Beyond The Will, Client Compass

Many trusts are established with the goal of protecting assets and ensuring the longevity of those assets for future generations. A trustee then may wonder if they have the authority to withhold money from a beneficiary who is not responsible with money. You may be able to answer this question already if you’ve read my prior blogs; that’s right: it depends. Here are some things to consider if you are a trustee in this situation or a beneficiary seeking additional monies from a trustee.

The terms of the Trust

Whether a trustee or a beneficiary, the terms of the trust are the beginning of the inquiry as to a trustee’s discretion to limit distributions. In Massachusetts, a trustee must act impartially in “investing, managing and distributing the trust property.” G. L. c. 2023E, § 803. A trustee must also administer a trust “as a prudent person would” and “protect the trust property.” G. L. c. 203E, §§ 804, 805.

That said, a trustee can alter their distributions depending on the standard for distributions set forth in the trust instrument.

Trusts generally have a standard for the trustee to determine when distributions are appropriate. A common one is the so-called HEMS standard: a trustee can distribute to a beneficiary as necessary for the beneficiary’s health, education, maintenance, and support. A trustee under this standard cannot distribute money to a beneficiary for a second pony but can distribute money to pay for college. If the trust in question has this standard, a trustee can limit distributions to a beneficiary to ensure that the beneficiary does not waste money. Another potential option—if allowed by the terms of the trust—would be to make distributions directly to entities on behalf of the beneficiary. That way, the beneficiary cannot spend the distribution, but the trustee ensures the beneficiary’s needs are met.

Another standard for distribution is if distributions are wholly discretionary. In this case, the trust simply says distributions can occur at the trustee’s discretion. Trustees of a discretionary trust can choose whether to make distributions and when but must ensure that they act in accordance with their fiduciary duties.

Finally, a trust may have a mandatory standard for distributions. In this case, the trust will contain a term that commands the trustee to make certain distributions. If the trustee does not follow these directions, the trustee will have committed a breach of fiduciary duty. For example, the terms of a trust command the trustee to give $250,000 to a beneficiary each year for the rest of the beneficiary’s life. Even if the beneficiary spends all $250,000 each year (or even within the first two weeks of the year), the trustee does not have the discretion to deny distributions.

Amend the Trust

Suppose you are a trustee of a revocable trust and the grantor of the trust. In that case, you may simply amend the trust to alter the standard for distributions or even remove the problematic beneficiary entirely. If you are the trustee of your friend’s revocable trust, ask your friend to amend the trust to state your authority more explicitly. The terms of a trust can modify the provisions of the MUTC; therefore, the requirement that all beneficiaries be treated equally may be written out of the trust. See G. L. c. 203E, § 105.

Petition the Court

In Massachusetts, if the trust instrument itself is not clear, a trustee can file a General Trust Petition seeking instruction or clarification from the court to adjudicate a standard for distributions to trust beneficiaries. The trustee may either take a position on the proper standard or simply ask the court to allow the beneficiaries to argue the appropriate standard.

In summary, if you are a trustee or a beneficiary, the most important source of information you have is the trust instrument itself. A careful review of a trust instrument is the first step to determining whether you, if you are a trustee, may deny money to an irresponsible beneficiary or, if you are a beneficiary, whether the trustee properly denied you money.