How trust distribution rules shape beneficiary access

Required payments and discretionary payments

In Minnesota, for example, mandatory distributions include income or principal the trust requires a trustee to pay, including at termination. Other states differ.

A distribution subject to discretion falls outside that definition even when discretion follows a distribution standard or appears alongside language directing payment.

Upon accepting trusteeship, a trustee must administer the trust in good faith under its terms and purposes, beneficiary interests and applicable law.

For your discussion with counsel, highlight both the payment language and any qualifying language elsewhere in the instrument. Reading only the word “shall” leaves the rest of the clause unexamined.

Broad discretion and judicial review

In Colorado, even “absolute,” “sole” or “uncontrolled” discretion must be exercised in good faith within the trust's terms and purposes, beneficiary interests and relevant fiduciary duties.

A trustee does not abuse discretion by exercising honest judgment with a proper motive while following those terms and purposes and considering beneficiary interests.

When discretion is unlimited, a court cannot find abuse merely because it would have decided differently or declined to act.

In Delaware, a discretionary interest is a mere expectancy rather than a property right, without a deemed right to compel payment. This includes discretion subject to an ascertainable standard and mandatory wording qualified by discretionary distribution language.

Judicial review remains available for abuse of discretion under section 187 of the Restatement (Second) of Trusts. Delaware expressly excludes sections 50 and 60 of the Restatement (Third) from that review standard.

HEMS and federal power classification

For federal power of appointment classification, a power to use property for oneself is not a general power if limited by a reasonably measurable standard relating to health, education, maintenance or support, often abbreviated HEMS.

Support and maintenance extend beyond bare necessities. Qualifying examples include an accustomed standard of living, college and professional education, and medical expenses.

Powers for comfort, welfare or happiness do not satisfy this federal standard. Whether the beneficiary must exhaust other income first is immaterial to this classification.

This classification does not independently entitle a beneficiary to payment.

Ask counsel to identify the precise standard in your instrument before discussing its federal classification.

When the beneficiary is also a trustee

In Colorado, a beneficiary trustee other than the settlor may make discretionary distributions for personal benefit only under an ascertainable standard, unless the terms expressly displace that default and subject to the exceptions below.

The same framework prohibits discretionary distributions satisfying a support obligation the trustee personally owes another person, unless the terms expressly displace that default and subject to the same exceptions.

These defaults do not apply to qualifying marital deduction powers held by the settlor's spouse serving as trustee, periods when the settlor may revoke or amend, or trusts whose contributions qualify under section 2503(c).

For a power restricted by these defaults, a majority of remaining trustees whose exercise is unrestricted may exercise it. If every trustee is restricted, a court may appoint a special fiduciary authorized to exercise it.

These state defaults do not replace the federal power classification analysis or establish a federal estate tax result.

Creditor access and overdue payments

In Minnesota, for example, a beneficiary's creditor cannot compel a discretionary distribution, with or without spendthrift terms, even when discretion follows a standard or has been abused. Other states differ.

The beneficiary retains a judicial remedy for abuse of discretion or failure to follow a distribution standard.

For a trustee or cotrustee whose self distribution discretion is limited by an ascertainable standard, creditors have only the access they would have if the beneficiary were not serving in that role.

Valid Minnesota spendthrift terms restrict both voluntary and involuntary transfers through express restrictions or manifested intent. “Spendthrift trust” or similar wording suffices.

A beneficiary cannot transfer an interest contrary to valid spendthrift terms, and a creditor or assignee cannot reach the interest or a distribution before the beneficiary receives it.

A valid disclaimer or exercise of a limited power of appointment is not a voluntary transfer for this purpose.

Even with spendthrift terms, a creditor or assignee may reach a mandatory distribution withheld beyond a reasonable time after its designated payment date, including a required distribution at termination.

For counsel's review, distinguish a request for a discretionary payment from an overdue required payment.

Two related terms

Ascertainable standard: A standard that limits distributions by reference to health, education, maintenance or support.

Power of appointment: Authority to designate who receives specified property, within the limits of the instrument creating the power.

A perspective on understanding family priorities

Before discussing distribution language, take time to explain your family's priorities and listen to the people involved.

"take your time get to know these people get them get that get a chance to really Understand what they do Their mission statements for their families and that sort of thing"

Common questions