In the past, settlors tended to limit a trustee’s discretion by setting forth a specific formula for the distribution of trust assets. Nowadays, however, settlors often prefer to vest more discretion in their trustees. This is partly due to the fact that beneficiaries tend to live longer and, therefore, trusts inevitably last longer, thereby requiring trustees to respond to changing conditions. In addition, settlors often believe that vesting increased discretion on the part of trustees will discourage beneficiaries from bringing expensive and disruptive challenges to their decisions.
Nevertheless, the trend toward increased discretion is not without its problems. First of all, there is a need to balance the wishes of the settlor against the duty of the courts to oversee the conduct of trustees and other fiduciaries. In addition, it is also necessary for courts to balance the wishes of the settlor with the right of the beneficiaries to receive fair and impartial treatment. Finally, it is necessary to determine when, if ever, creditors should be able to reach a beneficiary’s interest in a discretionary trust. The article begins with a description of the various linguistic formulas that settlors have typically used to describe the scope of a trustee’s discretion. It concludes that no language, however broad, can completely shield a trustee from judicial scrutiny. It then examines some of standards courts invoke when they purport to review the exercise of discretion by trustees. These standards be classified as subjective, objective or a combination of both.
The article also examines the ability of trust beneficiaries to challenge a trustee’s exercise of discretion. In addition, the article discusses the rights of creditors and concludes that discretionary and support trusts are treated like spendthrift trusts. This means that providers of necessary goods and services, as well as spouse, ex-spouses and minor children, can often reach a beneficiary’s interest in a trust. Finally, the article suggests some improvements in certain problem areas and advises drafters to be more specific about what a trustee can and cannot do when exercising discretion.
Ausness, Richard C., "Discretionary Trusts: An Update" (2018). Law Faculty Scholarly Articles. 622.