Sometimes language contained in wills and trusts can be misleading to the lay person.
For example, while they are good for a chuckle, provisions in wills that unequivocally and forcefully direct the executor to hire a certain lawyer in connection with the testator’s estate’s administration are unenforceable. Who would believe that such will provisions usually direct that the executor hire the lawyer who drafted the will?
As my colleagues explain, “exoneration clauses,” which are provisions in wills and trusts that purport to provide ironclad insulation from liability to an executor or trustee, are “not all they are cracked up to be.”
What about a trust that grants the trustee “absolute discretion” to make distributions? What do those words mean to a beneficiary who is seeking a distribution?
As the New York County Surrogate’s Court held in Matter of Hammerschlag, NYLJ April 26, 2013 at p.37, the broad grant of absolute discretion to a trustee to make distributions is “not unbounded.” The court explained the well-settled law that a court is empowered to review the exercise or non-exercise of a discretionary power (such as the absolute discretion to make distributions of principal and income from a trust) conferred upon a trustee so as to prevent any abuse in the exercise of that power.
In Hammerschlag, a beneficiary of a trust sought to compel trust distributions. The beneficiary alleged that she was in dire straits, homeless and with no means of support. She asserted that the trustee improperly exercised his absolute discretion when he declined to make distributions. Specifically, the beneficiary argued that the trustee merely relied on information (or misinformation) received from her estranged mother in deciding whether to make distributions – that he acted arbitrarily and without appropriate inquiry into relevant circumstances. The trustee argued that he was acting in good faith and desiring to preserve trust assets, guarding against the beneficiary’s improvidence. The court scheduled a hearing on the issue of whether the trustee failed to exercise his independent judgment or adequately evaluated the beneficiary’s needs in good faith before exercising his absolute discretion and refusing to make distributions.
Matter of Mark, C.H., 83 Misc 3d 363 (Sur Ct, New York County 2012), provides an example of what the New York County Surrogate’s Court viewed as an indefensible attempt to rely on the broad grant of “absolute discretion.” In that case, at trust beneficiary was one of the most vulnerable among us, suffering from profound disabilities. There, Court first observed that the trust at issue empowered the trustees with absolute discretion to withhold or pay out income, and, in the event of an income shortfall, to pay trust principal for the “care, comfort, support and maintenance” of the beneficiary and his descendants. Then the Court found as follows:
The trustees left [the beneficiary] to languish for several years with inadequate care, despite the fact that the [trust] had abundant assets. In so doing, the trustees failed to exhibit a reasonable degree of diligence toward [the beneficiary]. Courts will intervene not only when the trustee behaves recklessly, but also when the trustee fails to exercise judgment altogether (“even where a trustee has discretion whether or not to make any payments to a particular beneficiary, the court will interpose if the trustee, arbitrarily or without knowledge of or inquiry into relevant circumstances, fails to exercise the discretion”) (citation omitted). That is, sadly, precisely what occurred here.
Absolute discretion is the broadest grant of discretion, and courts are deferential to a trustee’s exercise of such discretion– courts do not lightly substitute their own judgment for that of a trustee. However, in exercising absolute discretion, a trustee must not act arbitrarily, but must use his judgment and act in good faith with knowledge of or inquiry into relevant circumstances. In a case like Hammerschlag, the trustee’s decision-making process is critical. Was the decision to decline to make distributions arbitrary or the result of a process of consideration and the exercise of the trustee’s independent judgment, or was it arbitrary and made without consideration or inquiry?