The WAY to WOW Shows
Avoid Disputes over Trust Distributions
April 1, 2024
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[0:00] States weekly I'm your host Kevin bemel and we are here every Monday at 10:00 a.m. Pacific time to talk about matters relating to both estate planning for individuals or for professionals helping them as well as settling Estates and trusts dealing with probate all of those issues and um we we cover really the the broadest range of topics to help you understand and how to deal with um ensuring as much as one can what you

[0:36] know that your your financial Legacy and really your legacy in general uh happens in in the way that you wanted so just um before we get into today's topic I was reading a post on LinkedIn earlier and the U the person who who who posted it um Wasing saying that you know you shouldn't rely on a will um because a will has to go through probate and that means um the the court is going to get to

[1:11] decide what happens um and that the only way the only real way to ensure that you that that what you want to happen will happen is is to do a trust well uh you know in general um I agree with that however I would never State the case that categorically first of all um if you have a will and it's well done and it's well thought out while the court is over going going to oversee the

[1:47] probating of that will it's going to do so according to the terms of the will so that won't necessarily mean that somehow the court is going to get in the way of of getting done what you want done um on the other hand the idea that a trust will absolutely ensure that your wishes are carried out after you die I think is also not true you know no trust can be written that tightly um the trustee will all or the

[2:23] trustees will always have some discretion and and the reality is the execution of your plan under your trust is going to rest largely on the Fidelity that your trustee feels to making sure that your wishes are carried out now to the extent that the trustee does not know you particularly well so that's going to be harder to do um because they're going to be in many cases guessing as to what your intentions are

[2:59] so uh I like I said I in in general a a trust probably is a better document um foreseeing to it that your wishes are carried out if only because you do avoid having to go through Pro probate and so um the the you won't you know your estate won't be bearing the costs Etc as we've discussed many times the idea that probate automatically means your wishes will not be carried out and a trust automatically means they will be it's it's it's just not that definitive um

[3:36] you know this is human endeavor and so we can plan as as as well as possible um but in the end I think we have to get comfortable with the idea that once we're gone so you know things may not happen exactly the way we would wish them to happen so just kind of a little you know side commentary um based on something I I read today um I I do think that that belief is is probably um more common than um it ought to be um and and

[4:11] there's there's a bit of um shall we call it marketing there um as opposed to really helping people understand um the task at hand and and the challenges to to meeting what they they want to do so we're going to be talking about a subject as it turns out I didn't I didn't even think about this before I I got onto that little you know side topic but our topic for today I think will will relate to what I was just talking about we're going to talk about um how trustees

[4:49] guidelines for trustees and beneficiaries um in making or and or well in receiving and making distributions from a trust so so I did put together a um a a short PowerPoint presentation uh you know I I look at other podcasts and um and other shows and they tend I guess not to do um you know PowerPoints as often you know I I come from a um a pedagogical background I don't want to say an education

[5:24] background that that carries a a different connotation to it but you know seeing and hear hearing information helps us retain it better and so that's why I like to do these um I part of it too is is an outgrowth of my um time in the military where you pretty much didn't do a presentation in the military without a PowerPoint so you know it's uh it's an occupational hazard having said that if you're just listening to this you're not not seeing the visuals um you know I think you'll you'll still get a lot out of it and you can always go to our YouTube channel and

[6:01] and review the slides if you care to to get a refresher so trust distribution guidelines um and and we're going to be talking about this both as I said from beneficiaries and from trust the trustees standpoint so um a reminder as I always do the way to wow shows are all based on the three pillars of attainment and uh T the Today's Show trust and Estates weekly generally deal deals with the finances Realm of the Pursuits pillar but it also gets into relationships both friends and family

[6:37] and and even God in the sense that sometimes when we're doing our estate planning we we want um our our church our synagogue our religious denomination to somehow um benefit from from our passing um and I think there's also an aspect of Self in this as well okay so let's let's first let's start out by talking about guidelines for beneficiaries if you're the beneficiary under a trust um and and just you know a a one minute refresher because we've talked about trust many times on on the

[7:13] show so a trust is a is a basically a an entity that's created by a a document the trust document and it has um a grantor which is the person who creat the trust also known as the trust store typically it's their uh assets that are funding the trust there is a beneficiary that is the person who's receiving the benefits of the trust um typically some kind of income Andor

[7:49] assets and then there's the trustee which is the person or there could be more than one trustee who's responsible for administ ating the trust now some people would say manage the trust that's not NE that's not I think administrating is probably a more accurate term um but if you say they manage a trust that's that's fine um you won't get a big argument from me okay now in the beginning the um the grantor the beneficiary and the trustee may all be

[8:24] the same person okay especially in a living trust um while it's while it's revocable um once once a trust um uh once I I should say the uh the grantors under a living trust die so now it becomes irrevocable and um since they're now gone um the parties they'll always remain the grantors even though now they're deceased but they'll be different trustees if they were the trustees formerly and the beneficiaries will now be whoever succeeds to be the

[8:59] beneficiaries under the trust okay so the beneficiaries are the people receiving the income and assets of the trust depending on you how it's written okay so guidelines for beneficiaries with respect to distributions so number one know the trust document now I'm going to talk first of all about adult beneficiaries I'll talk about miners um later in in in the show okay but for right now we're talking about adult beneficiaries that would generally be people 18 years of age or

[9:35] older and presumably they they have uh competence meaning they can you know they they're able to handle their own Affairs etc etc and so even though trust documents can be a little bit complex and and sometimes somewhat opaque um it's it's to your benefit as a beneficiary to read the trust document and make sure that you understand what it's saying you don't need to memorize it or go to you know to those kind of lengths but you should know generally what you know what are the terms under which you're a beneficiary what are you

[10:12] entitled to receive according to the trust um and uh you know how much uh how much Authority does the trustee have etc etc so that's the first step is is to understand if you will the rules of the game so because the trust document determines how the trust is going to work that that's what matters okay so a hundred other trusts could work completely differently than the one for which you're a beneficiary doesn't matter um as long as the the trust is

[10:49] not purporting to do something illegal um the trust document is going to govern and and and that's the bottom line next you want to have a relationship ship with the trustee so you know again the the amount of authority the trustee has will depend on what it says in the trust document okay um but in in any event um you're the your your best policy if you will in in in um having having distributions work the way

[11:24] you want them to is to establish a relationship a relationship of trust with the trustee okay now that goes hand inand with respecting his discretion so no matter how tightly a trust is written in the end the trustee is going to have some discretion okay and so understanding the breadth of that discretion will help you in terms of maintaining a harmonious relation ship with the trustee so to

[12:02] give you an example I'm I'm a successor trustee in a trust where um the beneficiary um I'm sorry where the the current trustee has um limited Discretions so when she makes distributions on behalf of the trustee they can't be for um certain um religious reasons okay now why that was set up that's that's the way the gror decided to set it up okay

[12:38] so um one of the challenges that the uh trustee has is essentially making sure that she doesn't overstep her discretion okay and one of the issues the trustee has is understanding that um the uh the trustee cannot make dispersements or distributions for the for that particular reason okay and so to ask her to do so or insist that she do so it it's just she's not able to do

[13:15] it all that's going to do is make the relationship more difficult okay um now the flip side is if the trustee does make a distribution that is out outside of her discretion so now the beneficiary is in a position to challenge what the trustee has done okay and that's part again of knowing the trust document and having that relationship and understanding the discretion so respecting the trustees discretion is not the same thing as allowing the

[13:52] trustee to exceed his discretion okay um and in this particular trust there is some question as to um whether that's that's happening or not right so this is how these kind of things sometimes end up in court okay one of the problems is well I'm I'll talk about that when I get to the next one trustee so I'll get back to that example in a minute okay so for beneficiaries now going back to beneficiaries provide documentation okay so let's say that the

[14:29] beneficiary thinks that the trustee um exceeded his discretion okay so rather than just saying you know you've exceeded your discretion blah blah blah I'm gonna sue you I mean you can certainly do that of course but it's not going to be very productive uh in most cases so knowing the trust document a better way to do it would be by taking an excerpt of the trust document that shows that that particular distribution is outside of the trustees discretion and and you know sending an

[15:06] an email or a letter to the trustee saying I you know I from from the information I've received a a distribution was made for the following purposes this would appear to conflict with you know section such and such of the trust document a copy of which is attached uh and so please um provide me with an explanation as to you know what what transpired and and uh and and what your justification is okay so while that's certainly a challenge to the trustees

[15:42] discretion it's done in a polite way um and and in a way that is you know more likely to um result in in a a a you know a proper uh resolution okay now the resolution in that case might be that um the trustee has to get that distribution back from the party to whom it was distributed um or the trustee may be required to repay that money since it exceeded his discretion okay and here's where you're going to want to you may

[16:17] need to seek legal advice so you know depending on the size of um the incorrect distribution you know going to court and mitigation just may not be worth it the the dollar amount um may not be I mean if if if it was a you know a distribution of a couple hundred dollars um you know even an hour or two of attorney's time is is now multiples of that okay on the other hand letting the trustee exceed his

[16:52] discretion is is a and just and just ignoring it is a bad policy because there tend there sometimes can be creep in these sort of things right so um and you know the the um distribution needs to be challenged um and and even though um the recovery to the trust um may be less than um uh what it costs to get that recovery that that may serve to be good insurance for the future in that it will prevent the

[17:27] trustee from future and larger um distri distributions that you know exceed his discretion okay and then finally for beneficiaries beneficiaries should keep records of all Communications all um distributions the beneficiary has received um they should be receiving especially if you're an adult beneficiary you should be receiving information about distributions made from the trust that are made presumably on your behalf so because you're the beneficiary okay and and and and the

[18:02] trustee should be providing that uh to you okay so that's guidelines for Ben for beneficiaries now let's switch to the other side and look at guidelines for trustees and to a certain extent what you're going to see is kind of the flip side of the previous one okay so for trustees not only should they know the trust document but they need to comply with it okay so whereas the the beneficiary should be expecting compliance with the trust document um

[18:38] and that's why the the beneficiary needs to know it the trustee needs to know and thoroughly understand the trust document to make sure that that he's complying with its terms okay now the trustee too should oh I say I've got a I've got a mistake here should say relationship with beneficiary so the trustee should M be working to have a uh um a a um sound uh cordial relationship with the beneficiary or the

[19:14] beneficiaries okay um and that's going to require listening to them um you know taking into account um their their thoughts their concerns okay now just because a trustee listens to what a beneficiary has to say doesn't mean that the benef that the trustee has to do what the beneficiary says okay now it may be that the beneficiary wants the trustee to do something that's beyond

[19:49] his discretion so let's go back to the example I was I was talking about before where there's a a restriction on the trustee about making distributions for religious purposes if the beneficiary let's say wants uh a distribution made um to his church well the trustee does not have the um authority to do that okay but that doesn't mean that the trustees should just you know ignore the beneficiaries wishes in that respect okay it may be that that that the

[20:26] beneficiaries uh wishes can be accomplished um just not directly by the trustee so if the beneficiary is entitled to certain distributions okay so the trustee can make a distribution to the beneficiary and the beneficiary can do whatever he wants with it okay so if he wants to turn around and donate that to his church well I mean that's perfectly fine now if the trust says that the trustee may not make a distribution to the

[21:01] beneficiary if the trustee reasonably believes that that money will be used uh for religious purposes so now that that sort of workaround uh may not work nonetheless the trustee should still engage with the beneficiary about the issue and explain why the trustee is not able to comply with the beneficiary's wishes and you know and and in the end he may have to say look uh you know I I understand what you want but by the

[21:38] terms of the trust and if you look at you know page such and such section such and such um I I'm not able to do that it's it's not within my authority to do this okay now look the TR the beneficiary can use subterfuge you could say okay well you know I want to buy a car instead and okay so you make distribution to buy a car he turns around and gives it to you know his church well okay I mean there's only so much you can do that's why I'm saying that's what I was saying at the beginning we think oh well if I set up a trust it'll I'll make you know I'll be

[22:13] sure that my wishes will be um followed to the letter no no not really I mean if if people really don't want to adhere to your wishes there are ways around it and and we just have to live with that okay so next the trustee has to exercise prudent judgment okay and and and this is this is where your choice of trustee is really critical okay will the person exercise prudent judgment in

[22:49] accordance with your wishes okay that's that do do they does the trustee really understand what you intend to have happen not just what's written in the trust document because it's it's virtually impossible to write something that's so tight that there's like said as I've said a couple times already that there's there's no wiggle room at all okay and then also will will the trustee exercise prudent judgment just as someone who's administrating the trust

[23:24] are they going to take the time to speak with the benefit FCI to understand the beneficiary's point of view even if in the end um the beneficiary's argument is is unpersuasive okay so that's all part of exercising prudent judgment okay are they going to exercise prudent judgment in terms of the expenses that the trust Bears etc etc okay all of that is tied into make as well as possible you want to make sure that you choose the right person as your trustee okay next the

[24:01] trustee should document decisions so going back to the example of the situation where a beneficiary wants to make a contribution to his church the trust document doesn't allow it so the trustee declines to make the distribution okay all of that should be documented okay in in a memo to the file uh to use a legal term um and and and that again that's part of being prudent um the trustee should not be relying on his memory so that if a year from now um

[24:39] now he finds himself in litigation over his refusal to make that dispersement or that distribution now he's going oh gosh what exactly happened it should all be documented okay and kept in the file even I mean these days of course almost everything's done online so I don't NE I don't mean literally a paper file but you know draft a memorandum Word document or whatever um maybe turn it into a PDF um so that um there's a more of sort of a fixed document um and and and there you go

[25:16] okay anytime there's any kind of dispute for sure the trustee needs to do that um whether whether the dispute is about having making or made having made a distribution or refusing to make a distribution doesn't matter okay but in general any distribution that the trustee makes should have documentation so if the trustee is paying for something that should be documented in the form of some kind of invoice okay now if the trustee is reimbursing himself for expenses that he

[25:52] then he needs to issue an invoice documenting those expenses now if it's something like well so then you know he he probably doesn't have I mean he's not going to take pictures of his you know odometer something like that um but for example if he paid for parking or um if he paid an expense then he should have a receipt for that he at minimally he should have a credit card uh for that and so that should be included in in documenting that particular decision okay next the trustee needs to

[26:27] avoid conflicts of interest okay so um let's say that um so uh here's what I was talking to a um a uh wealth manager uh week or two ago and we we were talking about how um trustees will sometimes H uh have as part of part of the assets of the trust a portfolio of stocks okay now some trustees will take it upon themselves to um also be

[27:03] the wealth manager okay others will not now one has to be careful a trustee has to be careful about acting in more than one role okay because that could present a conflict of interest how so well let's say that the the trust owns some real estate and also owns a portfolio of Securities and let's say that the trust needs to generate some cash and it can do it by either selling the real estate

[27:38] or selling some Securities well if the trustee is the wealth manager and part of his compensation is coming from the the wealth management fees he may be tempted to sell the real estate in order to maintain his wealth management fee income that's a conflict of interest or at least a potential conflict of interest now it may very well be the case that it makes more sense to sell the real estate you know this isn't an actual example um but the fact that the trustee has this dual role calls into

[28:15] question whether the trustee can act objectively and in the fiduciary role that the trustee has so um the trustee needs to avoid conflicts of interest when it especially when it comes to making distributions or decisions that affect distributions and I would say too that the trustee should avoid the appearance of conflict of interest now you know that that's not a bright line um but but in the end the trustee needs to keep uppermost in his mind he's a

[28:52] fiduciary on behalf of the beneficiaries and that's what matters most okay and and so this gets down to the last item get professional advice to the extent that they're you know doing something might be a conflict of interest or might might pose one or might appear as one or there's an there's an issue of do I have the discretion to do this do I have the authority to do this so the trustee may need to get professional advice and in fact um if it gets particularly hairy um the trustee may decide to seek a court

[29:28] order um and and although trusts generally speaking are ad administered administered outside of the Court's Jurisdiction in a very difficult situation it may be necessary to go to court to make sure that things that that there's essentially uh uh you know the judge is saying this is this is being done correctly on the part of the trustee okay now let's talk about dealing with minors so de dealing with a minor someone under the AE generally under the age of 18 okay that's going to

[30:04] add some additional issues for the trustee kind of for the minor as well although the minor typically is not going to be acting on his own um there's there's going to be a parent or a guardian there okay and and so um these these are some additional issues to keep in mind um when you're dealing with distribution first of all what may be appropriate for uh you know what may be an appropriate thing to do for a minor who's 10 years old may

[30:41] not be appropriate to do for a minor who's 17 years old okay those you know those very different levels of maturity different age different needs okay so for a trustee who's dealing with a minor okay the needs age and maturity of that minor need to be taken into account and need to be revised as the minor gets older and becomes more mature okay so while the second one is true the the trustee always needs to act in the Minor's best interest okay that what is

[31:20] in the Minor's best interests will undoubtedly change over time now let's take a situation where at a certain point in time the minor is going to be entitled to all to a distribution of all the Assets in the trust okay you know I I have a trust where um the I think the it's it's a the beneficiary right now is a minor um but I believe she's entitled to full distribution of the assets when she turns I want to say 23 okay so when she was you know much

[31:57] younger 10 12 13 years old you know it it was fine for the trust to be managed on her behalf um and in her best interest but as she gets closer to being 23 years old how things are handled need to be explained to her in much more detail in order to prepare her to take over that function because she's she's going to take over those assets and so she needs to learn how to handle them appropriately and so um that I would

[32:33] argue that that's part of acting in the Minor's best interest okay certainly keeping her informed um she's a teenager now is much more important than it was when she was a child or or a pre-teen okay and and so acting in the Minor's best interest at at this point as a teenager um I would argue entails talking to her about decisions even though she may not make the final decision still she needs to be consulted so she gets used to um thinking about

[33:11] financial decisions looking at the various issues involved and being able to make a good decision on her own okay another issue for minors is you need to balance current needs with future growth okay so um I've got a a another trust situation where um this is one where I'm a successor trustee I I think the the actual trustee is trustee is not looking um at the future growth and needs of of

[33:46] the minor trustee um she's very much focused only on current what she views as being current needs um and so there's potentially a big spute Brewing there um you know we'll see um but um in in in any event um those two need to be balanced out so um especially if the minor is entitled to the assets at some future time imagine how she might feel finding out oh well that you were entitled to all the assets when you turned you know um 20 but but they're

[34:23] all gone so you know too bad for you um you know that that could cause a lot of resentment or Worse okay next um with whereas with when you're dealing with an adult beneficiary you're you're going to want to be communicating with that that beneficiary when you have a minor beneficiary there are going to be other interested parties like I said a minute ago Guardian parents Etc now here's one of the challenges of dealing with

[34:58] minor parents May view the Minor's best interest differently than the trustee does and so they may be you know asking or demanding for a distribution for their child that really is for their benefit not for the minor benefit and so this is why doing your best as a trustee to be to be able to communicate with parents Guardians whoever other interested parties is is important um and so that they understand that um

[35:34] you're always going to act in the Minor's best interest and um if if you get a sense that what you're being asked to do um violates that tenant you're going to have to decline okay now that goes somewhat related to complying with legal requirements so when a minor is involved involved um it is more likely that um a court could be called in to oversee um the Minor's best interests okay and and

[36:09] especially if there's a guardian um um so that there are legal issues there um and you know there are parental rights although they're they're less clear I would say than a Guardians rights because in in the case of a guardianship usually those are enumerated okay but the the trustee needs to be aware of all of these aspects in order to make sure that he's acting in accordance with the Minor's best interest which is his core responsibility okay so that does it for

[36:45] today I think yep here we go so these links will be in the show notes if you have any questions or comments feel free to drop them in um in the in our social media you can always send me an email okay here's our legal stuff there you go I'm going to go ahead and close this out and come back okay so you you can see that this issue of making distributions uh it's it's not com it's not straightforward at all it's it can be very complex uh and but it is it does get to the core of being in a

[37:21] fiduciary uh a position of fiduciary responsibility that of a trustee okay as a beneficiary while you're entitled to distributions the rarely is it the case that you know they're available to you on demand there are certain restrictions um that that have to be dealt with and so it's it's good for everybody concern to understand the context understand the rules of the game so to speak to make sure that harmonious relations are maintained so thank you very much for joining me today and just uh real

[37:58] quickly for tomorrow at 10: a.m. Tuesday business lessons from the military um we're going to talk about the idea of having some kind of training Evolution that will help you build a spree a core in your business this is one of the things the military does uh well on the one hand it does it really horribly on the other hand it does it quite well so I'm going to give you two examples one from each of those extremes um and you'll I I think you'll see the uh how this translates to the

[38:34] business World pretty well and then on Wednesday is people making money and we're gonna we've been talking about various real estate subjects for the last couple of weeks we're going to continue in that vein going to talk about types of leases and this may sound um kind of getting into the weeds but if you're going to do any kind of real estate investing even if you're not going to do direct investing but you're going to buy into re a real estate investment trust or a partnership you're going to want to

[39:09] know this information so you can understand the basis for the income that the property is generating so I invite you to join me at 10 o'clock Pacific time on Wednesday to talk about types of leases and then of course a week from today on next Monday we'll be back for the next episode of trust and estate weekly so thanks so much for joining me appreciate it and one wishing you a wonderful rest of the day and signing off Marie darling you are my bell all the best folks