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Trust Beneficiary Distributions | Trustee Judgment Required?

Trust Beneficiary Distributions.jpgThe power of trustees should not be underestimated. It is said that power can be intoxicating. Some grow with its possibilities and some swell with pride and arrogance. Those who swell may act like potentates whose power can be exercised arbitrarily and without explanation. When queried for reasoning behind a decision, their answer might mimic a parent's answer to a young child's question - "Because I said so!" While this might end a parent-child discussion, it is offensive to an adult trust beneficiary whose parent invested love, thought, time and money in establishing a trust for the benefit of her children, not a trustee.

Paul's letter to the Corinthian church captures the difference between a child and adult: "When I was a child, I talked like a child, I thought like a child, I reasoned like a child. When I became a man, I set aside childish ways." And so, it should be in dealing with adult beneficiaries. They no longer talk like a child, think like a child and reason like a child. They are adults. They deserve adult reasoning.

What are trustee duties in California?

  • Duty of Loyalty: to act in the best interests of the beneficiary.
  • Duty to Safeguard Trust Property: to maintain trust property and assets for the good of the beneficiary.
  • Duty to Avoid Comingling: comingling, self-dealing, and misappropriation of trust assets and funds are all prohibited.
  • Duty to Deal Impartially with Beneficiaries: a trustee must distribute assets to beneficiaries in a fair and equitable manner.
  • Duty to Transparency: trustee must provide a clear accounting of assets and distributions on a regular basis.

State law as well as trust documents generally provide trustees with wide discretion in the exercise of their varied powers. These endowed powers include broad trustee discretion over distribution of income, principal or both to trust beneficiaries. Typical trust provisions might include language like this: "Trustee shall pay to or apply for the benefit of the beneficiary so much of the net income and principal from such beneficiary's trust as the Trustee deems necessary for such beneficiary's support, health and education, taking into consideration any other resources or assets know to the Trustee and available to such beneficiary. Any income not so distributed shall be accumulated and added to the principal of such beneficiary's trust." The "support, health and education" standard is so common that estate planning attorneys, financial advisors, and certified public accountants often refer to it as the "HEMS" standard (health, education, maintenance and support).

Language like that quoted indicates a design on the part of the grantor - the trust maker - to devote their estate to the support of their designated beneficiary. The designated beneficiary is the "first object of their bounty." The language is clear. If the income from the trust is insufficient for the beneficiary's support, health and education, the trust corpus or principal is available for that purpose.

Trustees cannot shut their eyes to the needs of the beneficiary. The grantor's intent to support the beneficiary, must not be ignored. How can a trustee exercise their discretionary power of distribution without keeping themselves informed of the beneficiary's life situation? The trustee has a duty to make themselves knowledgeable of the beneficiary's condition and needs in order to exercise judgment for the purposes anticipated and designated by the grantor. The referenced language imposes an obligation on the trustee to the beneficiary of the trust it administers to know the beneficiary's needs related to their "support, health and education" and to utilize the trust income and principal if necessary, to satisfy those needs.

While courts will not generally substitute their judgment for that of the trustee, they will not permit the trustee to abuse his or her discretion. For example, California Probate Code Section 16080 provides in part that "a discretionary power conferred upon a trustee is not left to the trustee's arbitrary discretion, but shall be exercised reasonably." In other words, "because I said so" is not a fair exercise. A trust granting the Trustee discretionary power and leaving its exercise to the trustee's judgment is not a greenlight to Trustees to fail to use their judgment.

Arbitrary decision making, that is the failure to exercise judgment altogether invites court intervention. "[E]ven where a trustee has discretion whether or not to make any payments to a particular beneficiary, the court will interpose it the trustee, arbitrarily or without knowledge of or inquiry into relevant circumstances, fails to exercise discretion." Restatement ]Third] of Trusts, ยง 50, Comment b.

If a Trustee fails to probe into the beneficiary's circumstances, he or she has failed to exercise judgment. An unwillingness to act despite the clear mandate of the trust document is offensive to the purposes of a trust.

So, trustees must exercise judgment. And, this judgment means having contact with and understanding the circumstances of a beneficiary. Failing to use judgment invites court intervention.

A challenge to a Trustee and petition for court intervention will, by necessity, require discovery. Obvious inquiries include identifying the elements that a trustee considered in utilizing its judgment in decision making? Did the trustee know the beneficiary's needs? Did the trustee make contact with the beneficiary? Was the contact merely perfunctory? What internal standards does the trustee utilize in decision making? How does the trustee deal with the issue of successive beneficiaries, particularly where the terms of the trust mandate that the grantor's "first object of their bounty" has a right to trust principal if necessary for the beneficiary's support, health and education.

California, like many states, provides that civil discovery procedures generally apply in trust proceedings. California Probate Code Section 1000. Parties in California trust litigation have a right to conduct discovery in a trust proceeding [Mota v. Superior Court (2007) 156 CA 4th 351, 355]. This is an important right because a trustee's failure to use judgment may not be apparent on its face. Document production, depositions and other discovery processes may be essential to identify the failure of judgment. A beneficiary challenging the decision making of a trustee is really "flying blind" unless the basis for judgment can be identified.

Hackard Law regularly represents aggrieved beneficiaries in actions against trustees, including trustees who appear to be arbitrary or failing to file the mandates of the trust document. If you have a case that you would like to discuss with us call us at 916 313-3030. We regularly represent clients in the Superior Courts of Los Angeles, Orange, Santa Clara, San Mateo, Alameda, Contra Costa and Sacramento Counties.. We focus on substantial cases where we think that we can make a significant difference and there is a wrongdoer who can be made financially accountable for their wrongdoing.

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