Discretionary Distribution Standards for Estate Planning

Tax Professionals' Resource
March 6, 2013 — 2,139 views  
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The discretionary distribution standard is a provision in a trust that instructs the trustee to distribute a portion of the trust estate to one or more of the beneficiaries. Trustees and advisors often face difficult decisions when exercising discretion of distributions to the beneficiaries. The estate planner incorporates the discretionary distributions into the trust documents when drafting so that it reflects the intent of the settler better. But there is a possibility of the words written in these documents being misinterpreted. Therefore, it is good to be aware of the conventions to draft and interpret discretionary distribution standards for trusts.

Understanding Commonly Used Distribution Standards

Support, maintenance, and health are the most commonly used distribution standards. 'Support' and 'Maintenance' are considered to be synonymous. It is understood that a beneficiary may receive distributions necessary to maintain the standard of living they are accustomed to. The term 'health' does not mean greater distributions, as the necessary money for healthcare is typically included in support and maintenance. Another common term is 'education' and its definition varies from supporting the beneficiary’s educational pursuits lifelong to requiring only distributions for a minor's education. But as many clients will have an idea of what 'education' means for them, planners should give a customized definition in the agreement after thorough discussions.

Expansion or Restriction of Trustee's Discretion

For expansion of discretionary distribution standards in the client's trust, estate planners need to include terms such as 'benefit', 'comfort', and 'happiness', which are often used to extend discretion beyond support. Some courts interpret benefit and comfort to be the same as support and maintenance, so including 'happiness' will be the better option to expand a discretion beyond the standards of support, maintenance, and health.

For restriction of distribution standards, estate planners must consider including terms such as 'emergency' or 'hardship'. These terms are interpreted as restricting the discretion when compared to a typical health, education, support, and maintenance standard. These terms only authorize distribution when the circumstances or conditions arise. Even if the conditions or circumstances arise, the discretion can be exercised by the trustee only to the appropriate extent in order to alleviate the hardship, special need, or emergency. Only when the client has declared a fervent desire for restricting distributions, should the planner consider these terms.

Considering the Other Resources of Beneficiaries

If the trustee decides to consider the beneficiary's other resources, the next task is to decide what resources are to be considered. The trustee should consider the beneficiaries' independent income, principal of beneficiary's estate, annuity payments, income payments from the trust, and court-ordered support payments. It is also possible that some instances will call for taking into account the non-income assets of all or few of the beneficiaries.

Discretionary Distributions for Multiple Beneficiaries

In case of multiple beneficiaries, the trustee should deal impartially with them. ‘Impartial’ doesn't have to mean equal treatment; rather it should mean ‘equitable treatment’ according to the purposes of the trust. The trustee’s analysis should consider the size and purpose of the trusts, the terms in the discretionary powers, the circumstances of the beneficiaries, and their relationship with the settler and to one another. The trustee also has to consider the tax issues of the discretionary distribution. If the trustee is also a beneficiary, the potential tax issues can be avoided if the discretion is limited within ascertainable standards.

Practitioners should attempt to get all possible information about the intent of the client. This will help add additional language to the trust document to provide valuable guidance to a trustee. Courts rely heavily on the intent of the settler, and adding purpose statements, explaining the settler's perspective, on trust distribution documents will help avoid any misunderstanding of the language.

Tax Professionals' Resource