OCTOBER 13, 2014 VOLUME 21 NUMBER 37
Let's imagine that you are the trustee of an irrevocable trust, and you are considering making a distribution from the trust. Perhaps the distribution has been requested by a beneficiary, or a family member. How do you make your decision?
There is surprisingly little written direction for trustees. Partly that is because, until the middle of the twentieth century, trustees were most often professional, trained institutions -- like banks and trust companies. Only in the past half century or so has the notion of a family member acting as trustee become common, and there are many more small professional organizations acting as trustee, as well.
That is, of course, a good thing. There is no reason that only large banks are suitable to act as trustee (though there is no doubt that they are the appropriate choice for some trusts), and the democratization of trusteeship, if you will, is a positive legal and social movement. But that does also mean that people without any particular training or background are now being called upon to make decisions about trust distributions.
How do you decide? Here are some items to consider (and not necessarily in order of importance):
- What do the terms of the trust say? It's surprising how often the answer is actually in the trust document, but forgotten because no one has looked at the trust for months. Read the trust, looking for reference to the kind of distribution that is proposed.
- Is it clear that the distribution will be for the benefit of the beneficiary? If the beneficiary's parents (or children, or neighbors, or creditors) really, really want you to make the distribution, that is not enough -- look at the benefit to the beneficiary.
- How large is the proposed distribution as compared to the size of the trust? It should be much easier to approve purchase of a new home from a trust worth several million dollars than from a trust with a $200,000 balance.
- Are there other rules to consider? For instance, will the distribution have an effect on the beneficiary's Medicaid eligibility, or Supplemental Security Income benefits? If so, that doesn't necessarily mean you can't make the distribution -- but you should be sure that the benefit outweighs the costs.
- Will other people benefit from the proposed distribution? If you agree to purchase a vehicle for a child with a disability and difficulty getting to doctor's appointments (for instance), will the vehicle benefit the child's parents or other family members? Again, that doesn't mean you are necessarily prohibited from making the distribution, only that you are required to consider those ancillary benefits.
- How closely is the proposed distribution related to the original purpose of the trust? If the trust was funded by the proceeds from a personal injury lawsuit, for example, it is easier to approve expenditure of funds for an experimental medical treatment than if the trust was set up primarily for education of the beneficiary.
- What about remainder beneficiaries? Who is scheduled to receive the trust balance upon the death of the current beneficiary? They don't have a veto right over the proposed distribution, but their interests have to be considered. Does the trust document say you can ignore the remainder beneficiaries? OK -- but they are still likely to see an accounting, and they might have questions; you should be prepared to answer.
- Will the expenditure lead to liability for future costs? If you buy a house (or a car) who will pay the insurance and upkeep/maintenance costs? If someone agrees to pay the ongoing costs, is there a clear understanding about what will happen if they do not follow through?
- Are you sure your own interests are not tied up in the proposed distribution? If you are a relative of the beneficiary, might the proposed distribution benefit you as well? If, for instance, the beneficiary's doctor says that a therapy pool would be a good idea, can you assure anyone who asks that you agreed to use trust funds for a pool at your house without considering how nice it would be to have a hot tub? Conversely, can you be sure that your refusal to approve an expenditure was not motivated by your interest in collecting a fee as trustee? If your reaction to those suggestions is even slightly defensive, that should give you additional pause (rather than letting you off the hook).
- If you approve a significant purchase, have you figured out how to title the new house or car, or whether there needs to be an adjustment in the house's title after you make significant improvements with trust funds? There are no easy hard-and-fast rules here, except this one: you need to consider the titling of the affected asset, and you should document how you finally resolved the question.
There are more items to consider, but that should give you a sampling. We're working on a checklist of considerations for trustees -- and especially trustees of "special needs" trusts. If you have ideas for additional items to add to the list, please let us know. If you just want to know how that checklist project turns out, let us know about that, too.
Meanwhile, you should keep this in mind: acting as trustee is a challenging, difficult, but rewarding job. It's important to think through your decisions and document how you got to them, but the key goal is usually the same: can your decisions better the life of the beneficiary of the trust?