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Determining Necessity of Discretionary Distributions

Nevada court finds that trust beneficiary’s other resources may not be relevant.

The Supreme Court of Nevada held recently that language in a discretionary trust allowing distributions as “necessary for the proper support, care, and maintenance” of a beneficiary didn’t require the trustee to consider the beneficiary’s other resources.  (In re William J. Raggio Family Trust, 460 P.3d 969 (Nev. 2020)).

Discretionary Trusts Names Second Wife as Trustee and Beneficiary

William Raggio created a trust that would divide into two subtrusts—the marital deduction trust (MDT) and the credit shelter trust (CST)—on his death. He named his second wife, Dale, as the trustee and beneficiary of both subtrusts. He named his daughters as the remainder beneficiaries of the MDT and Dale’s grandchildren from a prior marriage as the remainder beneficiaries of the CST. The trust instrument provided that, as trustee, Dale was to pay as much of the principal of both trusts as she “deem[ed] necessary for” her “proper support, care, and maintenance.” 

Settlor’s Daughters Assert Breach of Fiduciary Duty Claims

After William died, his daughters sued their stepmother for breach of trust and breach of fiduciary duties. They alleged that Dale distributed funds to herself only from the MDT, while preserving the assets of the CST. The daughters thus asserted that Dale had breached her fiduciary duties as trustee of the MDT in two ways: first, by improperly favoring the remainder interests of her grandchildren over those of her stepdaughters, and second, by distributing more from the trust than was “necessary for [her] proper support, care, and maintenance” in light of her access to the assets of the CST. The district court granted the daughters’ motion to compel Dale to submit to discovery of her accountings of, and distributions from, the CST. Dale petitioned the Supreme Court of Nevada for a writ of prohibition.

Other Resources are Irrelevant

The Supreme Court vacated the discovery order. It concluded that neither Nevada law nor the terms of the trust required Dale to consider the availability of other assets in making distributions and, thus, discovery concerning the CST would be irrelevant and an invasion of privacy.  In so holding, the court considered a Nevada statute, NRS 163.4175, which provides that, “[e]xcept as otherwise provided in the trust instrument,” the trustee need not consider a beneficiary’s other resources in making discretionary distributions. Applying that standard, the court determined that the relevant trust provision didn’t condition Dale’s discretion on first determining that her other resources were insufficient to meet her needs. The court also noted that a separate provision of the trust required Dale to “take into consideration…any other income or resources” known to her when making distributions to a different beneficiary, which indicated that the grantor knew how to restrict the trustee’s discretion when he intended to do so.

Averting Disputes

This case demonstrates the importance of carefully drafting a trust instrument to ensure that the grantor’s intent is understood and carried out, particularly when statutory default interpretations may be at odds with the grantor’s true intent. In this case, including more specific instructions in the MDT, or adopting a unitrust approach in which a percentage of the assets are distributed to the surviving spouse each year, may have saved this family from such a public fight.  The case also illustrates the risks that accompany appointing a beneficiary as trustee, particularly when the trustee is asked to administer the trust for the benefit of multiple, intergenerational family members who may have competing interests. In particular, disputes among blended family members (a surviving step-parent and children from a prior marriage) are common.  In such situations, the grantor should carefully consider whether it may be prudent to designate an independent trustee.    

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