WHAT DID YOU MEAN BY THAT? TRUST LANGUAGE AND APPLICATION BY TRUSTEES PRESENTED BY: MARY C. BURDETTE CALLOWAY, NORRIS, BURDETTE & WEBER, PLLC. 3811 Turtle Creek Blvd., Suite 400 Dallas, Texas 75219 WRITTEN BY: SARAH PATEL PACHECO1 Crain, Caton & James, P.C. 1401 McKinney, 17th Floor Houston, Texas 77010 STATE BAR OF TEXAS 35TH ANNUAL ADVANCED ESTATE PLANNING AND PROBATE COURSE JUNE 8-10, 2011 FORT WORTH, TEXAS (CHAPTER __) © Sarah Patel Pacheco 2009 i INDEX I. INTRODUCTION. ......................................................................................................................... 1 II. SOURCES OF GUIDANCE AND AUTHORITY ...................................................................... 1 A. The Pecking Order ................................................................................................................... 1 B. Binding Authority .................................................................................................................... 1 1. The Trust Instrument ........................................................................................................ 1 2. Texas Trust Code Section 101.001 et seq ........................................................................ 2 3. Texas Common Law ......................................................................................................... 2 C. Potential Sources of Guidance ................................................................................................. 2 1. Restatement of Trusts ....................................................................................................... 2 2. Uniform Trust Code ......................................................................................................... 2 III. FUNDAMENTAL DUTIES OF A TRUSTEE ............................................................... 2 A. Overview ...................................................................................................................... 2 B. General Duties of a Trustee .......................................................................................... 2 C. Defining Standards of Conduct .................................................................................... 3 1. Bad Faith ............................................................................................................... 3 2. Good Faith ............................................................................................................ 3 3. Gross Negligence .................................................................................................. 3 D. Delegation of Duties .................................................................................................... 3 E. Burden of Proof at Trial ............................................................................................... 4 1. Burden on Complainant ........................................................................................ 4 2. Burden on Trustee ................................................................................................. 4 IV. FUNDAMENTALS OF INTERPRETING TRUST DOCUMENTS ........................... 4 A. Overview ...................................................................................................................... 4 B. Unambiguous Instrument ............................................................................................. 4 C. Ambiguous Instrument ................................................................................................. 5 1. Actions During Lifetime ....................................................................................... 5 2. Other Trusts Created by Settlor ............................................................................ 5 3. Context of the Creation of the Trust ..................................................................... 5 4. Framing the Issue: Overall Intent vs. Specific Intent ........................................... 5 D. Common Terms ............................................................................................................ 5 1. Shall Versus May .................................................................................................. 5 2. Necessary Versus Appropriate .............................................................................. 6 3. Absolute or Uncontrolled Discretion .................................................................... 6 4. Sole, Final or Conclusive Discretion .................................................................... 6 V. DISTRIBUTION STANDARDS .......................................................................................... 6 A. Mandatory Distributions .............................................................................................. 6 B. Discretionary Distributions .......................................................................................... 7 1. Ascertainable Standard ......................................................................................... 7 a. Tax Planning Considerations ........................................................................ 7 (i). Beneficiary as Trustee - Distributions to Self - Avoid Estate Tax Inclusion and Avoid Gift on Lapse ..................................................... 7 (ii). Beneficiary as Trustee – Avoids Loss of Spendthrift Protection ......... 7 (iii). Beneficiary as Trustee - Avoid Gift for Distributions to Others ......... 8 (iv). Settlor as Trustee - Avoid Estate Tax Inclusion .................................. 8 (v). Settlor or Settlor’s Spouse as Trustee - Income tax relevance ............. 8 b. “Support” and “Maintenance” ...................................................................... 8 (i). Bare Necessities ................................................................................... 9 © Sarah Patel Pacheco 2009 ii (ii). Educational Expenses .......................................................................... 9 (iii). Implied Standard of Living .................................................................. 9 (iv). Trust Size ............................................................................................. 9 (v). Present Versus Future Needs ............................................................... 9 c. Education .................................................................................................... 10 d. Health .......................................................................................................... 10 2. Unascertainable Standards .................................................................................. 10 a. Comfort ....................................................................................................... 10 b. Happiness .................................................................................................... 11 c. Welfare ........................................................................................................ 11 d. Benefit ......................................................................................................... 11 C. Drafting Suggestions .................................................................................................. 11 1. Marital Gifts ........................................................................................................ 11 2. Non-Marital Gifts ............................................................................................... 11 3. All Trusts ............................................................................................................ 12 4. Purposes Clauses ................................................................................................. 12 VI. POTENTIAL LIMITATIONS ON DISTRIBUTION STANDARDS ........................ 12 A. Standard of Living - Station in Life ........................................................................... 12 B. Other Resources ......................................................................................................... 12 1. General Rule ....................................................................................................... 12 2. Restatement Exceptions ...................................................................................... 12 a. Other Trusts Created By Same Settlor ........................................................ 12 b. Beneficiary Not Intended to Be Self Supporting ........................................ 12 3. What Other Resources? ...................................................................................... 12 4. Affect on Ascertainable Standard ....................................................................... 13 C. Priority of Beneficiaries ............................................................................................. 13 1. Settlor’s Intent Controls ...................................................................................... 13 2. Guidelines Under Texas Trust Code When No Expression of Intent ................. 13 3. Guidelines Under Restatement When No Expression of Intent ......................... 13 D. Parents Obligation To Support Beneficiary ............................................................... 14 E. Beneficiary’s Obligation To Support Family Members ............................................. 14 F. Other Relevant Factors ............................................................................................... 15 VII. POWER TO ADJUST INCOME AND PRINCIPAL ................................................