Absolute Discretion must be exercised reasonably.

What does it mean for a trustee to have so-called “absolute
discretion” with regard to their trustee powers?  The term “absolute discretion” is an oxymoron.  Absolute discretion is not absolute; it does
not allow the trustee to do whatever he pleases.  Without careful advice from a qualified
attorney, a layperson acting as trustee can easily get himself into
trouble.  Let us explore what absolute
discretion really means. 

A trustee with “sole
and absolute” discretion is not required to act as a reasonably prudent man
would under similar circumstances, but still must act reasonably, in good
faith, and not arbitrarily. That is, the trustee is not held to the objective legal
standard that requires acting prudently under the relevant circumstances.  Removing the objective standard thus allows
the trustee more freedom to use his independent judgment and to consider a
broader range of possible actions.   “Absolute
discretion” will justify the trustee’s decision as to the manner in which the
trustee has decided in good faith to further the purpose of the trust.  Naturally, a trustee should still consult
with professionals to seek professional input; he may decide that it is best to
follow professional guidance. 

Stated in terms of what
absolute discretion does not allow:  a trustee
with absolute discretion cannot do whatever he pleases but must consider
foremost the purpose of the trust, and then exercise his own independent
judgment in order to arrive at a good faith decision.    Thus, “absolute
discretion” will not protect a trustee who is irresponsible and who fails to exercise
absolute discretion reasonably.  A
trustee must always take personal responsibility for his actions.  Simply following the wishes of a beneficiary
without exercising independent judgment, would be irresponsible of a trustee, and
may land him in trouble. 

Consider, for example,
a Special Needs Trust.  The trustee has
absolute discretion over whether, when, and how much to distribute for the supplemental
care or support of a special needs beneficiary, not otherwise met by government
benefits.  (Absolute discretion is
necessary here to preserve eligibility by preventing certain trust assets from
being counted as available resources to the beneficiary.)  The trust’s stated purpose is thus to
supplement and not to replace needs-based government benefits (such as SSI and
Medi-Cal).  The trustee may reasonably
decide not to pay for medical services that are covered by Medi-Cal because the
trust is not meant to replace government benefits. 

In a Special Needs
Trust, it is unquestionably wrong for the same trustee to give cash distributions
to the special needs beneficiary, because the trust is intended to prevent cash
distributions to a person who is unable to manage their own finances.  Doing so would also likely disqualify the
beneficiary from government benefits and defeat the trust’s other purpose.  Taking actions that defeat the purpose of the
trust is a breach of trust for which the trustee could be held accountable by a
beneficiary.

Lastly, a trustee who
abuses his absolute discretion can be replaced by the court upon petition by
the beneficiary.  Sometimes the trust
will even allow for trustee to be removed by a trust protector who is named in
the trust as having the authority to replace a poorly performing trustee.