Recently, more instances have emerged of trusts that contain clauses in which the grantors are trying to dictate not just the behavior of their beneficiaries but also their beliefs.
Often emerging in areas of religious practices, substance abuse and charitable giving, moral and religious qualification clauses can pose significant administrative problems for fiduciaries.
Ideally, fiduciaries are consulted during the drafting stage of the trust, but often they’re asked to serve as a successor trustee for an existing trust. Having a methodology in place to determine if they’ll be able to meet the grantor’s goals and fulfill the fiduciaries’ obligations to both the grantor and the beneficiaries, all while limiting the fiduciary’s own liability, is paramount.
Serving as a Successor Trustee
While the drafting stage is the preferable point to come across a trust with a moral or religious qualification clause, it’s just as common for a fiduciary to come across some of these provisions in existing trusts when they’re being asked to serve as a successor trustee. In some ways, it’s an easier position because the fiduciary can evaluate the risks up front and determine whether they want to accept the position. However, there’s a larger burden on a fiduciary in this case because many of the clarification options that could have been included during the drafting stage are no longer available. This often requires significant interpretation of the document to determine what efforts the fiduciary must take to enforce the trust as written.
Evaluating the Terms of the Clause
Evaluation of an existing trust must include examining several factors. First, vagueness in trust language easily leaves a new fiduciary open to significant scrutiny from beneficiaries. Next, if a trust is changing the fiduciary, there’s a high likelihood that there’s been some conflict within the family or within the trust relationship already. Finally, it should help in the evaluation process to see the records of the previous fiduciary’s distribution history and discuss with the current beneficiary class what criteria has been used up until this point, as well as what they believe is required by the trust.
No matter how much exploration and due diligence a new fiduciary undertakes, sometimes they find that they would be unwilling to accept the trust as it’s written or administer it in the same way as the prior fiduciary. Greater monitoring may be needed or more information may be required before making a distribution than the beneficiaries would like. In the case of a broad or vague clause, a fiduciary may feel that there isn’t sufficient clarity to allow them to support any decision that they may make about distributions. If that’s the case, the fiduciary’s options are limited in what they can do to accept the role.
Reducing Fiduciary Liability
Review available decanting statutes. Consider whether any of the states with a sufficient connection to the trust have an applicable decanting statute that would allow an adjustment to be made. Many states that are recognized as having broad and flexible decanting statutes would enable a family to decant a trust into a new trust with better defined standards for the clause or, potentially, its removal. Such a discussion depends on state law and whether the clause could be deemed to constitute a material purpose of the trust. These trusts vary considerably, and some would fit that description while others would not.
The same goal could also be accomplished by creating a new trust with more direct or specific language and merging it with the original trust. If the beneficiaries are identical and the trusts have the same purposes, a merger could be used to allow the trust to benefit from more extensive provisions drafted into a new trust. This can only be considered in states whose trust codes include merger provisions.
Work with a trust protector. The ability to work with a trust protector or another trust advisor who could be responsible for making determinations regarding the clause in question is a powerful option. This role can be filled by any number of authority figures with greater expertise in the subject matter of the clause, whether that’s a religious leader for a religious clause or a medical professional willing to coordinate the monitoring of a substance abuse clause. In the case of a charitable clause, consider engaging a family charitable advisor.
Declining to Serve
Whatever options are considered, the final option is always to decline to accept the role of fiduciary. Vague trust documents within strict trust jurisdictions with strained family dynamics may put a fiduciary in a position in which they’re unable to see a way to fairly administer the trust on the grantor’s terms or to even discern the grantor’s original intent and goals. In these cases, it’s better to refuse to serve as a fiduciary rather than face the potential for litigation.
This is an adapted version of the authors' original article in the August 2018 issue of Trusts & Estates.