More on Drafting for Flexibility: Providing Guidance to the Trustee

A2277893Most Trusts give the Trustee broad discretion in making investments, dealing with Trust assets, making distributions to beneficiaries, etc. Usually the Grantor of the Trust has strong opinions about how the Trust should be used for the beneficiary. Distributions can be mandatory, or the Trust can be more flexible by including precatory language only, or the Grantor can give the Trustee a “letter of instructions” that is not included in the Trust, but that can provide private guidance to the Trustee.

If a letter of instructions is utilized, consideration should be given to providing in the Trust Agreement that the Trustee may rely on such outside guidance in determining the Grantor’s intent.

The Trust may also provide standards to give the Trustee guidance. If the beneficiary is also the Trustee, the standard should be limited to health, education, maintenance and support (the “HEMS” standard). This is to prevent adverse tax consequences to the beneficiary. In the alternative, the Trustee could be given “absolute” discretion to make distributions to beneficiaries. But in any case, the Trustee owes certain duties to the beneficiaries and must act in good faith.

The Grantor may provide additional guidance by having the Trust set forth preferences for use of the Trust assets, such as to purchase a home, pay for education, start a business, pay for a wedding, etc. Such guidance may help the Trustee defend its actions if necessary.

Careful consideration must be given if the Trust requires that other assets of the beneficiary be taken into account. If this requirement is mandatory, then the ability to make distributions may be severely limited. If the Trust is silent, then state law may apply and, depending on the state, various results may happen.

It is our general belief that a Trustee does not have a duty to look at outside resources of a beneficiary if the Trustee merely has the discretion but not the mandatory requirement to take the beneficiaries’ other resources into account. Duck


About Janet Moore

Janet has been with the firm since 1980 and is a partner in the Trusts and Estates Group. She focuses her practice in estate planning and estate and trust administration, including all areas of estate and gift tax planning, ranging from testamentary estate planning (including wills, trusts, durable powers of attorney, health care proxies and living wills) to sophisticated lifetime gifting techniques, such as irrevocable life insurance trusts, lifetime marital (QTIP) trusts, spousal lifetime access trusts (SLATs), charitable trusts, grantor retained annuity trusts (GRATs), intentionally defective grantor trusts, family limited liability companies, and qualified personal residence trusts (QPRTs). Janet also advises clients in prenuptial agreements, elder law and planning for special needs, guardianships and probate law, homestead declarations, charitable giving techniques, business succession planning, and asset protection planning. She also handles estate settlement and administration and trust administration and prepares gift tax returns, as well as estate tax returns and fiduciary income tax returns for estates and trusts. Janet is compassionate and easy to talk with and to understand, which contributes to her ability to work well with and relate to individuals and families, young and old.
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