A trustee is bound by the terms of the trust agreement. The performance of his or her duties, including and especially making distributions to beneficiaries, must strictly comply with the trust terms. However, more and more trusts, especially those utilizing advanced estate, tax, and asset protection planning techniques, provide an independent trustee with sole and absolute discretion to make distributions of principal and/or income to the trusts beneficiaries. So how does a trustee exercise this discretion? Is the trustee free to do anything or are there restrictions?
Even when a trustee holds sole and absolute discretion over trust distributions, the trustee must still exercise that discretion in a reasonable fashion. Specifically, the Trustee must balance the competing purposes of the trust. Specifically the Trustee must weigh his or her responsibility to have assets to distribute against the beneficiaries needs and wants. Satisfying immediate and excessive wants will deplete the trust and render the beneficiary helpless in a moment of greater need. So how does a trustee draw that line?
