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Trust Law Presumes that Principal Is Not Available to the Current Beneficiary

May 18, 2014

Charles E. Rounds, Jr. & Charles E. Rounds, III, in their 1768-page treatise on trust law, state that trustees are limited to paying only income to the Settlor unless distributions of principal are specifically authorized: “Nowadays, it is default law that the current beneficiary of a trust is entitled to the net trust accounting income. It is also default law that a trust is income only, i.e., the current beneficiary is not entitled to principal, unless the governing instrument indicates that the settlor intended otherwise. Thus, a trust for the “benefit” of C, remainder to D is normally income only absent additional language suggesting the contrary. Without such additional language, the trustee would have no power to invade principal for the income beneficiary. On the other hand, when the purpose of a trust is to “support” the current beneficiary, there may be implied authority in the trustee to invade principal, at least some courts have so held.” Loring and Rounds: A Trustee’s Handbook, (2013 Edition), §5.4.1.3 at 376-377.

Note that in Doherty v. Commissioner, 74 Mass. App. Ct. 439, 442 (2009), the court found the implicit authority to invade principal; the court wrote about language in the trust indicating an intent to administer the trust so as to address the Settlor’s changing life needs. “[E]mbedded in the trust’s governing recitation is not only an explicit assessment that public or other charitable benefits will likely be insufficient to provide Muriel the quality of life she might desire, but the corollary implicit direction for the trustees, in such case, to invade assets to make up that difference. Which is not to say that specific trust provisions do not confer this authority, but is rather simply to observe that the trust vehicle, considered as a whole, evidences Muriel’s expectation or intent that the trustees will invade trust assets when necessary to ensure Muriel’s comfort.” By way of contrast, in the irrevocable trust in many MassHealth trust denials there is no support intention expressed or even implied.

Trust law presupposes that the income beneficiary is entitled only to income, even if, for example, an annuity were to be purchased by the trustee for purposes of increasing the income of the trust above the rates provided at banks by certificates of deposit.

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