Income Beneficiary Trust & Estate Challenges | California

It’s not easy to be a trustee – for a lot of reasons. Some particularly challenging aspects of the job involve trust beneficiary distribution decisions – decisions inherent to trust administration.

Trust settlors often express concern that their beneficiaries may request and/or spend inordinate amounts of money in ways that they, the settlor, if alive, might disapprove. Trustees are empowered to hold and distribute funds for the benefit of beneficiaries. This is a responsibility that can be challenging. Emotions may run high.

Third-party trustees are often viewed as interlopers by family trust beneficiaries. It’s one thing to have a parent or grandparent as a trustee, and quite another to have an out of state or in state bank, trust company or third-party individual acting as a trustee. These emotions seem particularly endemic to uncontrolled discretion trusts.

So, let’s take a look at the types of trusts used to provide beneficiaries income or principal. High net-worth settlors, desiring that their beneficiaries have long lasting income, use different options to accomplish their goal. Among them:

1. The Uncontrolled Discretion Trust.

A trust entitling a beneficiary to only so much of the income or principal as the trustee, in its uncontrolled discretion, chooses to distribute. These trusts can be problematical as a trustee may be profligate or stingy – either result being unsatisfying. The beneficiary is generally unable to compel the trustee to pay or apply anything, unless the trustee abuses its discretion.^[1]

2. The HEMS Ascertainable Standard Trust.

The trustee’s discretion is limited by a standard relating to the beneficiaries’ health, education, maintenance or support. These trusts become problematical when the trustee fails to make inquiry into the relevant circumstances of the beneficiary and because of their failure makes arbitrary decisions.

3. The “5 by 5 Power” Trust.

A “5 by 5 Power” can be a power expressly provided to the beneficiary in the trust declaration. This power allows trust’s beneficiary to make certain withdrawals. Specifically, a 5 by 5 Power (also called a 5 by 5 Clause) gives the beneficiary the ability to withdraw the greater of: a) $5,000 or b) 5% of the trust’s fair market value (FMV) from the trust each year. (FMV is the price that property would sell for at present on the open market.) The 5 by 5 Power can be customized to fit particular circumstances. It is most helpful to insure that a beneficiary gets a minimum dollar distribution.

4. The Unitrust.

California law allows for conversion of income trusts by consent or court order. With a unitrust approach the trust distributes a fixed percentage – usually 3% to 5% – of the fair market value of the principal of the trust to the current or income beneficiary. The net fair market value of each asset held in the trust must be determined no less than annually This approach allows trust assets to be invested for total returns. This allows the trustee to liquidate capital assets as needed to supplement the annual return from interest and dividends. The end goal – allow trust assets to provide sufficient income to the life beneficiary and allow reasonable growth for the remainder beneficiary.” When Uncontrolled Discretion Trusts and HEMS Ascertainable Standard Trusts go to beneficiary-trustee litigation, settlement discussions should include the utilization of 5 by 5 Power Trusts or a Unitrust.

Trust litigation is uncertain and its resolution by mediation and/or court settlement conferences is common. It helps for the parties to know their options and to have sufficient information about trust options to apply their knowledge in crafting a reasonable settlement.

Hackard Law regularly represent aggrieved beneficiaries and heirs in trust, estate, probate and elder financial abuse litigation. We take substantial cases where we think that we can make a significant difference and there is a wrongdoer who can be made financially accountable for their wrongdoing or breach of duty.

We focus our geographic practice on California’s largest urban counties, including Los Angeles, Orange, Santa Clara, San Mateo, Alameda, Contra Costa and Sacramento Counties.. If you would like to speak with us about your case call us at 916 313-3030. We’ll be happy to hear your story.

[1] Uniform Laws: Unif. Trust Code § 504(d).