November 2, 2011
Authored by: Luke Lantta
Discretionary distributions of trust corpus probably rank near the top of trustees‘ or trust administrators‘ headaches. No matter how the discretion is exercised someone is going to be angry – maybe even angry enough to sue. Either the beneficiary requesting the encroachment will complain that it’s not enough or the remainder beneficiaries will complain that it was too much.
Corporate trustees have gotten pretty good at documenting and formalizing the manner in which they handle discretionary distributions, usually routing the requests through committees. In making a discretionary distribution, one question will always come up: “Do I have to consider the beneficiary’s other means of support?” Some states, like Georgia, have statutes stating that, in the absence of a trust provision to the contrary, a trustee has no duty to investigate a beneficiary’s resources prior to making a discretionary distribution. Other states do not.
Beatrice Ansbigian was the trustee of the Arthur Ansbigian Trust. Beatrice was the widow of Arthur H. Ansbigian, the settlor of the Trust, and she was also the lifetime beneficiary of the Trust. George Harootian, the successor trustee and remainder beneficiary of the Trust, claimed that Beatrice breached her fiduciary duty to him as a beneficiary by encroaching upon trust principal for her benefit after Arthur’s death.
The disputed principal encroachments fell within three categories:
(1) encroachments to pay Beatrice’s personal taxes;
(2) encroachments to pay professionals for services in assisting Beatrice with her finances and care; and
(3) Beatrice’s failure to return to the Trust a rebate check from an assisted living center.
George claimed that Beatrice abused her discretion as trustee by invading the Trust principal for her support because she had assets of her own with which to pay her bills. The appellate court disagreed with George.
The Trust instrument provided that upon Arthur’s death, the trustee had the power to encroach upon the Trust corpus “for the support in reasonable comfort and maintenance of” Beatrice. The Massachusetts Supreme Judicial Court has determined that similar trust language reflects “the unequivocal intention that [the widow’s] living expenses are to be borne exclusively by the trust income and principal.”
In Massachusetts, if a settlor wants the trustee to take into consideration other means of support, then the settlor should use language where a trustee’s discretion to pay is qualified by such words as “when in need” or “if necessary.” Without this qualifying language in a trust, the beneficiary is not required to use his or her own assets before having the trust corpus invaded to pay for his or her support.
George tried to argue that inclusion of the word “reasonable” limited Beatrice’s ability to encroach upon the corpus. The appellate court, however, determined that inclusion of the word “reasonable” before “comfort and maintenance” did not mean that Beatrice should have used her own assets so as to preserve the trust principal for the remainder beneficiaries.
“Reasonable,” however, is not without meaning. What constitutes “reasonable” comfort and maintenance is measured by reference to the beneficiary’s standard of living before the beneficiary became a beneficiary of the trust.