9.2 Trustee Standards

Once establishing that a discretionary trust was created in First National, the Court found that its review of the Trustee’s failure to distribute principal was limited to whether “it can be shown that they acted ‘dishonestly or arbitrary or from improper motive.’ Restatement (Second) of Trusts § 128, Comment d (1957).”   In Offutt v. Offutt, 204 Md. 101, 109, 102 A.2d 554, 558 (1954), the Court declared “[t]he principle that the exercise by a trustee of a personal discretion conferred upon him is not subject to control by the court, except to prevent an abuse of discretion.”   A “personal discretion” is one “which the instrument conferring it (a power given a trustee) declared should be exercised by him or not according to his own volition or at his own discretion.” (Offutt at 108, quoting from Gottschalk v. Mercantile Trust and Deposit Co., 102 Md. 521, 62 A. 810 (1906)). “Thus, where a personal power of discretion is vested in the trustees, the Chancellor, even after an assumption of jurisdiction, will require a showing of abuse of discretion before substituting his judgment for that of the trustees, even though he might control their imperative, impersonal, or ministerial powers.” (Offutt at 109).

This was the traditional approach that courts took to “enforcing” discretionary trusts, an approach that gave a beneficiary little recourse against a trustee who declined to make a distribution. Other Maryland cases seem to drift from the traditional “hands-off” rule. In Waesche v. Rizzuto, 224 Md. 573, 587, 168 A.2d 871, 877 (1961), the Court restated the rule for discretionary trusts: “A court of equity will not interfere in the exercise of the discretionary power conferred on the trustees provided that this power was honestly and reasonably exercised. However, it must appear that the trustees acted in good faith, having a proper regard to the wishes of the testator and the nature and character of the trust reposed in them.”   This language was cited in Jacob v. Davis, 128 Md. App. 433, 461, 738 A.2d 904, 918-9 (1999), which famously held that a remainderman is entitled to accountings despite a limitation to the contrary in the trust instrument, at least when the current income beneficiary is a co-trustee.   In Jacob, the Court found that the trustee abused his discretion by delegating to the co-trustee/income beneficiary the discretion to invade principal. Once that abuse of discretion was found, the burden shifted to the trustee to justify the distributions.   As to the broader holding that a trust necessarily grants rights to accountings to the beneficiaries, the Court quoted Bogart, The Law of Trusts and Trustees, § 973 (Rev. 2d ed. 1983): “A [testator] who attempts to create a trust without any accountability in the trustee is contradicting himself. A trust necessarily grants rights to the beneficiary that are enforceable in equity. If the trustee cannot be called to account, the beneficiary cannot force the trustee to any particular line of conduct with regard to the trust property or sue for breach of trust. The trustee may do as he likes with the property, and the beneficiary is without remedy. If the court finds that the settlor really intended a trust, it would seem that accountability in chancery or other court must inevitably follow as an incident. Without an account the beneficiary must be in the dark as to whether there has been a breach of trust and so is prevented as a practical matter from holding the trustee liable for a breach.” This principle, coupled with what may be an expanded standard of judicial review suggested by Waesche and Jacob, may create unintended consequences.