A Strong Offense
A Stronger Defense
The words in a trust instrument mean something. So, too, does the absence of words in the trust instrument. Therefore, when in a trust instrument a grantor gives a trustee the authority to favor one beneficiary over another, gives broad discretion in making discretionary distributions, does not require the trustee to consider certain information in making discretionary distributions, or permits a concentration of assets, the trustee – and a court – should carefully consider those words.
In O’Riley v. U.S. Bank, N.A., a Missouri appellate court reviewed a situation where a trustee supposedly favored a grantor’s spouse over his children in making discretionary distributions and in investing trust assets.
Donald and Arlene O’Riley had two sons, Terrance and Gerald. Donald died leaving assets in a marital and a non-marital trust. The non-marital trust was the subject of litigation between the trustee and Donald’s sons. The terms of the trust provided for discretionary distributions of income to Arlene for her care, support, maintenance, and welfare. The trustee had discretion to make income distributions to the sons under a similar standard. Arlene and the sons had certain encroachment rights in the corpus. The trustee made distributions to Arlene, occasionally made but also denied distributions to Terrance, and made no distributions to Gerald. The trust was also, for some time, concentrated in income producing assets. Donald’s sons claimed that the trustee impermissibly favored Arlene.
The Missouri appellate court began its analysis by recognizing the broad authority granted a trustee when the grantor grants the trustee “sole discretion.” The grantor, however, can supply a standard by which the reasonableness of the judgment can be tested. This was the case here.
Duty of Impartiality
Terrance and Gerald contended that the trustee’s discretionary authority to distribute trust assets was subject to a reasonableness test and the trustee failed to use a reasonableness process to make distribution decisions. More specifically, the beneficiaries claimed that the trustee was on “auto pilot” when it came to distribution of all income rather than examining and balancing Arlene’s and their needs and other resources before making distributions.
While a trustee shall act impartially in administering a trust that has two or more beneficiaries, the duty to act impartially does not mean that the trustee must treat the beneficiaries equally. The trustee must treat the beneficiaries equitably in light of the purposes and terms of the trust.
Here, the trustee had absolute discretion to make income distributions to Arlene to provide for her care, support, maintenance, and welfare. Moreover, the grantor gave the trustee the direction that it should favor Arlene as the preferred beneficiary. These terms revealed that the purpose of the trust was to first provide for Arlene as the preferred beneficiary. In addition, the support and maintenance provisions demonstrated an intent to provide Arlene with an accustomed standard of living. Furthermore, the trust included language that indicated that the trustee was permitted, but not required, to consider other resources in the exercise of its discretionary powers. Thus, the trustee would distribute income to Arlene to support her standard of living and, in doing so, it could – but was not required to – consider the beneficiaries’ other resources.
In this instance, the trust officer testified that the trustee considered Arlene’s financial circumstances before making income distributions. Arlene provided a financial report showing her income from all sources and expenses for the year. The trust officer would take this information and compare it to Donald and Arlene’s standard of living prior to Donald’s death. The income Arlene received from the trust was less than the income Donald and Arlene enjoyed prior to Donald’s death.
This information was turned over to the trust management committee. The committee asked questions and required follow-up information before making distribution decisions. The trust committee’s decisions did not always follow the trust officer’s recommendations.
The beneficiaries argued that the trustee should’ve sought information from them concerning their financial circumstances before making distributions to Arlene. But, the trust instrument did not require this. Moreover, the trustee had knowledge concerning the financial and other circumstances of the beneficiaries.
Duty to Provide Accounts and Reports
Terrance and Gerald complained that the trustee failed to provide them with accountings of the trust. The beneficiaries, however, ignored that the trustee provided them with account statements. Even if the beneficiaries were not provided with account statements, they failed to show any damage by a lack of account statements.
Duty to Properly Invest Trust Assets
The beneficiaries claimed that the trustee failed to prudently manage trust assets by not diversifying the trust portfolio and by investing only in assets to achieve maximum cash flow for Arlene. The trust instrument provided broad discretion to the trustee when it came to investment authority. The administration of the trust spanned the time before and after Missouri adopted the Prudent Investor Act in 1996. Prior to 1996, Missouri followed the Prudent Man Rule.
The evidence showed that the trustee prudently and reasonably invested the trust assets before and after the enactment of the Prudent Investor Act. The trust, as a whole, showed that its primary purpose was to provide income to Arlene to support her standard of living.
The investment officer for the trust explained that the purpose of the trust was to first provide income for Arlene, and this was an important consideration in making investment decisions and setting investment goals. The trustee, of course, considered several other factors when making investment decisions.
The investment officer also explained that Missouri trust law shaped the trustee’s investment objectives. When Missouri followed the Prudent Man Rule, the trustee invested the trust assets primarily in bonds and other fixed income assets. After the adoption of the Prudent Investor Act, the trustee began gradually changing its investment strategy to a more balanced and diversified portfolio of stocks and bonds.
Although this case is interesting on many fronts, it may be most enlightening for providing a detailed description of the trustee’s process in making discretionary distributions and in arriving at an asset allocation. These processes – and the ability of the trust officer and investment officer to describe them – appears to have gone a long way with both the trial court and appellate court.