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

age and the child or grandchild could serve as a co-trustee of the Trust. The
other co-trustee would typically be given the discretion with regard to
distributions of principal and income in connection with the trust’s incentive
provisions. This type of trust may be used to extend a § 2503(c) trust as
well. As counsel for our clients, it is important that the trust beneficiary
understand that the lawyer represents the parent or grandparent and not the
beneficiary.
C. Pot/Individual Trusts. Pot trusts and trusts established for
individual beneficiaries are commonly used to support behavior that our
clients want to emphasize. In particular, these trusts may contain specific
incentive provisions but commonly will provide for distributions of income
and principal at the discretion of the trustee. They are also commonly used
for education, health, maintenance and support. Unequal distributions are
commonly permitted.
D. Dynasty Trusts. Dynasty or generation-skipping trusts will
generally include distributive provisions that grant the trustee great latitude
with regard to the distribution of both income and principal. Clients who are
interested in certain incentive trust provisions may also have some firm ideas
regarding limitations on the types of investment the trustee can make. It is
very important to carefully select any objective qualifications so that
beneficiaries may be able to meet the criteria and qualify for distributions. It
is equally important for the client to clearly express a client’s intentions in
order to provide clear direction to the trustee. During the consultation and
drafting process, the client should be encouraged to review several possible
situations to make sure that 1) the trustee will have the appropriate
information in order to properly administer the incentive/disincentive
provisions; 2) the burdens on the trustee and the beneficiary to administer
the provision do not exceed the prospective benefits; 3) the tests or
qualifications are very clear so that disputes between the trustee and
beneficiary can be avoided; 4) any disputes that arise can be resolved
without resorting to litigation; and 5) the beneficiaries will not be able to
manipulate the incentive/disincentive provisions in order to achieve results
that are contrary to the purposes of the trust. Clients must be encouraged
to thoughtfully consider the objectives of the trust and restrictive provisions
that might be necessary or appropriate.
E. Trustee Indemnification. In order for discretionary trusts to
work properly, it is imperative that the client provide the trustee with every
appropriate protection so the trustee can exercise discretion as intended by
the client. State laws may not provide adequate protection in connection
with the exercise of discretion by trustees. For example, South Dakota law,
specifically SDCL 55-1-43, provides that a discretionary interest is neither a
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