Drafting Flexibility into Trusts.

Discretionary decision making authority over the administration of the trust or its assets directly can be delegated or reserved to the settlor(s). Persons with discretionary decision making may include the trustee(s), trust protectors, trust directors, and holders of powers of appointment. Provisions for trust protectors and trust directors, however, is not typically seen in most living trusts.

A trust may give the trustee discretionary authority over distributions, asset investments, and asset management. Such discretionary authority can be broadly or narrowly defined and tailored to the purpose. For example, the trustee of a special needs trust always has absolute discretion over whether to make distributions for the special needs beneficiary. Also, the trustee of a support trust may have discretion to make additional distributions.

Trust protectors can be given authority to hire and fire trustees and amend the terms of the trust as needed to keep current with the law. Trust protectors are relevant when inheritances are administered in ongoing trusts over years and not simply distributed outright to the beneficiary at the settlor’s death. For example, special needs trusts for persons on needs based government benefits typically always have a robust set of trust protector provisions that authorize the trust protector to amend the terms of the trust to remain compliant with ever changing government benefits rules.

A trust protector may have a fiduciary role (i.e., legal duties and accountability) or a non-fiduciary role (i.e., no duties) depending on their authority and the settlor’s intentions. That is, a trust protector may have a non-fiduciary capacity when firing and hiring replacement trustees but may have a fiduciary capacity when amending the trust to conform its terms to current law.

Trust directors, new to California law, are “trustee like” fiduciaries with power(s) of direction over some specific aspects of the trustee’s administration of the trust; the power of direction can be narrow or broad. A trust may include one or more separate trust directors who, for example, may decide when and how a trustee makes beneficiary distributions, invests trust assets, or manages special trust assets, or any other aspect of trust administration. Trust directors are typically advisors – be they professionals, family or friends – whom the settlor wants involved in a decision making capacity to tell the trustee how certain trust administration matters are handled. Trust directors never hold title to trust assets themselves, the trustee does, and so directors can only act through the trustee who keeps all trustee duties not otherwise assigned to the trust director(s).

Powers of appointment included in a trust allow a person, even the settlor, certain specific or general authority to distribute trust assets either to anyone or to specific persons. The power is held in a non-fiduciary capacity, which means that the person has full freedom to use or not use the power as they personally choose. Revocable trusts typically include a reserved power of appointment by the settlor(s) to direct the transfer of assets by way of a written instrument to the trustee, which could be exercised in life or at death through a will (called a testamentary power of appointment).

A power of appointment is different than a trust director’s power of direction over the trustee’s administration. The power of direction is always a fiduciary responsibility that requires the trust director to act under the same standards as a trustee would act if the trustee were exercising that same authority over the trust administration.

Whether to include any of the foregoing authority in a person’s trust is best understood in terms of the person’s estate planning goals, concerns, and circumstances. During the estate planning discussion it should become apparent whether such provisions may be needed to address future and unforeseen circumstances.

The foregoing brief discussion is not legal advice. Consult a qualified estate planning attorney for guidance. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.