EPTL 10-10.7: Why a Trustee Who Is Also a Beneficiary Cannot Distribute to Himself

A New York trust often names a family member as trustee and also as a beneficiary. A surviving spouse may be trustee of a trust that pays her income for life. An older child may be trustee of a trust for himself and his siblings. The arrangement is common and lawful. The problem arises when the trust gives the trustee discretion over distributions. New York law does not let a trustee decide, on his own, to hand trust money to himself. The disqualified trustee keeps his office and his beneficial interest, but the decision to distribute to him must be made by someone else.

Which Section Governs: EPTL 10-10.1 or 10-10.7?

Readers often search for this rule under EPTL 10-10.7. The self-distribution restriction is in fact codified at EPTL 10-10.1, titled "Power to distribute principal or allocate income; restriction on exercise." EPTL 10-10.7 is a related provision in the same Part of Article 10. It addresses how a power held by two or more fiduciaries is exercised, including the rule that a power held by three or more trustees may generally be exercised by a majority. The two sections work together when a trust has co-trustees, as discussed below. For the substantive bar on a trustee paying himself, the operative section is 10-10.1.

What EPTL 10-10.1 Provides

The statute is short. Its practical content is this:

• The bar: A power conferred on a person in his capacity as trustee to make discretionary distributions of principal or income to himself cannot be exercised by him.
• Allocations, too: The same bar applies to a discretionary power to allocate receipts or expenses between principal and income in the trustee's own favor. A trustee who is the income beneficiary cannot, for example, choose to treat a capital gain as income so that it flows to him.
• Co-trustees: If the power is held by two or more trustees, the trustee or trustees who are not disqualified may exercise it.
• No qualified trustee: If no trustee is qualified to exercise the power, its exercise devolves on the Supreme Court or the Surrogate's Court. Where the power was created by will, it devolves on the Surrogate's Court that has jurisdiction over the estate of the person who created the power.

The statute reflects the fiduciary duty of undivided loyalty. A trustee stands on the opposite side of the table from the beneficiaries when he decides who gets what and when. He cannot sit on both sides at once. The general relationship is explained further at Trustee vs. Beneficiary.

What the Statute Does Not Prohibit

EPTL 10-10.1 is aimed at discretionary powers. It does not disturb the following:

• Mandatory distributions. If the instrument directs that all net income be paid to the trustee-beneficiary quarterly, the trustee is carrying out an instruction, not exercising discretion. He may pay himself that income.
• Distributions to other beneficiaries. The trustee-beneficiary remains fully qualified to decide on distributions to co-beneficiaries. Only distributions in his own favor are off limits.
• Ordinary administration. The trustee may still invest, sell property, hire professionals, file returns and exercise the general fiduciary powers listed in EPTL 11-1.1.
• Distributions within an ascertainable standard. As amended, the statute exempts a power to distribute to the trustee himself that is limited by an ascertainable standard relating to his health, education, maintenance or support. A clause allowing distributions "for the trustee's health and support" falls within this exemption. A clause allowing distributions for the trustee's "comfort, welfare or happiness" does not, because those words set no measurable limit.

Because the exemption turns on the exact words of the instrument, the trust document must be read before any self-distribution is considered. A trustee who guesses wrong has made an unauthorized distribution and can be surcharged for it.

Worked Examples

Example 1: Sole trustee, pure discretion

Dana is sole trustee of a $600,000 trust created under her father's will. The will authorizes the trustee to distribute principal to Dana and her brother Marcus "in such amounts as the trustee in her sole discretion deems advisable." Dana wants $50,000 to renovate her kitchen. She may not write herself that check. The power, as to Dana, has devolved on the Surrogate's Court that handled her father's estate. She may distribute $50,000 to Marcus if she concludes it is advisable, because the bar does not apply to distributions to others.

Example 2: Sole trustee, ascertainable standard

Same trust, but the will permits principal distributions to either beneficiary "for health, education, maintenance and support." Dana incurs $20,000 in uninsured medical bills. The power is limited by an ascertainable standard, so the statutory bar does not apply. Dana may distribute $20,000 to herself for the medical bills, must document the expense, and must account for it. The kitchen renovation still would not qualify unless she can show it falls within her maintenance and support in the manner the creator intended.

Example 3: Allocation between principal and income

Carl is trustee and lifetime income beneficiary; his children take the remainder. The trust sells a block of stock for a $30,000 gain and the instrument gives the trustee discretion over allocating receipts. Carl cannot allocate the gain to income, because the allocation would be in his own favor. Absent a co-trustee, the allocation decision goes to the court or is governed by the default rules of the Principal and Income Act in EPTL Article 11-A.

How Co-Trustees Handle the Problem

The simplest solution is a second trustee. Under EPTL 10-10.1, the non-disqualified co-trustee alone exercises the power to distribute to the interested trustee. EPTL 10-10.7 supplies the mechanics for multiple fiduciaries generally, but 10-10.1 removes the interested trustee from the count on that particular decision. In Example 1, if Dana's cousin Priya were co-trustee, Priya alone would decide whether Dana receives the $50,000. Dana should not vote, should not pressure Priya, and should keep a written record showing that Priya made the decision independently.

Trustees frequently get this wrong by treating the decision as joint. A distribution approved "by both trustees" where one of them is the recipient is vulnerable to challenge, even if the independent trustee would have approved it anyway.

Sole Trustee-Beneficiary: Steps in Surrogate's Court

A sole trustee who wants a discretionary distribution to himself has two paths.

1. Petition for appointment of a co-trustee. Under SCPA 1502, the trustee may petition the Surrogate's Court to appoint an additional trustee. Once an independent co-trustee qualifies, that person exercises the power under EPTL 10-10.1. This is the better long-term fix if distributions to the trustee will recur. The petition should identify the proposed co-trustee, state the reason for the appointment and be served on all persons interested in the trust.
2. Petition the court to exercise the power. Under EPTL 10-10.1, the court may exercise the power itself. The trustee files a petition describing the trust, the proposed distribution, the reason for it and the effect on other beneficiaries, with citation to all interested parties under SCPA 307 and 308. The court may grant, deny or modify the request. This path suits a one-time need.

In either proceeding, the court will look at the creator's intent, the size of the trust, the needs of the trustee-beneficiary and the interests of the remainder beneficiaries. If the request also involves invading principal beyond what the instrument permits, the separate standards of EPTL 7-1.6 come into play.

Consequences of Violating the Rule

A distribution a trustee makes to himself in violation of EPTL 10-10.1 is an unauthorized act. Beneficiaries may respond in several ways:

• Compulsory accounting under SCPA 2205, forcing the trustee to disclose every transaction.
• Objections and surcharge in the accounting proceeding, requiring the trustee to restore the amount taken, with interest, from his own funds.
• Removal under SCPA 711 for improvidence or misconduct, followed by appointment of a successor trustee.
• Denial or reduction of commissions for the period of the breach.

The trustee's defense that he would have received the money anyway rarely succeeds. The statute disqualifies the decision-maker, not the outcome. The options available to an aggrieved beneficiary are covered in more detail at Can a Beneficiary Sue a Trustee?

Common Pitfalls

• Assuming "sole discretion" is an ascertainable standard. It is the opposite. The broader the discretion, the more clearly the bar applies.
• Using decanting to get around the rule. EPTL 10-6.6 has its own limits on a trustee decanting to a trust that increases the trustee's own interest. See EPTL 10-6.6 Trust Decanting.
• Indirect self-distribution. Paying the trustee's personal bills from the trust, or distributing to a spouse or a company the trustee controls, will be treated as a distribution to the trustee.
• Relying on the other beneficiaries' informal consent. Consent may be a defense against the consenting adult beneficiaries, but it does not bind minors, unborn remaindermen or beneficiaries who did not sign a proper release. A court-appointed co-trustee or a court order is safer.
• Failing to plan at the drafting stage. A creator who wants a trustee-beneficiary to have access to funds should either include an ascertainable standard or name an independent co-trustee with authority over distributions to the interested trustee.

Albert Goodwin represents trustees seeking court authority for distributions and beneficiaries challenging distributions a trustee made to himself in Surrogate's Courts throughout New York.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].