In Harootian v. Douvadjian, Case No. 05-1510, 2010 Mass. Super. LEXIS 78 (Apr. 15, 2010), the Worcester Superior Court discussed the bounds of a trustee's discretion to invade the principal of a trust.
In 2001, Arthur Ansbigian settled a trust naming himself and his wife Beatrice as co-trustees, naming Beatrice as a lifetime beneficiary, and naming the plaintiff as a remainder beneficiary. After Arthur's death in 2003, Beatrice became the sole trustee and the lifetime beneficiary of the trust. Over the next two years, she spent the trust principal on personal expenses to the point where the principal had been substantially depleted by the time of her death in 2005, thereby diminishing the plaintiff's remainder interest.
The plaintiff challenged three transactions in particular. Specifically, he challenged Beatrice's spending of approximately $58,000 of principal to pay taxes assessed against the trust and her personally. He challenged Beatrice's payment of approximately $8,000 to the defendant (the executor) as compensation for various services he provided to her personally in her final months. And he challenged Beatrice's borrowing of $150,000 on behalf of the trust, from herself personally, to avoid having to sell the trust's real property when its liquid assets were running low. Upon Beatrice's death, the loan was repaid.
The Court granted summary judgment for the defendant and against the plaintiff, holding that Beatrice did not abuse her discretion as trustee in depleting the principal. The Court explained that where a trustee's discretion is not limited to making expenditures of principal for "necessary" payments only, the general rule is that the trustee need not consider a beneficiary's personal assets in exercising such discretion to invade principal to make support payments. Therefore, Beatrice's exercise of her discretion to use trust principal to satisfy her tax liabilities and to pay the defendant for personal services to her was not inconsistent with the instructions of the trust.
The Court further explained that Beatrice's loan to the trust presented a "closer question," but held that the loan was not improper because its purpose was to avoid the need to sell the trust's real property and thus was appropriate to provide for Beatrice's comfort and maintenance. Although the trust instrument did not expressly authorize Beatrice to borrow money on behalf of the trust, the authority to dispose of assets includes by implication the authority to borrow against or mortgage those assets.