Stephen Trefts, President

“So why can’t I have that car?  It is my money.”  Many times a week we are faced with requests for funds for a variety of purposes which include things like education, medical needs, travel, home repairs, allowances, attorney fees, and even funds to post bail. So, how do we make decisions on who gets what? While there is no mechanical formula that can be used, there are certain land marks we look for on the road to the right decision.

DOCUMENT

Naturally, the first thing we look at is the language in the trust document. It is easy for us when the document is restrictive and does not give us a choice. Language in this category includes:

The trustee shall pay my beneficiary:

Net income, or

An allowance of $__ /month, or

A unitrust amount of___ % of the net assets of the trust as revalued annually, or

___% of the beneficiary’s earned income.

This type of language is typically used when the beneficiary has exhibited spendthrift problems or may have drug or alcohol issues and has outside assets or income for emergencies.

However, most trusts give discretion to the trustee to make distributions because the grantors do not know what life issues will face the beneficiary (usually their children). The grantors want the trustee to step into their shoes and use parental judgment. Language in these types of trusts range from the very restrictive such as:

The trustee shall pay for the higher education of my children so long as… 

to the less restrictive such as:

The trustee shall pay from both income and principal for my beneficiary’s maintenance, education, support, and health.

to the least restrictive such as:

The trustee shall pay to or for the benefit of the beneficiary from either income or principal for anything in the trustee’s absolute discretion that the trustee deems necessary for the beneficiary.

Many older trust documents also add:

. . . including the beneficiary’s happiness, comfort, and enjoyment

INTENT OF THE GRANTOR

So the language in the document is a starting point, but    we often need to go deeper. One of the first places we look is the intention of the person who wrote the document (grantor). It would be helpful if the grantor’s intentions were incorporated in the document, but it rarely is. Tha is why it is so important for us to talk with the grantor if possible and document those conversations regarding the grantor’s intentions. If the grantor is not available, we will talk with family, friends, and advisors. In one case, the grantor was an elderly woman who came into our office with her inebri- ated son. She made it very clear to us that under no circumstances should we pay him directly for anything, as he would just use it for alcohol or drugs. This conversation greatly assisted us in future dealings with her son.

DURATION AND SIZE OF THE TRUST

If the trust is intended to last for the lifetime of a younger beneficiary and is relatively small, then we will be more conservative in granting re- quests for funds. Conversely, if the trust is large and the beneficiary is older, then we can be more liberal with distributions.

NEEDS VERSUS WANTS               

In a discretionary trust, we always analyze the quality of a request for funds. Will this really benefit the beneficiary? Is it within the intentions of the grantor? Can the trust sustain this type of outlay for the longer term? For in- stance, we are often requested to pay off consumer debts for clients. Sometimes, we have declined because we knew that paying off large credit card debt would encourage the beneficiary’s spendthrift habits. At the opposite end of the spectrum are requests for medical or educational assistance where there is clear evidence of need or where the assistance will improve the beneficiary’s life or situation.

BALANCE

The trustee must continually strike a balance between the needs of the in- come beneficiary and those who will inherit after their lives (remainder- men). An example is when the income beneficiary is the second wife and the children of the first marriage are the remaindermen. Sometimes, the trust document will give us guidance by stating that the trustee may favor the in- come beneficiary over the remainder- men, but usually the document is silent. As a general rule, in this latter circumstance, we usually look at the totality of the situation. Are there out- side assets or income for support? Is it separate or community property that funded the trust? What are the expectations of the remaindermen? Would this request for funds maintain the beneficiary in a lifestyle to which she has been accustomed or does this represent life beyond her means (or the expectations of the grantor)?

Being a trustee takes wisdom, compassion, and the experience to identify the landmarks on the road to the right decision.

Print Date:  Spring 2010