Can A Trustee Withhold Money From A Beneficiary?

Whether or not a trustee can withhold money from a beneficiary depends on the terms of the trust document. It is important to read the trust document carefully to know the rights of the beneficiaries with regard to the timing of the distributions. Trusts differ as to the power given to the trustee and the time in which a trustee must give the distribution to the beneficiary. If you have any doubts about the trust document, have a trust litigation attorney review it. You can call us at 212-233-1233 or send us an email at [email protected].

Examples of trust terms regarding distributions

Trust terms regarding distributions vary. Some beneficiaries are only entitled to income distributions without the power to invade the principal. Some beneficiaries, especially minors, are only entitled to the distribution upon reaching a certain age. Some trust agreements give the trustee sole and absolute discretion to decide when to distribute the assets, while other trusts grant the trustee the power to make distributions only for the health, education, maintenance, and support of the beneficiary.

In deciding whether a trustee can withhold money from a beneficiary, the overall terms of the trust have to be reviewed to determine the intent of the grantor. Regardless of the terms of the trust document, the trustee has the duty to act in good faith and with a reasonable basis for their decision to withhold a distribution. If you believe that the trustee is withholding distributions without a valid reason or in bad faith, you may have legal options to challenge the trustee’s actions.

The HEMS standard for distributions

Most trusts nowadays include a provision granting the trustee discretion to make distributions based on the HEMS standard: health, education, maintenance and support. This provision gives the trustee discretion to decide whether a beneficiary is entitled to distribution, considering the beneficiary’s circumstances and whether such request for distribution falls under health, education, maintenance, and support.

In Matter of Cameron, 39 A.D.3d 768 (2d Dept. 2007), the court directed the trustee to give the beneficiary a distribution for the off-campus apartment and meal plan because the trust document authorized a distribution for “other expenses incidental to education.”

In Matter of Cooper, 76 Misc.2d 166 (1973), the court directed the trustee to invade the principal to provide for the support of the beneficiary, despite the trustee’s claims that he had absolute discretion to withhold distribution. In this case, a reading of the trust showed that the intent of the grantor was to provide for the beneficiary’s support as the main object of bounty, even to the invasion of the principal, without regard for the residuary legatees. The court held that, “where a trustee has been given freedom to act according to his own judgment in matters pertaining to another, and he fails, in the opinion of the court, to exercise such discretion in a proper manner, he may be compelled to do that which the trust fairly requires him to do.”

Even if a trustee has been granted discretion, you can still compel such trustee to make a distribution through a petition with the court if you have differing interpretations of the trust agreement. The trustee must always act in good faith in accordance with the terms of the trust in the exercise of his discretion, considering the beneficiary’s current and future needs.

Trustee’s discretion to grant or withhold distributions

Some trusts also grant the trustee absolute and uncontrolled discretion to make distributions. However, is this absolute and uncontrolled discretion not subject to any limits or should it be exercised in good faith?

In Matter of Stillman, 107 Misc.2d 102 (1980), the trust provided for the principal to be disbursed at ages 25, 30, 35, and 40, if in the trustees’ absolute and uncontrolled discretion, they deem it advisable to do so. The beneficiaries were already 62 and 76, and yet never received any principal of their $8.5M trust.

The court held that, the typical invasion language at ages 25, 30, 35 and 40, emphasizing uncontrolled and absolute discretion on the part of the trustees, constitutes more an urging of the trustees to invade than a restraint against invasion except for limited protective purposes. The court found that the intent of the testator was different from the standards the trustees have been using in considering invasion.

Because of this, the court found that the trustees have misconstrued the testator’s will and have abused their so-called absolute and uncontrolled discretion to withhold principal. If discretion is conferred upon the trustee in the exercise of a power, the court will not interfere unless the trustee in exercising or failing to exercise the power acts dishonestly, or with an improper even though not a dishonest motive, or fails to use his judgment, or acts beyond the bounds of a reasonable judgment.

These cases illustrate the fact that a trustee, even if granted sole and absolute discretion, must exercise such power within reason and in good faith, pursuant to the intent of the grantor in accordance with the terms of the trust document, as read in its entirety. As trustee, it is his fiduciary duty to always consider the beneficiary’s best interests, consistent with the purposes of the trust.

Disagreements between trustees and beneficiaries are common, especially with regard to the interpretation of trust distributions. When in doubt, it is important to have your trust document reviewed by a beneficiary litigation attorney to know your rights, remedies, and legal options. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].