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Discretionary Trust Distributions of Principal and Income: Avoiding Beneficiary Challenges and Adverse Tax Consequences

Note: CPE credit is not offered on this program

Recording of a 90-minute CLE video webinar with Q&A

This program is included with the Strafford CLE Pass. Click for more information.
This program is included with the Strafford All-Access Pass. Click for more information.

Conducted on Tuesday, December 12, 2023

Recorded event now available

or call 1-800-926-7926

This CLE course will provide trust planning counsel and fiduciary advisers with a thorough, practical guide to making discretionary distributions of principal or income from a discretionary trust. The panel will discuss liability risks involved for trustees making these distributions, review appropriate factors, considerations, and standards for evaluating discretionary distributions, and outline potential challenges from creditors or other beneficiaries to such distributions.

Description

Determining whether and when to make a discretionary distribution of trust assets presents significant challenges for trustees and estate planning counsel in drafting trusts. Trust counsel must fully understand the impact and risks to a fiduciary in exercising discretion to make distributions, particularly of the trust principal, when structuring distribution provisions in discretionary trusts.

A discretionary trust is a complex trust that allows a trustee discretion over income or assets distributed to defined beneficiaries. Generally, trust documents specify standards for discretionary distributions. The most common measure is the health, education, maintenance, and support (HEMS) standard, defined in Treas. Reg. 20.2041-1(c)(1) as an "ascertainable standard."

Trust drafters may include other "unascertainable" standards to guide fiduciaries. Absent careful drafting and thoughtful trustee selection, the use of an unascertainable standard may trigger a tax recognition event such as a general power of appointment.

While courts generally give wide latitude to a trustee's exercise of discretion to make distributions, beneficiary challenges to distributions have succeeded in cases where the court finds flaws in the discretionary provisions or the trustee's exercise of distribution powers. Counsel must be fully aware of permissible standards to deter beneficiary disputes and avoid adverse tax and accounting consequences.

Listen as our experienced panel provides a practical guide to structuring distribution provisions in discretionary trusts, outlines liability risks involved, discusses appropriate factors, considerations, and standards, and examines potential creditor or other beneficiary claims arising from a trustee's decision to grant or deny a discretionary distribution request.

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Outline

  1. Discretionary trusts defined
  2. HEMS standard allowable provisions
    1. Health
    2. Education
    3. Maintenance
    4. Support
  3. Unascertainable standards
  4. Risks in structuring discretionary distribution provisions
  5. Areas of successful beneficiary challenges

Benefits

The panel will review these and other relevant topics:

  • Unascertainable standards that present liability or tax risks to fiduciaries
  • Types of discretionary distribution provisions that courts have ruled defective
  • Elements of HEMS standards, IRC 2014, and governing regulations
  • Risks in distributing assets from the principal or income of a discretionary trust

Faculty

Bernard, Daniel
Daniel R. Bernard
Partner
Twomey Latham Shea Kelley Dubin & Quartararo

Mr. Bernard is a partner in the firm and member of the Trusts & Estates Department. He focuses his practice on...  |  Read More

McNary, James
James T. McNary
Attorney
McNary Law Office

Mr. McNary has been practicing law for more than 30 years. Throughout most of his career he has limited his practice to...  |  Read More

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