Article on Disretionary Trusts: An Update
Richard C. Ausness published an Article entitled, Disretionary Trusts: An Update, 43 ACTEC L.J. 231 (2018). Provided below is an abstract of the Article:
In the past, settlors tended to limit a trustee’s discretion by setting forth a specific formula for the distribution of trust assets. For example, a family trust might direct the trustee to distribute the trust income in equal shares to the settlor’s children. After the death of the last child, the trust corpus would be distributed to the settlor’s grandchildren in equal shares or in accordance some other standard or formula. Nowadays, however, settlors often prefer to vest more discretion in their trustees. This is partly due to the fact that beneficiaries tend to live longer and, therefore, trusts inevitably last longer, thereby requiring trustees to respond to changing conditions. In addition, settlors often believe that vesting increased discretion on the part of trustees will discourage beneficiaries from bringing expensive and disruptive challenges to their decisions.
Nevertheless, the trend toward increased discretion is not without its problems. First of all, there is a need to balance the wishes of the settlor against the duty of the courts to oversee the conduct of trustees and other fiduciaries. In addition, it is also necessary for courts to balance the wishes of the settlor with the right of the beneficiaries to receive fair and impartial treatment. Finally, it is necessary to determine when, if ever, creditors should be able to reach a beneficiary’s interest in a discretionary trust.
Part II begins with a description of the various linguistic formulas that settlors have typically used to describe the scope of a trustee’s discretion. It concludes that no language, however broad, can completely shield a trustee from judicial scrutiny. It then examines some standards courts invoke when they purport to review the exercise of discretion by trustees. These standards can be classified as subjective, objective or some combination of both.4 However, as Dean Halbach predicted, the trend seems to be moving toward an objective or reasonableness standard and away from the narrower subjective or good faith standard.
Part III examines the rights of beneficiaries and distinguishes between mandatory and discretionary support trusts on one hand, and purely discretionary trusts on the other. In the case of support trusts, whether discretionary or mandatory, courts have often intervened when they thought that the distributions were too parsimonious or when the trustees favored remainder beneficiaries too much. In contrast, in the case of purely discretionary trusts, courts tend to uphold a trustee’s exercise of discretion as long as it is not tainted with bad faith or improper motivation. However, they have required trustees to render accountings and carry out other fiduciary duties no matter how broad the scope of their discretion was.
Part IV is concerned with the rights of creditors. In general, discretionary and support trusts are treated much like spendthrift trusts. Creditors appear to fare better when the trust is a support trust. Providers of necessary goods and services can usually compel the trustee to make disbursements to them and other favored creditors–such as spouses, ex-spouses and minor children–are often allowed to reach a beneficiary’s interest in a trust. On the other hand, creditors usually cannot reach a beneficiary’s interest in a discretionary trust although the Uniform Trust Code and the Restatement approve of Hamilton orders and similar remedies by which creditors can attach distributions before they are transferred to debtor beneficiaries.
Finally, Part V suggests some improvements in certain problem areas. For example, it would helpful to agree on a single test for determining whether an abuse of discretion has occurred. This test should require a finding of either bad faith or unreasonable behavior on the part of the trustee. In addition, words such as “comfort” or “station-in-life” are not necessary to describe a beneficiary’s interest in a support trust and should be ignored, although other words, such as “benefit,” “best interests,” or “welfare” are appropriate when the settlor intends to provide the beneficiary with a more upscale lifestyle than mere support. Furthermore, the trustee of a support trust should be allowed to take a beneficiary’s other resources into account in determining how much to distribute unless directed otherwise by the settlor. When reviewing a trustee’s decision in the case of a purely discretionary trust, the courts should apply a reasonableness standard unless the settlor expressly provides that a good faith standard may be used. Lastly, Part V addresses the thorny issue of creditors’ rights and concludes that creditors should normally not be able to compel the trustee of a support trust or a purely discretionary trust to pay a beneficiary’s debts. The only exception to this rule should be for child support and providers of necessities in the case of support trusts.