Key point. The decisions of trustees regarding the distribution of trust income or principal ordinarily will be upheld by the courts, especially where the trust confers upon them the sole discretion to make such decisions and they act in good faith.
* A California court ruled that a trust that was created by a church member to benefit elderly members of the church did not act improperly in rejecting a request by the church to distribute $300,000. A church member (Ruth) created a trust that directed the trustees to pay her church so much of the income and principal “as is necessary for the benefit of senior citizens, whether to improve the church for their comfort, or to assist programs started through the church for the benefit of senior citizens, or for such other needs of the church as the trustees shall, in their sole discretion, determine. At the time of Ruth’s death, the trust was valued at more than $1 million. The trust named two individuals to serve as co-trustees.
The church asked the trustees to distribute $300,000 from the principal of the trust to help pay the cost of a $3 million remodeling project that had gone several hundred thousand dollars over budget. The church claimed that it would use the $300,000 in accordance with the terms of the trust by paying for things that benefited seniors, such as benches in the reception area and more comfortable seating in the church, a new sound system, brighter lighting, better heating and air conditioning, and a new drive-through area to give seniors better access. However, the church did not give the trustees a breakdown of how the church intended to spend the $300,000. The trustees rejected the church’s request because they believed that it was inconsistent with Ruth’s intent in creating the trust.
The church asked a court to order the trustees to distribute the $300,000. A member of the church and a self-avowed “senior,” testified at a hearing that she was a member of the “Pioneer Club,” which is an organization of church seniors that met twice a month at the church. She testified that the seniors appreciated the new cushioned church pews and improved lighting that were “just so conducive to an elder to be relaxed and enjoy the service.” She also appreciated the improved air conditioning and heating in the new church, as well as the new sound system. Another benefit of the new building was the addition of a ramp from the parking lot to the church.
Another church member prepared a spreadsheet of the costs of the items included in the church remodeling which he believed benefited seniors. Many of these items involved making the church compliant with the American with Disabilities Act. The member concluded that $50,835 of the cost of the reconstruction directly benefited seniors.
A court ruled in favor of the trustees, and denied the church’s request to compel a distribution of $300,000 from the trust principal. The court based its ruling on two considerations. First, the trust gave the trustees “sole discretion” to determine any distributions of principal or income from the trust. The trust did not give the church, as beneficiary, “an unfettered right to demand distributions of principal.”
Second, while there was evidence that the church remodeling project had some benefits to seniors, “there was no evidence that the benefits to seniors had a value of $300,000—the amount the church was requesting. In fact, [a church member] testified that he created a spread sheet analyzing what parts of the construction project favored seniors. He concluded that $50,835 was spent on items that particularly benefited seniors. Since the trustees had discretion to invade principal as necessary to assist the church in benefiting seniors, and there was no evidence that seniors would derive a $300,000 benefit from the reconstruction project, the trustees had a rational basis to conclude that a $300,000 principal distribution was not necessary to benefit seniors.”
The court conceded that “we can imagine situations where the trustees would not be fulfilling their fiduciary duties by refusing to invade principal,” but concluded that “the evidence does not support such a conclusion in this case.” Gordon v. Holy Redeemer Church, 2006 WL 1330916 (Cal. App. 2006).
