Can a trustee pay the college tuition for a trust beneficiary’s child? The distribution would, after all, benefit the beneficiary by eliminating the financial burden of paying the child’s tuition. What if the trust directs the trustee to make distributions for education? A tuition payment is certainly a distribution for education. However, and unfortunately for the trust beneficiary putting a child through college, unless the trust specifies that a distribution can be made for paying for the education costs of the beneficiary’s kids, it is likely that such a distribution would be a breach of the trustee’s fiduciary duty.
Last fall, Division I of the Washington Court of Appeals addressed this issue in an unpublished case, In re Irrevocable Trust of Clark. In this case, Donna Clark executed a trust that provided for her assets in the trust to be divided on her death into two separate shares, one for each of her two sons, Gary and Curtis. After Donna died, Gary served as trustee. Gary and Curtis could not agree on how to divide the assets in their mother’s trust and disagreed about many other things related to the trust. Curtis filed a petition to resolve these disputes under Washington’s Trust and Estate Dispute Resolution Act.
Among other claims, Curtis alleged that Gary breached his fiduciary duty as trustee by paying his daughters’ college tuition directly from the trust. Gary argued that the trust authorized the tuition payments because one of the purposes of the trust was to support education and that Donna had made tuition payments on behalf of her grandchildren from her personal account while she was alive. The court disagreed with Gary’s argument. It ruled that Gary had breached his fiduciary duty as trustee by making tuition payments from the trust because he made distributions to benefit individuals who were not trust beneficiaries – his daughters.
Gary further argued that there was no harm to his brother when he used trust funds to make the tuition payments because they came from his share of the trust. This argument also failed. The court noted that Gary did not divide the trust into shares as directed and, further, that “[e]ven if Gary may have planned to reduce his portion when finally dividing the Trust, those future intentions did not change the undisputed facts that Gary disbursed undivided Trust assets to non-beneficiaries so as to benefit his family.” In other words, because the distributions benefited his family over the collective interest of the trust beneficiaries, Gary breached his duty as trustee by engaging in self-dealing.
What should Gary have done differently? Of course, he should not have made tuition payments from the trust account. Like many trustees who find their actions under scrutiny by the court, Gary erred when he failed to follow the terms of the trust. The trust directed that it be divided into two shares, and he didn’t do that. He also made the mistake of making a distribution to benefit someone who was not a beneficiary. While it’s not clear from the court’s opinion when Gary finally consulted with an attorney regarding his duties as trustee, it is apparent that he failed to seek legal advice regarding his duties as trustee early in the trust administration process – before he made those missteps.
What can be learned from this decision? Serving as a trustee can be a daunting task. Just because a trustee thinks a trust distribution is okay doesn’t make it so. Trustees should, when embarking upon their fiduciary responsibilities, retain counsel as soon as possible to avoid these types of errors. Our firm provides these services, and we’d be happy to help.
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