Florida Banking July 2022

TRUST BANKING

THE TRUSTEE’S TIGHTROPE – BALANCING THE CONFLICTING INTERESTS OF INCOME AND REMAINDER BENEFICIARIES

BY KELLY O’KEEFE, SHAREHOLDER, STEARNS WEAVER MILLER

T rustees beware. Remainder beneficiaries of revocable and irrevocable trusts can challenge how you administer a trust for an income beneficiary, and increasing inflation may give them cause to do so.1 To avoid future challenges, trustees should consider inflation risk factors when balancing the competing interests of income and remainder beneficiaries. Finding that balance may feel like a tightrope act for a trustee. A trustee, like the tightrope walker jumping on a tightrope without an understanding of the circumstances and tools needed to adjust to strong winds, can lose her balance. This article describes some of the factors a trustee should consider when balancing the conflicting interests of remainder and income beneficiaries, and explores how remainder beneficiaries can upset trustees’ efforts to maintain that balance. Recall that a remainder beneficiary’s interest in a revocable trust generally vests only after the income beneficiary’s interest ends. Notwithstanding, remainder beneficiaries of a revocable trust can reach back in time (subject to some limitations) to sue a trustee for breach of fiduciary duty previously owed to the deceased income beneficiary. The remainder beneficiary of an irrevocable trust can allege breach by the trustee before or after the income beneficiary’s death. To make matters worse, the income beneficiary’s interest is almost always at odds with the remainder beneficiary’s interest. Investments generating a high yield for the income beneficiary may risk the safety of the principal due to the remainder beneficiary. For example, an income beneficiary may request significant distributions to invest in her business, while the remainder beneficiaries demand less risky investments to preserve principal. Inflation could magnify the risk of making the requested distributions. So what do you do in a situation like this? It depends. Start with the Trust Language Preparation cannot fully eliminate risk for a tightrope walker or a trustee. However, a well-drafted trust may

help the trustee establish the right balance between income and remainder beneficiaries. Trusts containing language expressly overriding the trustee’s duty of impartiality can minimize the conflict. The following language, for example, should give a remainder beneficiary who is dissatisfied with income distributions pause before alleging breach by the trustee: In exercising discretion to make distributions to or for the beneficiary of this trust, the trustee shall consider the needs of the remainder beneficiaries to be subordinate to the interests of the current beneficiaries. No good faith decision to invade principal for the benefit of a current beneficiary shall be subject to challenge by any remainder beneficiary. No language is foolproof though. The trust must be read as a whole and other terms may provide guidance on balancing distributions to income and remainder beneficiaries. For example, the trust may contain specific limitations or conditions for distributions or even a schedule of distributions. These terms may fall within the sections of the trust on discretionary power of the trustee or the terms related to distributions. Obtain Consent or Court Approval Even where the trust contains clarifying language, the trustee may find the circumstances necessitate a remainder beneficiary’s consent to certain distributions. For example, the trustee would be well advised to obtain the remainder beneficiary’s written consent to distributions the income beneficiary wants to expand her risky business venture. For consent to be valid and have the best chance of withstanding future challenges, it must meet certain criteria. If it is not given by the beneficiary or an acceptable representative, it may be invalid. If the beneficiary is not fully informed of the detrimental circumstances the consent may cause, it may be invalid. Consent is a commonly litigated issue, so obtaining a written agreement from a remainder beneficiary who is represented by counsel is recommended to minimize future conflict claims.

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