The question of granting trustees discretion to adjust distributions, particularly during economic downturns, is a frequent one for Ted Cook and his clients at his San Diego estate planning practice. It’s a complex issue balancing the grantor’s intent with the real-world financial pressures that can impact a trust’s sustainability and the beneficiaries’ needs. While seemingly straightforward, allowing such flexibility requires careful drafting and consideration of applicable state laws, and a deep understanding of the potential ramifications for both the trustee and the beneficiaries. Often, individuals establishing trusts desire a specific distribution schedule, but fail to account for unforeseen economic hardship, which is why incorporating a “total return” provision or a hardship clause can be critical.
What happens if the trust runs out of money?
One of the biggest concerns beneficiaries have is the potential depletion of trust assets. According to a recent study by the National Foundation for Credit Counseling, approximately 28% of Americans have no emergency savings, making them particularly vulnerable during recessions. A trustee with discretionary powers can mitigate this risk by delaying distributions during market downturns, allowing the trust’s principal to recover, rather than being forced to sell assets at a loss. This is particularly important for trusts designed to provide income over a long period, such as those established for children’s education or for the ongoing care of an elderly parent. The key is to provide clear guidance within the trust document about what constitutes a “recession” or “economic hardship” and the factors the trustee should consider when making distribution decisions.
Can a trustee be held liable for delaying distributions?
This is where things get tricky. Trustees have a fiduciary duty to act in the best interests of the beneficiaries, and that duty includes making prudent financial decisions. However, delaying distributions, even during a recession, can lead to disputes if beneficiaries feel their needs are not being met. In fact, trustee litigation is on the rise, with approximately 30% of trust disputes involving allegations of mismanagement or breach of fiduciary duty. To protect the trustee, the trust document should explicitly authorize discretionary distributions and outline the permissible factors for consideration, like market conditions, inflation, and the beneficiary’s overall financial situation. It’s also crucial to include an exculpatory clause, shielding the trustee from liability for good-faith decisions made based on reasonable interpretations of the trust document.
I remember a client, old Mr. Henderson, who established a trust for his grandchildren’s college education. The trust stipulated equal annual distributions starting when each grandchild turned 18. When the 2008 financial crisis hit, the trust’s investments plummeted. The first grandchild reached 18, and the trustee was obligated to make a large distribution just as the market was at its lowest. Forced to sell assets at a significant loss, the funds available for the subsequent grandchildren were drastically reduced. Had Mr. Henderson included a clause allowing the trustee to temporarily suspend distributions during economic downturns, the trust could have weathered the storm and provided a more stable educational fund for all his grandchildren.
How can I ensure my trustee makes responsible decisions during tough times?
The solution often lies in crafting a well-defined “total return” provision within the trust document. Instead of mandating fixed distributions, this provision directs the trustee to distribute a percentage of the trust’s total return – encompassing both income and capital appreciation. During a recession, capital appreciation may be negative, resulting in lower distributions, but preserving the trust’s principal. This approach provides the trustee with flexibility while ensuring beneficiaries still receive some benefit. Another effective strategy is to appoint a trust protector – an independent third party who can oversee the trustee’s actions and provide guidance during challenging circumstances. I recently helped a family establish a trust with this feature, and it proved invaluable when the trustee faced a difficult decision during the recent market volatility. They consulted with the trust protector, reviewed the trust document, and collectively determined a course of action that balanced the beneficiaries’ needs with the long-term sustainability of the trust. The family was immensely relieved, and the trust remains a source of financial security for generations to come.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, a trust lawyer near me: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
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