Probate & Trust Law Section Conference Manual ... - Minnesota CLE

The following examples show some of the pros and cons of provisions that emphasize
certainty at the expense of flexibility, and vice versa:
Certain Middle Ground Flexible
Pay to my daughter, Mary, from
income, and to the extent income is
insufficient, from principal, the sum
of $25,000 annually.
This provision provides
little room for interpretation
or disagreement. The
trustee simply will
distribute the set dollar
amount to the beneficiary
each year.
This provision also creates
substantial risk of failing to
achieve the testator’s goals
if Mary’s needs change or
if the value of the trust
assets changes
significantly. At a
minimum, the amount
could be adjusted for
inflation.
The $25,000 distribution
will be subject to creditor’s
claims once distributed to
Mary, but future payments
may be protected with a
spendthrift clause and
principal will be protected.
Pay to my daughter, Mary, in annual
or more frequent installments, all of
the net income of the trust and such
amounts of principal as the trustee
shall determine appropriate for her
health, education, support and
maintenance.
Requiring all income,
instead of a dollar amount,
will adjust the distribution
for changes in the trust
assets.
Allowing distributions of
principal will give the
trustee discretion to make
additional distributions if
needed by the beneficiary.
The power to invade
principal also gives the
trustee greater investment
flexibility without the need
to adjust between income
and principal.
Principal of this trust will
be vulnerable to claims of
creditors to the extent they
can show the beneficiary
needs the principal for
“support” (e.g., Medical
Assistance).
There is a risk that Mary
and the trustee (or the
remainder beneficiaries)
will dispute the proper
amount to be distributed.
Pay to my daughter, Mary, such
amounts from principal or income as
the Trustee in its sole discretion
shall from time to time determine
advisable in the Trustee’s sole
discretion.
This provides maximum
creditor protection, because
the beneficiary has no right
to demand any amount
from the trust.
It also provides maximum
ability to address changing
circumstances.
One problem with
maximum flexibility,
however, is that it also
creates the greatest risk that
the trustee will distribute
more or less than the
testator would have wanted.
This language creates great
potential for disagreement
about the appropriate
amount to distribute, but
actually may limit the risk
of litigation because the
trustee’s decisions will be
very difficult to overturn.
Further guidance to the trustee regarding distributions is common to either clarify the
grantors intent with respect to distributions from a trust.
This may be clarifying guidance such as “to assist the beneficiary in purchasing her first
home” or “to assist the beneficiary in starting a business or establishing a vocation”.
Alternatively, language may establish parameters for the trustee in exercising discretion
such as “such amounts from principal as the trustee determines necessary to assist the
beneficiary with medical or other emergency needs” or “to provide for her undergraduate
education.”
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