In my last blog of August 14, 2015 I referred to the discretionary family trust as being one of the key tools in the estate planner’s toolbox. I made this statement given the flexible nature of this tool. I also, however, noted that it is often the case that little time is spent with the creator of the trust to detail their intent as to the circumstances for when the trustee is to make a distribution to a beneficiary.
In my next few blogs I intend to focus on the manner in which creators of trusts can convey their intentions regarding the circumstances in which distributions are to be made by the trustee to the beneficiaries. To facilitate a better understanding of how this can be accomplished, in this blog I will focus on the different means by which the creator of a trust can express his/her intention concerning the standards imposed on the trustee in the trust deed.
The most common strategy for a creator of a trust to convey his/her intentions concerning the standards to be followed, is to state the standard in the trust deed itself, thereby directing the trustee in the form of a written standard mandated by the trust deed. There are a number of common written standards that are included in trust deeds, each of which has its own meaning. This will be the focus of my next blog.
Besides the commonly employed written standard used in the trust deed itself, there are a number of other methods available to a trust creator to articulate their intentions in this regard. These other methods generally break down into the following three categories:
- Adding additional written statements into the trust deed to augment the meaning given to the stipulated standard, to facilitate the interpretation of the stipulated standard or to include a prioritization among the possible discretionary distributions that could be made within the stipulated standard.
The additional written statements might take the form of special definitions given to particular words used in the written standard. For example, if the written standard is “maintenance in health and reasonable comfort”, particular meanings may be given to the chosen words that may augment the legal meaning otherwise given to those words.
The written recitals and background provided in the trust deed could have the trust creator outline his/her vision as to the purpose the trust is to play in his/her overall wealth plan, as well as his/her vision for the values s/he is hoping to instill in the beneficiaries by providing for the beneficiaries, can go a long way to facilitating the trustee’s future interpretations of the written standard.
If there are competing interests among the beneficiaries or competing demands for potential distributions, including a stated prioritization will also facilitate the trustee’s future interpretations. For example, if education for all beneficiaries is paramount over the provision of a house, then stating this will give the trustee a key touchstone to follow when making future decisions.
- Creating a special governance process in the trust deed that is to apply to discretionary distributions. While not a common approach, a trust creator might consider creating an express process that the trustee is to follow when making discretionary distributions. The process could go so far as to detail what information the trustee is to gather before making a distribution, if a beneficiary can request a distribution, what circumstances, such as financial, should exist before a distribution is made, as well as other matters that may be relevant to the process to be followed when making a distribution. The process could also include the involvement of other persons in the making of a discretionary distribution. Such a person may be called a “protector”, whose approval is either required on a consultative or perhaps mandated basis. Care in this regard must be taken to ensure the trustee is still functioning as a trustee with fiduciary duties.
- Articulating the creator’s intentions in the form of a separate letter of wishes that is ultimately not legally binding on the trustee but is meant to provide additional meaning to the written standard through the “voice” of the trust creator. For example, it is here where a trust creator may express his intentions or wishes regarding the trustee promoting the self-sufficiency of the beneficiaries by facilitating financial independence through education rather than dependence on the trust.
Ultimately the more care and attention that is paid to ensuring the trustee understands the creator’s intention concerning the making of discretionary distributions, the better the trustee will be able to perform his/her job.
In my next blog, I will focus on the meaning of the more common particular written standards chosen by trust creators to govern discretionary distributions.