Planning for Life

What's a Trustee to Do? Providing Guidance

Posted by Harry S. Margolis on September 16, 2014

Find me on:

People set up trusts for all sorts of reasons: tax avoidance or reduction, financial management in the event of incapacity, probate avoidance, asset protection, and for a child with special needs, just to name a few. In these instruments, the person creating the trust -- the grantor or donor -- lays out all of the rules under which the person or institution managing the trust must operate. Oddly, trusts generally give the trustees little guidance on how to exercise their power to distribute trust income or principal to beneficiaries.


Trusts often contain language such as the following:

  • The trustee shall pay to or on behalf of my spouse principal as necessary to maintain her in the standard to which she is accustomed.
  • The trustee may make distributions to my grandchildren as it in its sole discretion deems necessary for their health and education.

In general, trustees are tasked with the obligation of carrying the wishes and intent of the grantor. They are also supposed to consider the interests of both the current beneficiaries and future beneficiaries. But how, with the usual vague language is the trustee supposed to decide what distributions to make.

In the first instance, what if the surviving spouse wants a new Lexus every year? Should the trustee pay for this? Perhaps, yes, if he and his wife were buying new Lexuses every year before the wife died. But what if this would likely deplete the trust and leave nothing for the children after the surviving spouse also passes away?

In the second example, clearly college tuition would come under education, but how about a backpacking trip to view all of the great Buddhist sites of Asia? Health insurance premiums would come under health, but what about a gym membership?

To answer these types of questions, trustees generally consider the past practices of the trust grantor, the financial resources of the trust, the other financial resources of the beneficiary, and the importance of the requested payment to the beneficiary. Then the trustees essentially apply their own judgment to the question at hand. That judgment, in addition to being influenced by the factors just listed, will also be affected by the trustee's own values and experiences, both personally and, if a professional trustee, as a trustee of other trusts.

The trustee's judgment and values may or may not coincide with those of the trust grantor. Ideally, the grantor will have chosen the trustee in part because of their shared values, but this is not always the case. Especially when a professional trustee is involved, the trustee and grantor may not know one another very well. And if an institution is the trustee, the person managing the trust in future years may never have met the grantor -- especially for old trusts that survive the grantor for many decades.

One would think that a good way to make sure the trustee follows the wishes of the trust grantor is to make them more explicit in the trust. The trust could list the types of items, services and experiences the trust should pay for. It could say "buy my husband a new Lexus every year" or "pay for up to two months of foreign travel for each of my grandchildren." Where the grantor has such specific uses of the trust funds in mind, including them in the trust itself makes a lot of sense.

The problem is that often future needs, interests and circumstances of beneficiaries cannot always be foreseen. For instance, what if Lexus goes out of business, or the surviving husband decides he would prefer a Tesla, or he becomes disabled and really needs 24-hour care rather than a new luxury car? Trusts can be more useful if they are flexible. In addition, the more specific the trust language, the more likely there will be fights and possibly costly litigation about the meaning and interpretation of the instructions. Charitable trusts that can last centuries often have to go to court to have the trusts reformed where it is now impossible or wasteful to carry out their original purpose.

Some attorneys are now advising trust grantors to write a separate letter of intent or wishes to guide future trustees. These can be as expansive as the grantor chooses and they don't need to be written in legalese. They can be changed and updated as circumstances and desires change (as long as the grantor is alive and competent). They cannot, however, be legally binding. The trust itself must remain the governing document. However, letter of wishes can guide the trustee and the trustee can take it into account along with other factors such as the financial health of the trust investments and the circumstances of the beneficiaries. Grantors of special needs trusts have long used letters of intent to tell trustees about their children and their desires for their future. There's no reason that this practice can't be adopted for other trusts as well.

Topics: trusts, Estate Planning

Subscribe to New Blog Posts

Recent Posts

Most Popular Posts

Posts by Topic

see all