April 02, 2009

Are you the beneficiary of a trust? If so, chances are the trust document bestows discretion in some form upon the trustees in making distributions of income and/or principal to you. How much discretion depends upon the precise wording of the trust and how the law interprets those words. There are numerous variations to be found in trust instruments. A basic question you need to know as a beneficiary of a trust, however, is whether the creator of the trust intended the trustees to have objective or subjective discretion.

OBJECTIVE: There are discretionary powers requiring the trustees to conform to an objective standard, meaning a standard not found in the individual mind of your particular trustee or trustees, but rather a standard that is capable of being independently measured.

An example of an objective standard would be where the trust states that the trustees are to "pay so much of the income or principal to the beneficiary as is necessary for the beneficiary's support, maintenance or comfort." The italicized phrase denotes that it was the intention of the creator of the trust to impose an objective standard. What is necessary for the support, maintenance or comfort of the beneficiary is capable of being measured without reference to the individual way of thinking of the trustees of that particular trust.

Where there is an objective standard in a trust, generally the law of New Jersey will read into the discretion a requirement that your trustees act within the bounds of reasonable judgment - namely, with respect to the example, pay out at minimum an amount which in the opinion of a reasonable trustee under similar circumstances would be necessary for the beneficiary's support, maintenance or comfort. Thus in litigation, a court would likely apply this or a similar test.

SUBJECTIVE: Subjective discretion is found in many trusts, meaning the trust creator gives the trustee the power to use his or her own subjective judgment.

The most common example of a subjective standard would be where the trust states that the trustees are to "pay so much of the income or principal to the beneficiary "as the trustees shall, in their absolute discretion, determine." The italicized phrase denotes that it was the intention of the creator of the trust to impose the trustees' subjective judgment as the measure rather than the judgment of a reasonable trustee under similar circumstances.

Generally, however, the law does not interpret "absolute discretion" literally. A trustee with absolute discretion cannot do whatever he or she wants. There are limitations on the trustee's absolute discretion imposed by the law. The trustee cannot act arbitrarily or capriciously, meaning without reason or foundation in fact. The trustee cannot act dishonestly. The trustee cannot act with some mindset other than one that looks to accomplish the purposes of the trust. The trustee cannot impede or frustrate the purposes of the trust. The trustee, however, is not bound by the objective measure of what a reasonable trustee in like circumstances would do.

FROM THE BENEFICIARY'S PERSPECTIVE: No doubt, you have heard horror stories about beneficiary/trustee conflict. Of course, as a beneficiary, you do not ordinarily get a say in how the trust instrument is drafted. If you did have input, as a general proposition you would want an objective standard to guide the trustees' exercise of discretion.

However, if your trustee has subjective discretion, you should know that the bright line rules end up quite blurred when, in litigation, Courts are called to respond to questions raised by a beneficiary regarding the trustees' exercise of discretion. As a practical matter, a judge that does not agree with what the trustees are doing will find a way, despite the absolute discretion language, to get to a result that the judge believes is fair and just. For example, a court that wants to interfere with the trustees' judgment will control the result by ruling that the trustees are not acting in the state of mind contemplated by the creator of the trust. Or, the judge will find that the trustees are not exercising their power in a manner consistent with the purposes of the trust. The point being that the absolute discretion language does not grant the trustees a license to do whatever they please and it does not provide them with immunity from intrusion by a Court if a beneficiary decides to contest the actions or inaction of a trustee.

Beneficiaries know your rights and seek the assistance of an experienced trust litigation attorney if you feel that you aren't being treated fairly by your trustees.

About the Author

The author, Betsy Sweetser, is a partner in the Princeton based law firm of Pellettieri, Rabstein & Altman, http://www.pralaw.com. She specializes in trust litigation and can be reached at 609 520-0900.