Beneficiary Distribution Requests under Texas Trust Law: A Potential Minefield for the Trustee

Originally published by Paul Romano.

Trust documents impose various limitations on the ability of a trustee to distribute trust assets to beneficiaries, depending on the specific terms of the trust. In all cases, a trustee is required by Texas law to act reasonably in the context of the specific trust being administered. In a worst-case scenario, however, “reasonably” functions as the ultimate “weasel word” that triggers an avalanche of litigation.

A trustee can reduce the odds of expensive, time-consuming, and potentially dangerous trust litigation by clearly understanding the risks involved in administering a trust and by making decisions with these risks in mind. No matter how careful you are, the risk is never zero. The best you can hope for is to minimize that risk.

The Source of Your Duties as a Trustee

Your legal duties as a trustee derive from three principal sources:

• The terms of the trust instrument;
• The Texas Trust Code; and
• Court decisions interpreting the Texas Trust Code.

If any of these three sources conflict, the terms of the trust instrument usually (but not always) prevail. It is important that you consult with an experienced Sugar Land trust lawyer before you move forward in the face of any apparent conflict between these three sources of trust law.

Your Fiduciary Duties

As a trustee, you are held to higher standards of conduct than the average person is – at least with respect to the administration of the trust. Texas imposes the following “fiduciary duties” on a Texas trustee. Keep in mind that these duties are “implied in law.” That is, they apply even if they are not mentioned explicitly in the trust document.

• Duty of loyalty: You must manage trust assets for the sole benefit of beneficiaries. Self-dealing is prohibited, and you must avoid both actual and apparent conflicts of interest.
• Duty of care and skill: You must exercise the care and skill that a “reasonably prudent investor” would exercise with respect to trust property.
• Duty of impartiality among beneficiaries: You may not arbitrarily favor one trust beneficiary over another.
• Duty of non-delegation: Although you may seek legal, accounting, or investment advice from professionals (and under certain circumstances you are obligated to do so), final decisions must be made by you.
• Duty to keep accounts: Texas trust law requires a trustee to keep accurate accounts of trust property.
• Duty to supply information: “First tier” beneficiaries 25 and over have the right to examine trust property and accounts along with certain documentation related to trust property. You must keep these beneficiaries informed about the state of the trust.
• Duty to maintain control of trust property: You must obtain and maintain control over trust property by titling bank accounts in the name of the trust, for example, and by maintaining possession of critical documentation and instruments.
• Duty to manage trust property: You must manage trust property with a high level of care and skill.
• Duty to enforce trust claims against others: You must take enforcement action to collect claims that belong to the trust such as rent owed by tenants living in trust-owned real estate.
• Duty to defend trust assets against claims asserted by others: You must take reasonable steps to defend trust assets against claims asserted by others. This duty might include defending against a third-party claim or against an unreasonable claim asserted by one beneficiary (in order to protect trust assets for the sake of other beneficiaries).
• Duty to keep trust property separate: You may not co-mingle trust assets with your own assets; neither may you co-mingle trust assets with the assets of another trust except for certain types of joint investments.
• Duty to prudently select and manage trust bank accounts: You might get into trouble by depositing trust funds into an account that imposes unreasonable restrictions on withdrawal, for example, or by depositing trust funds into accounts that do not bear interest for long periods.
• Duty to make trust property productive: Merely refraining from investing trust assets into risky ventures is not enough to satisfy your fiduciary duties. You are expected to invest trust assets under most circumstances, but you must do so prudently.

Prudent Management vs. Beneficiary Distribution: The Balancing Act

The trust may have been created to provide for the beneficiary’s “health, education, maintenance, and support.” Such a cause establishes a duty to make distributions to the beneficiary. This duty must be balanced, however, against:

• The general duty to prudently manage trust assets
• The duty to protect trust assets for the beneficiary’s future benefit (which might preclude a large distribution at the present time, even if circumstances would otherwise justify it)
• The duty to protect trust assets for the benefit of other beneficiaries
• The duty of impartiality among beneficiaries

“Absolute and Uncontrolled Discretion”

The trust instrument might purport to grant you “absolute and uncontrolled discretion” over beneficiary distributions. Don’t take this to heart. Your fiduciary duties are still implied in law, which means that you are obligated to act reasonably. Another way of putting it is that Texas trust law will not allow an “absolute and uncontrolled discretion” clause to be interpreted literally.

Factors that should be taken into account when determining the size and frequency of beneficiary distributions include:

• The overall value of the trust
• The liquidity of the trust
• The anticipated future appreciation of trust assets, both with and without making the distribution in question
• The number of beneficiaries and their respective needs and entitlements
• The requesting beneficiary’s age, life expectancy, and state of well-being
• The beneficiary’s present needs
• The beneficiary’s anticipated future needs
• Other resources available to the beneficiary
• Other reasonable considerations.

In other words, there is no formula that can tell you exactly how to respond to a given distribution request – it’s a judgment call.

Contact the Professionals

If you are considering drafting a trust instrument, if you are a trustee who is concerned about your liability or who is already involved in a dispute, or if you are a trust beneficiary who believes you are being treated unfairly, you need to speak with a Sugar Land, Texas trusts and estates lawyer immediately.

At Romano & Sumner, we serve Sugar Land clients in Mayfield Park, Ragus Lake Estates, First Colony, Sugar Lakes, and throughout Fort Bend County. Contact us today to schedule a free initial consultation where we can discuss your concerns. We can be reached at (281) 242-0995 or though our online contact form.

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