June 17, 2013

To Consider or Not Consider A Beneficiary’s Other Resources

by Rebecca Klock Schroer

There is often debate as to whether Colorado follows the Restatement (Second) of Trusts or Restatement (Third) of Trusts.  One area where this is particularly relevant is a trustee’s duty to consider a beneficiary’s other resources when determining whether to make a discretionary distribution.  When the trust language is silent, the Second Restatement provides that the beneficiary’s other resources do not need to be considered.  The Third Restatement generally provides for the opposite inference, but with several qualifications.

Specifically, the Restatement (Second) of Trusts, § 128, cmt. e (1959) provides the following: “It is a question of interpretation whether the beneficiary is entitled to support out of the trust fund even though he has other resources. The inference is that he is so entitled.”

The overall presumption under the Third Restatement is that the trustee is to take the beneficiary’s other resources into account in deciding whether to make a discretionary distribution, unless the settlor’s intent will be better accomplished by not doing so. Restatement (Third) of Trusts § 50, cmt. e (2003).  In the same comment, the Third Restatement lists several qualifications:

  • First, if there are other resources that the trustee readily knows about, such as mandatory distributions of income from the same trust or payments from another trust that is part of a coordinated estate plan, such resources should be taken into consideration. 
  • Second, if the settlor or decedent identified a period of time during which the beneficiary was not expected to be self-supporting, then the inference is that the trustee should not deny discretionary distributions. 
  • Third, the trustee’s consideration of other resources may have a bearing on the overall reasonableness of the trustee’s exercise of discretion even when there are nonobjective distribution standards such as “benefit” and “happiness.”
  • Finally, the grant of extended discretion to the trustee (e.g. “sole” and/or “absolute” discretion) does not necessary imply one way or the other, but may suggest that the trustee has greater latitude in exercising discretion.

Many trusts include language that helps guide the trustee in determining whether to consider a beneficiary’s other resources.  For example, “only if and as needed to maintain an accustomed standard of living” suggests that the trustee should take other resources into account. Restatement (Third) of Trusts, § 50, cmt. e (2003).  Although the Third Restatement provides that the phrase “necessary for support” does not alone imply that the trustee should consider other resources, the Colorado Supreme Court held that the trustee was required to consider other resources when the trustee had discretion to distribute “as may be necessary to provide him with the necessities of life.” Dunklee v. Kettering, 225 P.2d 853 (Colo. 1950). 

There is no appellate case law in Colorado specifically adopting either Restatement (Second) of Trusts § 128 (1959) or Restatement (Third) of Trusts § 50 (2003).  Therefore, trustees should carefully consider this issue.  In our experience, the trustees that are most successful in defending against abuse of discretion claims consistently apply a process when exercising discretion and document the reasons for their decisions.