Understanding Trustee Discretion and Distribution Standards in Trusts - Trusts & Estates and Elder Law Newsletter
By: Victoria Friedrich
One of the most important responsibilities of a trustee is making distributions to the trust beneficiaries. The trust agreement (the legal document that creates the trust) guides the trustee on how and when distributions should be made, and what factors should be taken into account. Additionally, the laws of each state, and federal laws, further guide the trustee regarding their duties and responsibilities.
Discretionary distribution provisions in a trust typically fall into two categories: ascertainable standards and non-ascertainable standards. Understanding these standards is crucial for trustees and beneficiaries alike, as they affect enforceability, tax treatment, creditor protection, and more.
1. Ascertainable Standards: Clarity and Enforceability
An ascertainable standard provides specific, objective criteria a trustee must consider when making distributions. These are always phrased in terms of “health, education, maintenance, and support,” commonly abbreviated as HEMS.
Because these standards are specific, beneficiaries may petition a court to enforce them if they believe the trustee is not fulfilling their obligations. For example, a beneficiary could challenge whether their request for support was unreasonably denied.
HEMS distributions typically include housing costs, insurance, healthcare, and even consistent vacation or charitable patterns, provided they reflect the beneficiary’s accustomed lifestyle. However, if a trust’s size is modest, beneficiaries may be expected to live more modestly.
Creditor Protection and Tax Benefits
A trust that limits distributions to an ascertainable standard also provides important protections, including, by way of example and not limitation:
- A beneficiary serving as trustee (or co-trustee) may make decisions without exposing trust assets to creditors.
- The limitation avoids classification of the distribution power as a “general power of appointment,” which can have adverse estate and gift tax consequences that the trust was likely designed to provide.
2. Non-Ascertainable Standards: Broad Trustee Discretion
A non-ascertainable standard gives the trustee broad discretion to make distributions based on subjective criteria, such as a beneficiary’s “best interests” or “welfare,” and often provides that the trustee has “unlimited discretion” or “absolute discretion.”
Distributions made under broad discretion standards can be for any purpose, including larger expenses such as the purchase of a house, a wedding, a luxury car or extravagant vacation, or even to decant one trust into another trust.
These provisions provide less opportunity for court intervention. A court generally will not second-guess the trustee’s judgment when using broad discretion powers to make distributions unless there is clear evidence of bad faith or abuse of discretion.
3. Factors Trustees Must Consider When Making Distributions
When making distributions, Trustees are required to balance several factors, including, but not limited to:
- The specific terms and intent of the trust document;
- The present and future needs of current beneficiaries;
- The preservation of assets for potential future and/or remainder beneficiaries;
- Other resources of the beneficiary (if the Trust documents includes such direction); and
- The standard of living expected or historically enjoyed by beneficiaries.
4. The Trustee’s Duty of Impartiality
Trustees have a legal obligation to act impartially among beneficiaries, especially when multiple generations are involved. This duty means the trustee must balance the interests of current beneficiaries (often entitled to income and/or principal distributions) with those of future or remainder beneficiaries (who inherit remaining assets after the current beneficiaries' interests end).
However, the trust provisions can modify this obligation. For example, a trust might explicitly prioritize a spouse’s needs over those of descendants or provide that the needs of the current beneficiary should outweigh the needs of remainder beneficiaries, which can help avoid conflict and guide the trustee in balancing distributions.
5. Unequal Treatment of Beneficiaries
If there is a trust with multiple current beneficiaries, absent specific instructions in the trust, trustees typically may not treat similarly situated beneficiaries unequally, such as distributing more to one child than another. To allow such treatment, the trust must grant the trustee that discretion clearly and unambiguously.
6. The Importance of Trustee Selection and Oversight
Since trustees make key decisions regarding both investments and distributions, choosing the right trustee is vital. Trustees must interpret the trust document, apply the applicable standard(s), and administer assets prudently, often over decades or even generations.
When considering distribution standards, the chosen trustee is just as important as the terms of the trust. Trust documents should also address, for example:
- How trustees are selected, replaced, and/or removed;
- Whether distribution decisions are to be made by one trustee or several; and
- How disagreements among co-trustees are resolved.
Proper drafting and thoughtful trustee selection can help ensure the trust operates smoothly and as intended by the grantor.
Final Thoughts
Trusts can be powerful estate planning tools—but they depend heavily on how distribution standards are defined and how trustees carry out their responsibilities. Understanding the distinction between ascertainable and non-ascertainable standards helps beneficiaries know their rights, and helps trustees fulfill their obligations in a responsible, compliant, and fair manner.
If you are a trustee or beneficiary and have questions about trust distributions or fiduciary duties, please contact our experienced Trust and Estate attorneys. We are here to help you navigate these complex and important matters with confidence.
Learn more about our Trust & Estates and Elder Law & Special Needs Planning Practices.
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The information contained herein is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to these materials do not create an attorney-client relationship between Pashman Stein Walder Hayden P.C. and/or its attorneys, and the reader of the materials.