If good faith was purely subjective (the “pure heart” test), enforcement would illusory – effectively negating the trust. Trusts presuppose giving enforceable rights to beneficiaries. In a Delaware case, for example, the trust instrument stated that distributions by a committee of trustees were “not subject to review by any court.” In that case, the court ignored the provision: “A trust where there is no binding legal obligation on a trustee is a trust in name only and more in the nature of an absolute estate or fee simple grant of property.”[1] [1] McNeil v. McNeil, 798 A.2d 503, 509 (Del. Super. Ct. 2002). There are potential adverse federal tax consequences if a trustee cannot be held to a reasonability standard as to discretionary distributions. One of the exceptions to grantor income tax inclusion, for example, requires that a power to appoint must be under a reasonably definite, ascertainable standard: “[I]f a trust instrument provides that the determination of the trustee shall be conclusive with respect to the exercise or non-exercise of a power, the power is not limited by a reasonably definite standard.” Treas. Reg. § 1.674(b)-1(b)(5)(i). A similar position could be advanced for federal gift and estate tax purposes. Thus when drafting provisions giving a trustee, who is also a beneficiary, distribution discretion under “ascertainable standards,” it may be prudent not to use extended discretion language. Generally, of course, a trust without the trustee’s obligation to account is not a trust: “A settler who attempts to create a trust without any accounting in the trustee is contradicting himself. A trust necessarily grants rights to the beneficiary that are enforceable in equity.” Bogert, supra note 34, at § 974.
If good faith was purely subjective (the “pure heart” test), enforcement would illusory – effectively negating the trust. Trusts presuppose giving enforceable rights to beneficiaries. In a Delaware case, for example, the trust instrument stated that distributions by a committee of trustees were “not subject to review by any court.” In that case, the court ignored the provision: “A trust where there is no binding legal obligation on a trustee is a trust in name only and more in the nature of an absolute estate or fee simple grant of property.”[1] [1] McNeil v. McNeil, 798 A.2d 503, 509 (Del. Super. Ct. 2002). There are potential adverse federal tax consequences if a trustee cannot be held to a reasonability standard as to discretionary distributions. One of the exceptions to grantor income tax inclusion, for example, requires that a power to appoint must be under a reasonably definite, ascertainable standard: “[I]f a trust instrument provides that the determination of the trustee shall be conclusive with respect to the exercise or non-exercise of a power, the power is not limited by a reasonably definite standard.” Treas. Reg. § 1.674(b)-1(b)(5)(i). A similar position could be advanced for federal gift and estate tax purposes. Thus when drafting provisions giving a trustee, who is also a beneficiary, distribution discretion under “ascertainable standards,” it may be prudent not to use extended discretion language. Generally, of course, a trust without the trustee’s obligation to account is not a trust: “A settler who attempts to create a trust without any accounting in the trustee is contradicting himself. A trust necessarily grants rights to the beneficiary that are enforceable in equity.” Bogert, supra note 34, at § 974.