Archive for October, 2009

A. Trust Distribution Issues

Undoubtedly, one of the trustee’s most important duties is to make distributions to beneficiaries in accordance with the settlor’s wishes as expressed in the trust instrument. This will often require the prudent exercise of discretion to provide income and principal payments to one or more beneficiaries, in accordance with the trust instrument. The trustee must be loyal and fair to all beneficiaries, both current and remainder. In addition, the trustee may have to take into account (but not necessarily be controlled by) the income tax situation of each beneficiary to assure that the overall income tax liabilities for the trust and the various beneficiaries will be minimized to the extent consistent with the settlor’s objectives.   If the trustee does not follow the terms of the trust instrument, or provisions of the law, then there is risk

1. Sanctions for Improper Distributions

If the trustee makes an improper payment, even if it was an honest mistake, there is liability.   Therefore the beneficiary may successfully sue the trustee for the improper distribution, depending on the circumstances surrounding that distribution.  Trustees are duty bound to treat beneficiaries fairly, make proper distributions, provide accountings, etc.  If any of these duties are violated, the trustee is in violation of the law, and therefore liable for damages, which might include restoring the financial value of the trust.  What this means is that the trustee has to be careful that any distributions proposed are consistent with the terms of the trust and also the law before being made.

2. Withholding or Postponing Distributions

The UTC and the Restatement prohibits a trustee from withholding distributions to which a creditor or other transferee of a beneficiary’s interest is entitled.  Before withholding distributions from the trust, trustees should ensure that they have a legally defensible reason for doing so.

b. Preventing Distributions For Asset Protection Purposes.

When creditor protection is important, such as in cases where the trust instrument has a valid and enforceable spendthrift provision, the trust itself would provide the trustee with the legal basis for withholding otherwise mandatory distributions, if the trustee, in the exercise of the trustee’s sole and absolute discretion, should deem the distributions to be adverse to the beneficiary’s interest because there exists a creditor problem at the time that the distribution would otherwise be made. The beneficiary’s interest is reinstated after the disqualifying event has passed or has been resolved. This suspension protects against creditors’ claims, provided that the trustee’s power to suspend distributions is absolute and not just a condition limiting the time or manner of payment.  The trustee should ensure that the spendthrift provision gives them the appropriate level of control over trust assets before making such an important decision.

C. Appropriate Screening by the Prospective Trustee

Each individual or corporate fiduciary that is considering an offer to be a trustee under a particular trust should fully assess the situation before agreeing to serve.  Careful review of the trust documents might highlight potential pitfalls that should be discussed with the settlors prior to that agreement being made.  Some of the things to look for can include: ambiguities, inconsistencies, potential tax problems, and potential conflicts of interest, as well as trustee fees.  Further, the potential trustee should learn as much as possible about the beneficiaries of the trust, including their family history and familial relationships.   Doing the appropriate level of due diligence might avoid potential future problems.

A potential future trustee and the settlor can and should seek the advice of their professional counselors in order to consider and address all these issues, prior to proceeding with legally enforceable trusts.

Do you want to create a trust?  Are you considering being a trustee or successor trustee?  If so, please contact the Law Offices of Daniela Lungu at (925) 558-2710 or email for a complimentary assessment of your legal needs.

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About Daniela Lungu, Attorney at Law

Daniela Lungu, founder of the Law Offices of Daniela Lungu, devotes her law practice to asset protection through estate and business planning. Ms. Lungu’s goal is to provide the people of the Bay Area and California with the highest quality, and most personalized legal services possible. Her attention to detail and a high level of communication with her clientele distinguish her from other attorneys in the field.

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