Many trust instruments prohibit trustees from relieving themselves of a legal duty under applicable law. Such language, which is sometimes referred to as an “Upjohn” clause after the case of Upjohn v. U.S. (30 A.F.T.R. 2d. 72-5918 (W.D. Mich 1972)), is most often, intended to prohibit a trustee from using trust assets to pay for anything which he or she is obligated to provide to his or her child as a matter of law and regardless of the trust.
Section 151.001 of the Texas Family Code imposes a legal obligation on parents to support their minor children. This includes the duty to provide a child with clothing, food, shelter, education, and medical and dental care.
The prohibitive language of an Upjohn clause typically comes into play in one of two scenarios: Either a grandparent has established a trust for the benefit of a minor grandchild and named the intervening child as trustee, or a spouse has established a trust for the benefit of a minor child and named the other spouse as trustee. In either case, the trustee is the parent of the beneficiary and owes the beneficiary a legal duty of support because the beneficiary is a minor. Although there are other circumstances where an Upjohn clause might apply (for example in the context of a marriage or guardianship), corporate and unrelated trustees generally do not need to concern themselves with this particular legal landmine.
The legal obligations prohibition is primarily meant to prevent inclusion of the entire trust corpus in a trustee’s estate under Treas. Reg. § 20.2041-1(c)(1), which treats the power to relieve a support obligation as a general power of appointment. Importantly, the trustee does not have to actually discharge an obligation. The mere power to do so is enough to cause inclusion. This is why some affirmative mechanism is needed to deny the trustee such power in the first place.
Legal support prohibitions are often contained in the boilerplate of a trust instrument which individual trustees are unlikely to bother reading and less likely to understand. Litigators who specialize in trust administration issues know to look for these clauses and point out violations. If a trustee makes even a small distribution in violation of an Upjohn clause, he or she has violated his or her fiduciary duty and may be subject to severe reprimand. This underscores the point that trustees, and in particular individual trustees, should maintain a close relationship with their attorneys and other professional advisors.
Although the distributions prohibited by an Upjohn clause are narrow in scope, there is very little legal precedent for determining exactly what is prohibited and what is not, so the best course of action is to proceed conservatively and with an abundance of caution.
In the absence of legal precedent to the contrary, more conservative guidelines are advisable. Thus, where an Upjohn clause applies, the following expenditures are best avoided:
- Rent or any similar payments
- Home improvements or decor
- Homeowners or renters’ insurance
- Basic utilities for the home
- Property taxes
- Health insurance
- Non-elective healthcare
- General dentistry
- Prescription glasses
On the other hand, there are a number of expenses which do not fall within support obligation, so trust assets may be properly expendable on the following:
- Cell phones
- TV, cable, or satellite service
- Internet service
- Personal accessories
- Auto insurance
- Private school education
- Extracurricular activities
- Trips and vacations
- Elective health care
If you would like to discuss the particular language in your trust instrument, or the circumstances in which it operates, please contact one of our trust attorneys for guidance.
Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP. He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.