Exercise of Powers Over Discretionary and Other Interests; Tax Savings

  1. Law
  2. Tennessee Code
  3. Fiduciaries and Trust Estates
  4. Tennessee Uniform Trust Code
  5. Duties and Powers of Trustee
  6. Exercise of Powers Over Discretionary and Other Interests; Tax Savings

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  1. Relative to exercise of powers over discretionary and other interests:
    1. “Improper motive” means to demonstrate action such as the following:
      1. A trustee refusing to make or limiting distributions to beneficiaries other than the trustee due to the trustee's self interest when the trustee also holds a beneficial interest subject to a discretionary interest; or
      2. A trustee making a distribution in excess of an ascertainable standard to such trustee as beneficiary when the trustee is restricted by an ascertainable standard in the trust.
    2. Unless otherwise provided in the trust:
      1. If the settlor's spouse is named as a beneficiary, the settlor's spouse is still living and the trust is classified as a support trust, then the trustee shall consider the resources of the settlor's spouse, including the settlor's obligation of support, prior to making a distribution; and
      2. In all other cases, unless otherwise provided in the trust, the trustee need not consider the beneficiary's resources in determining whether a distribution should be made.
  2. The following provisions apply only to discretionary interests:
    1. A discretionary interest is neither a property interest nor an enforceable right; it is a mere expectancy;
    2. A court may review a trustee's distribution discretion only if the trustee acts dishonestly, acts with an improper motive, or fails to act if under a duty to do so;
    3. A reasonableness standard shall not be applied to the exercise of discretion by the trustee with regard to a discretionary interest;
    4. Other than for the three (3) circumstances listed in subdivision (b)(2) or to enforce the limitations of subsection (d), a court has no jurisdiction to review the trustee's discretion or to force a distribution; and
    5. Absent express language in the trust instrument to the contrary, in the event that the distribution language in a discretionary interest permits unequal distributions between beneficiaries or distributions to the exclusion of other beneficiaries, the trustee may distribute all of the accumulated, accrued, or undistributed income and principal to one beneficiary in the trustee's discretion.
  3. The following provisions apply only to mandatory or support interests:
    1. A beneficiary of a mandatory or a support interest has an enforceable right to a distribution pursuant to a court's review;
    2. A trustee's distribution decision may be reviewed for unreasonableness, dishonesty, improper motivation, or failure to act if under a duty to do so; and
    3. In the case of a support interest, nothing in this section shall raise a beneficiary's support interest to the level of a property interest.
  4. Unless otherwise provided in subsection (f), and unless the terms of the trust expressly indicate that a rule in this subsection (d) does not apply:
    1. A person other than a settlor who is a beneficiary and trustee of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee's personal benefit may exercise the power only in accordance with an ascertainable standard; and
    2. A trustee may not exercise a power to make discretionary distributions to satisfy a legal obligation of support that the trustee personally owes another person.
  5. A power that is limited or prohibited by subsection (d) may be exercised by a majority of the remaining trustees whose exercise of the power is not so limited or prohibited. If the power of all trustees is so limited or prohibited, the court may appoint a special fiduciary with authority to exercise the power.
  6. Subsection (d) shall not apply to:
    1. A power held by the settlor's spouse who is the trustee of a trust for which a marital deduction, as defined in §  2056(b)(5) or §  2523(e) of the Internal Revenue Code (26 U.S.C. §  2056(b)(5) and §  2523(e)), was previously allowed;
    2. Any trust during any period that the trust may be revoked or amended by its settlor; or
    3. A trust if contributions to the trust qualify for the annual exclusion under §  2503(c) of the Internal Revenue Code (26 U.S.C. §  2503(c)).


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