The Fiduciary’s Role over
Discretionary Distributions
For those who regularly perform trust reviews for fiduciary clients, it is not uncommon to hear about bank trustees being sued for breach of fiduciary duties or criticized by banking regulators. In particular, many individuals fulfilling the fiduciary role struggle when it
comes to sufficiently documenting the fulfillment of their fiduciary responsibilities,
especially those related to discretionary distributions. The good news is that once
fiduciaries recognize their deficiencies, mitigating the risk of litigation and regulatory
scrutiny is relatively straightforward.
implications of the Discretionary
Distribution Power
As explained in the examination manual
issued by the Office of the Comptroller of the Currency (OCC), a fiduciary
with powers over discretionary distributions has the authority to determine the
amounts and types of distributions and,
in some cases, to select the beneficiaries
from among a class or several classes of
beneficiaries. Such authority, of course,
also carries some risk to the fiduciary.
Decisions made under discretionary
distribution power can mean that one
beneficiary’s receiving a benefit might
leave another beneficiary without a ben-
efit. For example, the decision to make
a distribution from a trust’s principal
to the initial beneficiary might deprive
remaindermen of the right to that por-
tion of the principal. If the amount dis-
tributed is significant and not based on
sound reasoning with sufficient support,
the remaindermen might pursue litiga-
tion against the fiduciary.
A fiduciary with discretionary distri-
bution power must exercise sound judg-
ment and clearly understand the terms
of the trust, the settlor’s intent, and the
beneficiaries’ best interests. The fiduciary
must also fully comply with the trust
agreement’s income payout and princi-
pal invasion guidelines. The fiduciary,
ensures that discretionary distribution
decisions are based on standards that are
fair to all beneficiaries. Trust companies
and trust departments might try to con-
trol this process by limiting the dollar
amounts of discretionary distributions
that individual fiduciaries can make
without obtaining a higher level of ap-
proval, and in extreme instances, they
could require that all discretionary dis-
tributions be approved by a designated
trust committee.
overview of Fiduciary
Responsibility
Fiduciaries must satisfy a variety of fiduciary duties stemming from both common law and state-specific statutes. As
defined by the OCC, the duties that are
of particular pertinence to discretionary
distributions include the following:
■ ■ Duty of loyalty: A fiduciary must
administer the trust solely in the interests of the beneficiaries and may
not engage in any act of self-dealing. A
fiduciary with discretionary distribution powers that generates fees based
on the amount of assets in an account,
for example, would breach this duty if
it held back on distributions to avoid
reducing the amount of assets and, in
turn, its fees.
■ ■ Duty of administration: A
fiduciary must administer the trust
in accordance with the trust’s terms
and purposes and the interests of the
beneficiaries. The fiduciary must act
prudently in the administration of the
trust; exercise reasonable care, skill,
and caution; and incur only reasonable
costs of administration. A fiduciary
risks breaching this duty when it fails to
communicate enough with all beneficiaries to determine each beneficiary’s
needs and other sources of income. The
fiduciary must also retain sufficient supporting documentation demonstrating
the results of such communications.
■ ■ Duty to control and protect
trust property: A fiduciary must
take reasonable steps to control and
protect the assets in the trust. For
example, a fiduciary should avoid
distributing funds haphazardly based
on every beneficiary request, because
such activity might result in depleting
the account prematurely.
Common Errors
Audits of trust departments reveal several common deficiencies stemming
from poor internal practices, which
in turn might lead to claims of breach
against a fiduciary.
■ ■ Lack of appropriate policies
and procedures: Each trust department or trust company should have
detailed policies and procedures for
handling discretionary distributions.
Among other things, such policies
should address who has decision-making power for the distribution, a
process for providing oversight to that
decision, and documentation expectations. Typically, a trust department or
trust company will establish a policy
