Revisiting the Ascertainable Standard in Light of the ‘Modern Family.’

Take-Away: Consider expanding the distribution standard used in trusts, beyond the conventional health, education, support and maintenance language, with broader definitions of those words to reflect the changing world in which we, and trust beneficiaries, currently live.

Background: The fairly ubiquitous ascertainable standard that is used in many trusts authorizes distributions by the trustee for a beneficiary’s health, education, support and maintenance. Those words have over the decades attracted definitions that have evolved and which are reflected in the common law and which most trustees are comfortable administering.

• Trust Code: This age-old standard is even a part of the Michigan Trust Code, which provides: “Ascertainable standard’ means a standard relating to an individual’s health, education, support, or maintenance within the meaning of section 2041(b)(1)(A) or 2514(c)(1) of the internal revenue code, 26 USC 2041 and 2514. [MCL 700.7103(b).] An ascertainable standard is also required for the exercise of a power of withdrawal as used in MCL 700.7815, which deals with a discretionary power of distribution by the trustee. Generally, health, education, maintenance and support are customary words with understandable purposes which are applied to meet and satisfy the basic needs of the trust beneficiary.
• Dynasty Trusts: With the recent changes in the transfer tax laws, we can expect many individuals to take advantage of the opportunity to transfer significant wealth in trust for the benefit of their children and grandchildren and for that trust to exist for multiple generations. These long-term trusts will often use an ascertainable standard to guide the trustee in making distributions, yet the needs and requests for distributions from these trust beneficiaries will be far different than they are today. As a result, we need to consider providing more flexibility in these dynasty trusts, including much broader definitions of the conventional words health, education, maintenance or support.

Revising the Ascertainable Standards: Despite our comfort and familiarity with the conventional ascertainable standard, the needs to be more expansive definitions to these basic words used in a trust instrument to reflect the rapidly changing world in which we live. It is that, or the settlor needs to provide the trustee with ‘letters of instruction or wishes’ to help the trustee understand the settlor’s intent when the ascertainable standard words are used in a trust.  A few examples that might test the limits of the standard health, education, maintenance and support words follow:

• Security: What if support and maintenance were defined to permit expenditures to provide for the beneficiary’s personal security? Using trust funds to provide for a trust beneficiary’s personal security is going to become more important in a global economy where more individuals will travel abroad, if not establish their domicile in a foreign jurisdiction. Add to this the ever-present danger of terrorism and possible kidnappings, and it is easy to foresee where personal security becomes almost as important as an individual’s financial support.
• Artificial Reproductive Technology (ART): Should health be interpreted to include expenditures incurred for ART if it is required to enable the trust beneficiary (or their spouse) to bear children. Twenty years ago ART was unheard of, yet today thousands of couples pursue these expensive treatments with the goal of starting a family. The Michigan Estates and Protected Individuals Code may be amended sometime this year to identify and protect the inheritance ‘rights’ of a child who is the product of ART. Should ART expenses be treated as a customary health expense? Should a gestational surrogate/carrier on the beneficiary’s behalf have their medical expenses paid by the trust, if the newborn child is for the trust beneficiary, but the carrier is not a trust beneficiary?
• Adoptions: If a trust beneficiary cannot bear children, or their spouse cannot, can the trustee make distributions for expenses that are incurred by the trust beneficiary for an adoption, especially when it is an international adoption where travel to the child’s home country is normally involved? Would that travel be a support expenditure?
• Chromosome Mapping: Should a request by a trust beneficiary for chromosome mapping be treated as a distribution for that beneficiary’s health? Or might that expense be viewed as a non-necessary medical expense like Lasik or plastic surgery?
• Gender: Should a distribution for the trust beneficiary’s health include treatments for gender reassignment? Transgender’ism’ apparently has now gone mainstream as estimates are that there are 1.4 million transgender adults living in the US today.
• Companions: Some trusts authorize health or support distributions to or for the benefit of a trust beneficiary’s spouse. How should the trustee treat an individual whose relationship with the trust beneficiary is authorized as a domestic partnership or civil union under one state’s law, but not a marriage, under the law of the beneficiary’s domicile?

The Modern Family: An article I recently read provided some startling insights into how much the ‘modern family’ is changing, which prompts the rhetorical question if existing trusts can keep up with and respond to these dynamic societal changes. Some of those eye-opening statistics follow:

• The one-time traditional family had 2.5 children; in 2016, the average number of children in a US family is below 2. [Reference in a trust to distributions to descendants will be limited.]
• A recent Gallup poll estimated that 20% of the US population is ‘gay’ (national self-reports are only at 3.5% ‘gay’.)
• Under 50% of the people in the US are married; the marriage rate is 6.9 per 1000, while the divorce rate has dropped a bit in the past 20 years to 3.2 individuals per 1,000. [Provisions in a trust for a spouse, or distributions tied to marriage, will be impacted.]
• The number of people over age 50 years who cohabit (i.e. without a formal marriage) has increased 75% in just the past decade. [Most trusts do not provide for a long-term cohabitant, just provisions for a spouse, on the beneficiary’s death.]
• Polygamous family situations are now publically accepted, e.g. Warren Buffet and his wife agreed that divorce was too costly, so they just agreed to participate in new relationships with non-spouses. [Spousal elective rights which persist despite not living together, could nonetheless mess up the trust’s distribution provisions.]
• Those who decide to marry are delaying that decision, the average ages in 2013 being 27 and 29 years, almost ten years longer than just two decades ago. [Distributions from a trust on the beneficiary’s marriage will be delayed longer.]
• 20 million Americans over age 65 years are single. [Does this fact increase the likelihood of some form of elder financial abuse as the individual ages that must be guarded against?]
• Same-sex couples can elect to be married couples, a fundamental change that occurred only in 2014. [Trust provisions that refer to husband and wife will have to be construed by courts when ascertaining the settlor’s intent.]
• Twelve states still recognize common law marriage. [How does an individual prove to the trustee that they were married to the trust beneficiary to justify distributions from the trust to the ‘beneficiary’s spouse?’]
• 7% of US families are now biracial. [Is a trust provision that makes distributions contingent on being married to a person of the same race (or opposite sex) contrary to the state’s public policy and thus unenforceable?]
• In the 1980’s 1 in 2000 children was diagnosed with autism. Today, 1 in 150 children are diagnosed with autism. [The trust is silent on making a beneficiary’s eligibility to receive discretionary distributions contingent on receipt of governmental benefits.]
• Down syndrome has increased 30% in the past two decades. [The trust does not have a ‘hold-back’ overriding provision to stop distributions from the trust when a beneficiary attains a specific age.]
• Alzheimer’s and dementia are increasing in our elder population, who are living longer. [Does a revocable trust have provisions that permit changes or amendments to the trust by a trust director once the settlor loses capacity?]
• In 1960 4% of the children in a family were ‘non-marital.’ In 2018 that number has increased to 40% of the children as not a product of that marriage. [What if the trust does not mention or treat step-children as a descendant?]
• More than 50% of new born children are to cohabiting (unmarried) couples. [What if the trust expressly excludes a ‘child out of wedlock’ as a beneficiary or be treated as a descendant?]

Conclusion: These are just a few examples of how the limits of the ascertainable standard (health, education, support and maintenance) are being tested these days by societal changes and how some trusts that are being drafted using old trust forms do not reflect the reality of the ‘modern family in the US.’ Much more time needs to be spent with the trust settlor to better understand how the settlor intends these types of changes, or expenses incurred by trust beneficiaries, are to be satisfied with the assets that they intend to be held in trust. They need to be asked whether some of the lifestyle decisions made by children and grandchildren will impact how the trust will be administered. With considerably less time spent on ‘saving estate taxes’ with the tax law changes, perhaps that freed up time can now be spent asking the settlor how they want their trust to respond to these rapid changes in the current American culture.