Trust Administration in Times of Pandemic and Economic RecessionMay 7, 2020
Corporate and individual trustees are reporting a significant increase in distribution requests from beneficiaries adversely affected by current economic conditions and business disruptions related to the COVID-19 pandemic. We anticipate such requests will continue long after ‘stay at home’ rules imposed by state and local authorities are relaxed and lifted, as adverse economic consequences are predicted to last for months. Whether and how a trustee may consider the exigent circumstance of the current COVID-19 pandemic in making beneficiary distributions depends on a number of factors.
First, one should look to the terms of the trust itself in determining whether and to what extent a distribution is authorized. If, for example, a trust restricts distributions to income only, whether permissible or mandatory, the current pandemic and resulting adverse economic consequences would not in themselves provide a justification to ignore such restrictions or to ‘read in’ a power to invade principal, absent a specific trust provision providing a trustee with special emergency powers or an ability to vary distribution terms due to exigent circumstances. Though such ‘emergency clauses’ are not unheard of, they are not found in most trust instruments.
If the trust permits a trustee to encroach on principal in making distributions to a beneficiary, the language used by the trust is key in determining the extent of that power. In some instances, the power is very narrow, and may only permit such encroachments in a limited number of circumstances. The trust may also permit (or even require) a trustee to consider the requesting beneficiary’s other financial resources before making such a distribution. On the other hand, some trusts provide very broad encroachment powers, and for a wide variety of reasons. Most encroachment powers generally fall between these two extremes. Clauses providing a trustee with emergency powers to vary trust distribution terms due to exigent circumstances may also come into play.
Second, if a trust is silent or ambiguous as to the scope of a trustee’s distribution power, or if the manner in which those powers are described appears inconsistent with other trust provisions expressing a broader desire to provide financially for a beneficiary (perhaps even referencing situations involving exigent circumstances and/or strong economic necessity), a trustee may seek court intervention to allow for a departure from or modification of the terms of the trust. All current and remainder beneficiaries would have to participate in such a proceeding. If all beneficiaries agree with a proposed modification or deviation, it may be possible to authorize the departure or modification through a non-judicial settlement agreement.
Finally, a trustee needs to consider any request to encroach principal in light of current market volatility and its effect on income generated by a given asset portfolio. Such volatility does not necessarily preclude possible asset sales to raise cash, or even an in-kind distribution of certain assets. However, as during any economic downturn, such decisions should be made with caution as such assets may be significantly undervalued at present (particularly stock and other marketable securities). Thus, a sale or in-kind distribution may unduly affect the interests of the remainder beneficiaries by reducing total trust assets to which they may be later entitled.
Because each trust is unique, there is no one correct way to respond to every request by every beneficiary.
The professionals in Lewis Rice’s Estate Planning Group are ready to assist with understanding the law and navigating the competing interests of current and remainder beneficiaries against the backdrop of current conditions, and our trust and estate litigation professionals are ready to provide assistance if court intervention is determined to be permitted and appropriate.