What Can Trustee Do About Difficult Beneficiary?
I am trustee for a 65-year-old sibling. There are two remainder beneficiaries who are my adult children. My sibling has not shown the ability to handle his finances wisely, thus my parents created a trust for him. I have managed the trust for nine years, but the hostility from my sibling towards me is to the point where I no longer wish to keep this arrangement. I am required to distribute 3% of the trust each year and have absolute discretion to distribute more. My thinking is to make an outright distribution to him of trust assets in return for him agreeing to a settlement where 50% of the assets are distributed to me for my children. If he agrees to this proposal, we would have an agreement drawn up by an attorney with provisions that he understands the consequences if he were to mismanage his distribution and holds me harmless if he were to lose this money. Would such an arrangement be a violation of my fiduciary duty? I just want to be done with his constant demands. I feel if I were to appoint another trustee for him that the trustee might distribute everything outright to him and the remainder beneficiaries would be cut out which was not the intent of my parents.
Categorize your situation under no good deed goes unpunished.
My first reaction is that the better course of action is to resign and appoint a new trustee. Your parents created the trust due to their understanding of your brother’s nature. When they took that step they no doubt understood that if your brother’s needs required full distribution of the trust property your children would receive nothing. On the other hand, your brother’s badgering could cause the trustee to distribute more than is arguably necessary under the terms of the trust and if the new trustee charges by the hour the high cost of dealing with your brother could further erode the trust principal. So, all things considered, I think what you propose is reasonable.
There are three possible ways to do this depending on your state’s law: trust reformation, decanting, and nonjudicial settlement agreement. The last most closely resembles what you have in mind, an agreement signed by you and all the beneficiaries. The problem is that state statutes may limit the types of change this approach may encompass. Here’s a short primer on each:
- Trust reformation requires court approval. It generally allows for more expansive changes than those allowed by nonjudicial settlement agreements. While the cost is greater, it also insulates you from any further challenges since you would have the imprimatur of the court.
- Decanting involves transferring the funds to a new trust that better accomplishes the purposes of the original trust. It does not seem like this fits what you’re hoping to do.
- Nonjudicial settlement allows you to make the changes you describe without going to court. But depending on state law, it may only be permitted for certain purposes. By way of example, here are the purposes permitted under Massachusetts law (M.G.L. Chp. 203E, Sec. 111):(1) the interpretation or construction of the terms of a trust;
(2) the approval of a trustee’s report or accounting;
(3) direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power;
(4) the resignation or appointment of a trustee and the determination of a trustee’s compensation;
(5) transfer of a trust’s principal place of administration; and
(6) liability of a trustee for an action relating to the trust.
It looks like you may be covered under the last provision, since it would relieve you of liability for making the distributions you are contemplating.
You will need to consult with a local trust and estates attorney to learn what the laws and practices in your state permit. If you go with a nonjudicial settlement agreement make sure that your brother is advised to get his own counsel. The risk is that he agrees to the deal and then comes back later when the money is all gone and say you violated the terms of the trust since your parents created the trust to protect him from himself. It will be much more difficult for him to make this claim if he is represented by counsel.