4.8 Extended Discretion and Court Enforcement of Distributions
In some trusts, however, the settlor appears to grant discretion without any standard or measurement of the settlor’s intent. In those cases, the settlor grants extended discretion (“absolute” or “unlimited” or “uncontrolled” discretion). Extended discretion, according to the first two Restatements of Trusts, obviates the requirement that the trustee act reasonably:
The mere fact that that the trustee is given discretion does not authorize him to act beyond the bounds of a reasonable judgment. The settlor, may, however, manifest an intention that the trustee’s judgment need not be exercised reasonably, even where there is a standard by which the reasonableness of the trustee’s conduct can be judged. This may be indicated by a provision in the trust instrument that the trustee shall have “absolute” or “unlimited” or “uncontrolled” discretion. These words are not interpreted literally but are ordinarily construed as merely dispensing with the standard of reasonableness. In such a case the mere fact that the trustee has acted beyond the bounds of a reasonable judgment is not a sufficient ground for interposition by the court, so long as the trustee acts in a state of mind in which it was contemplated by the settlor that he would act. But the court will interfere if the trustee acts in a state of mind not contemplated by the settlor. Thus, the trustee will not be permitted to act dishonestly, or from some motive other than the accomplishment of the purposes of the trust, or ordinarily to act arbitrarily without an exercise of his judgment.
In his treatise, Professor Scott distills the test to the “state of mind not contemplated” standard: “The real question is whether it appears that the trustee is acting in a state of mind in which it was contemplated by the settlor that he should act.” This shift away from “reasonableness” would appear to embrace subjective criteria which, by its nature, would be difficult for a court to second guess. It reduces the standard from a test of whether an abuse of discretion has occurred, in trusts providing for extended trustee discretion, to whether the power was exercised or, for that matter not exercised, in bad faith or through some other showing of improper motive and not in the state of mind contemplated by the settlor that he or she would act.
In practice, however, the courts impose a reasonableness standard regardless of whether the discretion is extended or absolute despite the early treatment in the first two Restatements:
The authorities do not appear to support the Restatement position that there is no requirement of reasonableness in the exercise of a power granted in the trustee’s absolute discretion. Most courts have held that the exercise of an absolute power is subject to the court’s review and determination as to whether the power had been unreasonably exercised by the trustee.
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It would appear that the difference in the attitude of the courts towards “simple” discretionary powers, on the one hand, and “absolute” or “uncontrolled” discretionary powers, on the other hand, is one of degree rather than kind. The courts appear more likely to find an abuse of a simple discretionary power than an abuse of an absolute or uncontrolled discretionary power. In addition to the commonly recognized factors used to determine whether there has been an abuse of discretion, a standard of reasonableness has been applied by the courts in judging the exercise of a discretionary power (whether simple or absolute), a standard implied from the settlor’s intent and the purposes expressed in the trust instrument. With respect to court review of discretionary powers, this standard is consistent with the standard of care and skill of a prudent man and is based upon established fiduciary standards and principles.
This was also the conclusion of Professor Halbach in his seminal 1961 article: that “reasonableness” was, in fact, required in every case involving extended discretion, but usually the Courts framed the discussion under “the state of mind contemplated by the settlor” standard:
[I]n numerous cases the trustee’s ‘absolute’ or ‘controlled’ discretion has been overturned on much the same ground as that on which simple discretions have often been upset – typically, unreasonably small payments to the beneficiary. Such cases can be interpreted as coming within the Restatement formulation requiring the trustee to act in the ‘state of mind’ … contemplated by the settlor, ‘and the modern opinions, almost without exception, have expressed their results in these terms when interfering with the trustee’s judgment. Even though language in the decisions tends to perpetuate the Restatement’s wording of the rule, any distinction between the test of reasonableness and the state-of-mind test is difficult to discern from the holdings of these cases. In fact, the requirements set out in the dicta of some cases, phrased in terms of requiring ‘reasonable judgment’ and ‘sound discretion,’ go far in obliterating any such distinction.
If good faith was purely subjective (the “pure heart” test), enforcement would be 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.”