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The Trust Document

John Pankauski explains the finer details of a trust documents. From the book, “Pankauski’s Trustee’s Guide”.

Understanding The Trust Documents

Read The Trust Document…

Plain and Simple.

You need to read, and understand, the trust document.

Welcome!

So, you have decided to serve.

Unlike years ago, today, trusts are not just for the wealthy, and the trust world is not limited to lush offices in big city banks and law firms. Trusts are now used by young and old, rich and, well, less-rich, for a variety of reasons, and to accomplish any one of dozens of objectives. These objectives may be very short-term, such as a trust to hold cash and an insurance policy until a minor child attains majority. Other trusts have long-term objectives, such as creating a multi-generational trust to compound and grow over a hundred of years for the benefit of your grandchildren and more remote descendants.

This is serious stuff. Trusts come in all shapes and sizes, with varying purposes. In all cases, however, a trust is set up for the administration and management of property according to certain guidelines and confines, which are found in the trust document and local law.

The job of a trustee is to carry out the intent of the grantor, as expressed in the trust document, and according to the law, which governs the trust and its administration. How do we understand the intent of the grantor? By reading the trust document. Many, many trusts are administered years after the death of the grantor, and under circumstances where the trustee never met the grantor, let alone talked to the grantor about his or her intent.

This is going to sound silly. Perhaps even obvious. But here goes: Reading the entire trust document is an essential prerequisite in considering whether to serve as a trustee, as well as a requirement for your tenure. Just as a restaurant operator needs to start with the menu before designing the infrastructure or running the place, so, too, must the trustee begin with the operative document: the trust agreement.

The trust may have additional documents, such as amendments, which must also be read thoroughly. Understanding the trust is another thing. If you don’t understand what you are reading, or understand how a trust is to be administered, you are going to fail. The good news is that you can hire trust counsel and other advisers to assist you. The bad news is the reality that “running” a trust is a whole heck of a lot more than merely investing. If you have “run” your own money for years, and follow the markets, and read the Wall Street Journal daily, I have news for you: that isn’t even close to being prepared for administering a trust.

When reading the trust document, and trying to understand how the trust is to be administered, start with the basics:

  • “Who” gets “what”?
  • Who are the permissible beneficiaries over what period of time?
  • Who must you distribute income or principal to?
  • Who may you distribute income or principal to and for what reasons?
  • How much discretion has the grantor given to you as trustee?

Example 1:

During the lifetime of my surviving spouse, the trustee shall distribute all income to my surviving spouse at least annually. In addition, the trustee may distribute principal for the surviving spouse’s health, educational maintenance, and support.

Issue: Now, consider a scenario where the surviving spouse has requested $50,000 from the trust for the purchase of a luxury automobile. Should you, as trustee, distribute $50,000 so that the surviving spouse may purchase a luxury automobile?

Answer: Not such a clear one. The challenge for the trustee is to determine whether a $50,000 luxury automobile is an appropriate distribution for the surviving spouse’s health, education, maintenance or support.

Here’s the challenge: At first blush, it would appear that such a distribution would not be permissible under the standards of health or education. But consider this: what if the surviving spouse told you, as trustee, that she had to drive to a chiropractor once a week, to a massage therapist twice a week, and to a doctor’s office every other week, and that she needed a new vehicle to get her there safely and securely. Would this justify a $50,000 distribution from the trust for the purchase of a luxury automobile for the “health” of the surviving spouse?

Example 2:

Now, consider that further down in the trust document, the following trust language appeared:

In deciding whether to distribute or not distribute principal to or for the benefit of my surviving spouse, the trustee shall maintain my surviving spouse in the lifestyle and manner in which she has become accustomed and which we enjoyed.

Same Issue/Answer: You must determine whether a $50,000 luxury automobile was something intended, or contemplated, by the standards of “maintenance” or “support.” In determining whether to grant or disapprove the surviving spouse’s request for $50,000, would it help to know that the grantor and the surviving spouse always drove a luxury vehicle? Or that they only drove pre-owned, inexpensive domestic automobiles?

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