Trustees given the responsibility of administering a trust know that their rights and responsibilities are determined by the trust instrument, and by state law. Many trusts are “discretionary” trusts, which means that distributions are made in the trustee’s discretion, often for the “health, education, maintenance and support” of one or more beneficiaries. This standard is referenced in the Internal Revenue Code section 2041(b)(1)(A), and many creators of trusts (settlors) appreciate this standard for distributions because it helps to avoid the risk of transfer taxes. Other trusts are "wholly discretionary" and provide maximum asset protection for beneficiaries. But what does “health, education, maintenance, and support” mean in terms of making trust distributions?
The answer to that question depends in part on how much discretion the trust instrument gives to the trustee. As a general rule, a trustee must exercise the discretionary power to make distributions reasonably and in good faith, and according to the terms of the trust. Some settlors give their trustees even greater discretion by using terms like “sole” or “absolute” discretion. With a broader grant of discretion like this, Ohio courts generally will not substitute their own judgment for that of a trustee so long as the trustee is not acting dishonestly or in bad faith.
Let’s talk a little about the specifics of health, education, maintenance, and support, and what expenses those terms are generally considered to govern. Distributions for health are generally understood to include payments for emergency medical care, treatment for physical or psychological conditions, dental and vision care, and medical insurance. What about, say, massage or spa treatments which arguably have a health benefit? A trustee without sole discretion might be skating on thinner ice with distributions for those things, especially if they are made to one beneficiary at the expense of the funds available for others.
Certain educational expenses are likewise considered to be covered, like materials, tuition and fees for primary, middle, and high school, as well as trade schools, colleges, and professional schools. For boarding schools and colleges, distributions may also be made for room and board. At least one court in New Jersey found that postgraduate educational expenses were outside of the scope of “education” as that term has traditionally been used.
Maintenance and support typically includes expenses for housing, such as mortgage or rent, property taxes, property insurance, and utilities. Maintenance and support distributions may also be made to cover a beneficiary’s basic needs as well as modest vacations or entertainment—not necessarily things one needs to live, but that make life pleasant. However, it can be difficult to know where to draw the line between such expenditures and more lavish ones.
On one hand, it might be helpful for the settlor to offer specific guidance as to what distributions should be made for in the trust. But the reality is that a settlor cannot anticipate every scenario in which a distribution should be made; that’s why he or she gives the trustee discretion to make those calls.
One thing a settlor can do to help a trustee exercise discretion is to be clear about his or her intentions. The clearer the trust is about the settlors general motivations in making the trust, and goals for the beneficiaries, the more guidance the trustee has about whether a distribution should be made. For instance, if a settlor makes clear in the trust that he supports the beneficiaries’ pursuit of professional degrees, the trustee will likely feel more comfortable making distributions for postgraduate educational expenses.
Trustees often also wonder if they can, or should, take into account the other resources a beneficiary has available to him or her. In making a trust, a settlor can express his or her intentions in this regard. Likewise, a settlor can give guidance as to what maintenance and support is envisioned. Should beneficiaries be supported in the style to which they may be accustomed, even if that far exceeds what most people would consider necessary? Should they be provided with very basic support and left to their own devices for the “extras” in life?
For those considering making a trust for the benefit of children, grandchildren, or other loved ones, these are questions to talk over with a good estate planning attorney so that the trustee will be best able to carry out the settlor’s intentions. For trustees wrestling with the question of whether or not to make a requested distribution, engaging legal counsel experienced in trust administration can help make difficult decisions easier and prevent litigation by beneficiaries or other unintended consequences.
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