Question: Should the investment policy and distribution rate from a trust be informed by assets held by the beneficiary that are outside the trustee’s responsibility or control? Predictably the answer is… it depends. However, in most cases it is fair to say, “The trustee is obligated by statute to consider other assets, income, and resources available to the beneficiary when the trustee establishes the investment policy and distribution strategy for a trust.”
Many trustees erroneously believe that their responsibility and consideration begins and ends within the four corners of the trust document. But the UPIA, adopted by the vast majority of states, directs that a prudent trustee acting in good faith will take into consideration the assets, income, and other resources available to the beneficiary that are OUTSIDE the purview or responsibility of the trustee.
Last month we were confronted with the following facts: For over 10 years the beneficiary was entirely dependent on distributions made from a trust. The distribution rate was unsustainable, averaging over $100,000 per year on a $1.0m trust, making the eventual exhausting of the trust inevitable. Nevertheless, this level of distribution was consistent with the purposes, terms, distribution requirements, and other considerations of the trust. The trustee owed no duties to any remainder beneficiaries, and the trust was established to support the beneficiary to the standard of living of which she had become accustomed even if the trust assets were exhausted in following this directive.
Then the beneficiary received a windfall. A long held asset, a fractional interest of an undeveloped piece of land thought to be of minimal value, was sold and the beneficiary received over $1.4m in proceeds outside of the trust. The trustee’s question was, “Should I modify my historically high distribution rate due to the windfall proceeds received by the beneficiary outside of the trust?”
Absent any direction from the trust document, the trustee is directed by the Prudent Investor Act to consider resources (assets and income sources) available to the beneficiary outside the trust when determining what distribution rate should be made from the trust. In making this determination the trustee relied on California Probate Code §16047(c)(6), which specifically directs a trustee to consider “other resources of the beneficiary known to the trustee as determined from information provided by the beneficiary.”
To be sure, the beneficiary was not happy with this decision. Predictably, she preferred the trustee continue the unsustainable distribution level and deplete the trust so that she could have her proverbial cake and eat it too. But the trustee concluded that it would be inconsistent with instructions given by the grantor in the trust document and her duty to preserve and protect the trust assets to continue this distribution scheme.
This is yet another illustration of why it’s hard to be trustee.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps trustees (ERISA, individual, and endowment) save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping the trustee conduct audits of the money managers to whom investment duties have been delegated. Fiduciaries have an affirmative duty to provide ongoing and independent oversight of the money managers. What makes us unique is that we do not manage money or sell insurance. Doing fiduciary audits, benchmarking studies, and performance attribution is all we do.
We do what trustees should do, but don't know how
Anodos develops and maintains an investment governance process for trustees so that their fiduciary duties are fulfilled.