolute”, “sole”, or “uncontrolled”, the trustee shall exercise a discretionary power IN GOOD FAITH AND IN ACCORDANCE WITH THE TERMS AND PURPOSES OF THE TRUST AND THE INTERESTS OF [ALL] THE BENEFICIARIES.
So what is required of the trustee is to act in good faith and in accordance with the terms and purposes of the trust and the interests of [all] the beneficiaries. Courts will review a trustee’s decision for reasonableness and/or good faith.
Is Trustee Given Discretion & How Broad?
Rest. (3d) Trusts §50
A settlor may manifest an intention to grant the trustee greater than ordinary latitude in exercising discretionary judgment. How does such an intention affect the duty of the trustee and the role of the court?
… words such as “absolute” or “unlimited” or “sole and uncontrolled” are not interpreted literally. Even under the broadest grant of fiduciary discretion, a trustee must act honestly and in a state of mind contemplated by the settlor. Thus, the court will not permit the trustee to act in bad faith or for some purpose or motive other than to accomplish the purposes of the discretionary power or from failing to act, either arbitrarily or from a misunderstanding of the trustee’s duty or authority.
Within these limits, it is a matter of interpretation to ascertain the degree to which the settlor’s use of language of extended (e.g., “absolute”) discretion manifests an intention to relieve the trustee of normal judicial supervision and control in the exercise of a discretionary power over trust distributions.
Support and Maintenance
Restatement (3d) (Trusts) §50
d(2). Support or maintenance. The terms “support” and “maintenance” are normally construed as synonyms, even when this treats the terms as redundant.
- Means more than the bare essentials for a beneficiary.
- Ordinarily entitles a beneficiary to distributions sufficient for accustomed living expenses, extending to such items as regular mortgage payments, property taxes, suitable health insurance or care, existing programs of life and property insurance, and continuation of accustomed patterns of vacation and of charitable and family giving.
- Reasonable additional comforts or “luxuries” that are within the means of many individuals of like station in life, such as a special vacation of a type the beneficiary had never before taken, may be borderline as entitlements but would normally be within the permissible range of the trustee’s judgment, even without benefit of a grant of extended discretion .
- Covers not only the beneficiary’s own support but also that of persons for whom provision is customarily made, such as the support of members of the beneficiary’s household and the costs of suitable education for the beneficiary’s children.
Does not normally encompass payments that contribute to a beneficiary’s contentment or happiness.
Defining Health
Rest. (3d) Trusts §50
Without more, references to “health,” “medical care,” and the like in the terms of a discretionary power may be useful to inform beneficiary expectations or guide an inexperienced trustee, but presumptively they provide merely for health and medical benefits like those normally implied by a support standard.
Accustomed Standard of Living
Rest. (3d) Trusts §50
- Unless the trust explicitly says otherwise, support and maintenance are understood to be based on accustomed standard of living.
- The accustomed manner of living for these purposes is ordinarily that enjoyed by the beneficiary, increased to compensate at the time of the settlor’s death or at the time an irrevocable trust is created for inflation and to meet subsequent increases in the beneficiary’s needs resulting, for example, from deteriorating health or from added burdens appropriately assumed for the needs of another.
- May also increase if a beneficiary becomes accustomed over time to a higher standard of living if consistent with the trust’s level of productivity and not inconsistent with an apparent priority among beneficiaries or other purpose of the settlor.
- A lower level of distributions may be justifiable if the trust estate is modest relative to the probable future needs of the beneficiary.
Education
Rest. (3d) Trusts §50
The term “education,” without elaboration, is ordinarily construed as extending to payment of living expenses as well as fees and other costs of attending an institution of higher education, or the beneficiary’s pursuit of a program of trade or technical training assuming adequate trust funds available for the purpose.
Absent clear statements in the trust to the contrary, related costs for education, such as for private primary school, study abroad programs and music lessons or sports instruction, are less likely than those above to be viewed as within the term “education.”
Emergency
Restrictive standard; objective vs. “personal” emergency
In re Tone’s Estate definition of Emergency: “a sudden or unexpected happening which calls for immediate action.”
Beneficiary’s Other Assets
Restatement (3d) (Trusts) §50
Is trustee, in determining the distributions to be made to a beneficiary under an objective standard (such as a support standard),
(i) required to take account of the beneficiary’s other resources,
(ii) prohibited from doing so, or
(iii) to consider the other resources but has some discretion in the matter.
If the trust provisions do not address the question, the general rule of construction presumes [this] …
Welfare, Best Interests, Happiness
Rest. (3d) Trusts §50
These terms tend also to authorize discretionary expenditures that fall beyond the usual scope of a purely support-related standard. For example, a “benefit” standard might make it reasonable for a trustee to make substantial distributions to provide a beneficiary with capital needed to start a business.
Happiness
Rest. (3rd) Trusts §50
Such language suggests an intention that the trustee’s judgment be exercised generously and without relatively objective limitation.
The primary effect of such a term is to immunize from challenge by remainder beneficiaries almost any reasonably affordable distributions.
This, however, does not mean that the trustee cannot properly resist any reasonable request by the beneficiary, because the decision remains one within the fiduciary discretion of the trustee.
Very broad, not ascertainable.
Duty to Inquire
Restatement (3d) (Trusts) §50
The trustee has an affirmative duty to act in a reasonable manner in attempting to ascertain the beneficiary’s needs and, under the usual rule of construction, other resources that may be appropriately and reasonably available for purposes relevant to the discretionary power.
The trustee generally may rely on the beneficiary’s representations and on readily available, minimally intrusive information requested of the beneficiary. This reliance is inappropriate, however, when the trustee has reason to suspect that the information thus supplied is inaccurate or incomplete. . . .
Trustees entitled to discovery of beneficiary’s financial statements and may require beneficiary to disclose other sources of income. In fact, it may be an abuse of discretion not to inquire into financial circumstances of all discretionary distributees before making payments to one.
May/Should a Court Intervene and When?
Rest. (3rd ) Trusts §50
A discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee.
Bad faith, arbitrary, or failure to act when action required
What is required in performing due diligence?
The overriding responsibility is to consider the intent of settlor and purpose of trust.
To do a proper job, trustee must consider:
The standards stated in the trust and how they should be applied here. Additional directions given by the settlor in the trust, a letter or otherwise may be used. Trustee should try to decide what the settlor would have done if s/he were deciding? If standards are ascertainable, then discretion is more circumscribed.
The standard of living of the beneficiaries the settlor wishes the trust to benefit, with concern for the needs of all beneficiaries, current and future, adjusted for changed circumstances and mindful of whether any beneficiary was meant to be of first importance. If trustee is also a beneficiary, greater scrutiny for abuse is appropriate. Trustee should be pro-active in determining needs of beneficiaries and may ask for financials.
The extent to which resources are available to beneficiaries from outside the trust and whether they are to be taken into account, including being careful not to disqualify beneficiary from public benefits, like Medicaid.
Previous actions and decisions made by settlor with respect to this or similar situations or family members.
The size of the trust relative to the possible distribution, including whether there is enough to help requesting beneficiary and others who may make a request later.
Recap - Trustee Duties re: Discretion
Unless the trust gives specific direction otherwise, the trustee has the duty to perform “due diligence” to determine who all the beneficiaries are & their needs as they pertain to the criteria for distribution. (Trustee may request financial statements to accomplish this task.) The settlor’s intent is the guiding principle. Normally, need is based on the beneficiary’s accustomed standard of living at the time the beneficiary’s interest ripens and usually includes a consideration of other resources.
Once having gathered the facts and determined needs, it is within the discretion of the trustee to decide what to do. The size of the trust relative to the needs of present and future beneficiaries is relevant. If due diligence is performed properly, courts generally will leave the final decision to the trustee so long as the determination is not (i) clearly erroneous or unreasonable, (ii) an abuse of discretion and capricious, or (iii) favors one set of beneficiaries over others, esp. where the trustee is also a beneficiary. But without the due diligence, any decision may be considered arbitrary.
For example, if the standard is to provide for the support of the beneficiary, it is up to trustee to determine if the beneficiary needs money and what kind of support settlor would have wished to fund, but then decide whether to do so and in what amount. If the decision of the trustee is “in the ballpark,” the court will not get involved.
Rights of Creditors and Planning to Protect the Assets of a Trust
Is your client vulnerable? If not, then normal estate planning techniques are probably adequate for settlor but maybe not for other beneficiaries.
Concern is for property in the trust for Settlor and Beneficiaries from claims by:
Patients
Contractors
Divorcing (predator) spouses – property settlement, child support and alimony
Injured party due to negligence
Anyone in today’s litigious society with ever-increasing jury awards
Also consider Special Needs Trust planning for government benefits
Creditors of a Beneficiary Who Is Not the Settlor
Remember that creditors of non-settlor beneficiaries of revocable trust cannot obtain anything since beneficiary only has an expectancy
A court may not allow a creditor to garnish a distribution if the beneficiary can establish the money is needed for her basic living costs
mandatory distribution
A creditor of a beneficiary may compel a mandatory distribution (if not subject to a spendthrift clause) and get a court order to attach present or future mandatory distributions
discretionary distributions
A creditor of a beneficiary may NOT compel a discretionary distribution or get a court order to attach present or future discretionary distributions.
Spendthrift Clauses
UTC §501 - RIGHTS OF BENEFICIARY’S CREDITOR
To the extent a beneficiary’s interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s interest by [writ of] attachment of present or future distributions to or for the benefit of the beneficiary or other means.
Read in reverse, if the interest IS subject to a spendthrift clause, a court may NOT issue a writ to trustee to make distribution payments directly to creditor. The creditor will have to go after the property once it is in the hands of the beneficiary. Note that this section, at least, does not differentiate between mandatory and discretionary distributions; so if there is no spendthrift provision, a writ of attachment is possible for both.
UTC §502 - SPENDTHRIFT PROVISION
(a) A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest.
(b) A term of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust,” or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest.
(c) A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this [article – specifically section 503], a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.
“No beneficiary shall have any right to anticipate, sell, assign, mortgage, pledge, or otherwise dispose of or encumber all or any part of any trust estate established for his or her benefit under this agreement. No part of such trust estate, including income, shall be liable for the debts or obligations of any beneficiary or be subject to attachment, garnishment, execution, creditor’s bill, or other legal or equitable process.”
Present & Future Creditors of Non-Settlor Beneficiary
No Spendthrift Clause
Creditor CAN get a court to issue a writ of attachment or garnishment respecting present & future distributions, whether mandatory or discretionary, to or for benefit of beneficiary to the extent not otherwise exempt.
Present & Future Creditors of Non-Settlor Beneficiary
With Spendthrift Clause
Creditor CANNOT get a court to issue a writ of attachment or garnishment respecting present & future distributions, whether mandatory (unless overdue) or discretionary. Creditor will have to wait until distribution and then have sheriff serve levy on beneficiary
