Most 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.