[Federal Register Volume 82, Number 1 (Tuesday, January 3, 2017)]
[Notices]
[Pages 122-124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31583]


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OFFICE OF GOVERNMENT ETHICS


Request for Public Input on the Application of the Criminal 
Conflict of Interest Prohibition to Certain Beneficial Interests in 
Discretionary Trusts.

AGENCY: Office of Government Ethics (OGE).

ACTION: Notice of request for public comments.

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SUMMARY: This notice and request seeks input from members of the public 
with expertise in trust law concerning the following question: Are 
there any circumstances under which an eligible income beneficiary of a 
discretionary trust might, in the absence of a vested remainder 
interest, be able to compel the trust to make a distribution or 
payment? OGE will take into consideration all relevant expert input 
submitted by the public within 60 days of the date of this notice. To 
be

[[Page 123]]

considered, any submission exceeding five (5) pages in length must 
include a one-page summary of key points and conclusions. Commenters 
are requested to state briefly the nature of their expertise in trust 
law.

DATES: To be assured consideration, comments must be received at the 
address provided below, by no later than 5:00 p.m. on March 6, 2017.

ADDRESSES: You may submit comments, in writing, to OGE regarding this 
notice and request by any of the following methods:
    E-Mail: [email protected]. Include the reference ``Request for Input on 
Discretionary Trusts'' in the subject line of the message.
    Fax: (202) 482-9237.
    Mail/Hand Delivery/Courier: U.S. Office of Government Ethics, Suite 
500, 1201 New York Avenue NW., Washington, DC 20005-3917, Attention: 
``Request for Input on Discretionary Trusts.''
    Instructions: All submissions must include OGE's agency name and 
the words ``Discretionary Trusts.'' All comments, including attachments 
and other supporting materials, will become part of the public record 
and subject to public disclosure. Comments may be posted on OGE's Web 
site, www.oge.gov. Sensitive personal information, such as account 
numbers or Social Security numbers, should not be included. Comments 
generally will not be edited to remove any identifying or contact 
information.

FOR FURTHER INFORMATION CONTACT: Jennifer A. Matis, Assistant Counsel, 
Office of Government Ethics, Suite 500, 1201 New York Avenue NW., 
Washington, DC 20005-3917; Telephone: 202-482-9300; TTY: 800-877-8339; 
FAX: 202-482-9237.

SUPPLEMENTARY INFORMATION: During the administration of President 
George W. Bush, a former Director of the U.S. Office of Government 
Ethics (OGE), Hon. Robert I. Cusick, issued a guidance memorandum 
addressing a novel legal issue concerning the application of the 
primary criminal conflict of interest statute to the interests of 
eligible income beneficiaries of discretionary trusts who lack vested 
remainder interests. Discretionary Trusts, DO-08-024 (2008). That 
conflict of interest statute, 18 U.S.C. 208, prohibits an executive 
branch employee from participating personally and substantially in any 
particular matter that directly and predictably affects a ``financial 
interest'' of either the employee or a person whose interests are 
imputed to the employee (e.g., the. employee's spouse or minor child). 
See 5 CFR part 2640, subpart A. The 2008 memorandum articulated OGE's 
conclusion that, for purposes of the conflict of interest statute, an 
eligible income beneficiary of a discretionary trust would not be 
considered to have a financial interest in the holdings of the trust, 
provided that the beneficiary was not the grantor and did not have a 
vested remainder interest. Discretionary Trusts, DO-08-024 (2008). The 
premise underlying OGE's conclusion was that such a beneficiary could 
never have an ``enforceable right to payment.'' Id. at 1. For this 
premise OGE relied upon the American Law Institute's Second Restatement 
of the Law of Trusts. Id. (citing Restatement of the Law (Second) 
Trusts, Sec.  155).
    In 2013, OGE issued a second guidance memorandum on the topic of 
reporting requirements applicable to a beneficiary who could meet the 
requirements articulated in its 2008 memorandum. The 2013 memorandum 
clarified that such a beneficiary would not have to report the holdings 
of the discretionary trust in an executive branch financial disclosure 
report filed under the Ethics in Government Act, 5 U.S.C. app. 101, et 
seq., in the event that the beneficiary were to receive income from the 
trust during the reporting period, though the beneficiary would have to 
report the income itself. Reporting Requirements for Discretionary 
Trusts, LA-13-04 (April 9, 2013). The 2013 memorandum did not otherwise 
modify the 2008 memorandum or revisit its underlying premise.
    The 2008 memorandum, which OGE has continued to apply, is based 
wholly on the premise that there are no circumstances under which such 
a beneficiary could ever compel a distribution or payment from a 
discretionary trust. This month, however, OGE learned that the American 
Law Institute's Third Restatement of the Law of Trusts may suggest a 
contrary analysis as to the financial interests of eligible income 
beneficiaries of discretionary trusts, at least in some jurisdictions. 
See Restatement of the Law (Third) Trusts, Sec.  60, cmt. e (Am. Law 
Inst. 2003) (``A transferee or creditor of a trust beneficiary cannot 
compel the trustee to make discretionary distributions if the 
beneficiary personally could not do so. It is rare, however, that the 
beneficiary's circumstances, the terms of the discretionary power, and 
the purposes of the trust leave the beneficiary so powerless. The 
exercise or nonexercise of fiduciary discretion is always subject to 
judicial review to prevent abuse.'').
    This discovery drew OGE's attention to an article in the Quinnipiac 
Probate Law Journal by Alan Newman, Professor of Law for the University 
of Akron School of Law. See Newman, Alan, Trust Law in the Twenty-First 
Century: Challenges to Fiduciary Accountability, 29 Quinnipiac Prob. 
L.J. 261 (2016). Professor Newman writes,

    ``[I]f, in fact, the beneficiary of a discretionary trust had 
only an expectancy with respect to the trust, arguably the 
beneficiary would be unable to hold the trustee accountable to 
enforce the trust. However, as noted elsewhere, `the difficulty with 
this theory is that it is not true.' Although there is a 
longstanding debate whether a beneficiary of a trust has a property 
interest in the trust assets, merely a claim against the trustee, or 
both, it is well-established that: (i) the beneficiary's interest in 
the trust itself is property, regardless of whether the trust terms 
provide that distributions to the beneficiary are at the trustee's 
discretion; and (ii) the beneficiary may enforce them.

Id. at 282 (quoting Jesse Dukeminier & Robert H. Sitkoff, Wills, 
Trusts, and Estates 689 (9th ed. 2013)).
    Professor Newman further explains that cases denying the claims of 
a beneficiary's creditors against the trust reflect only a ``policy-
oriented'' approach to addressing the claims of creditors and do not 
necessarily stand as evidence that the beneficiary lacks ``an 
enforceable property interest with respect to the trust.'' Id. at 283. 
At the time of its 2008 memorandum, OGE's research focused on cases 
addressing the rights of creditors or the eligibility of beneficiaries 
for public assistance, but Professor Newman's article raises a question 
as to whether OGE should have focused instead on cases addressing the 
rights of beneficiaries as to trustees of discretionary trusts. See, 
e.g., id at 284 (``[R]ecently enacted statutes stating that 
beneficiaries of discretionary trusts do not have property interests 
with respect to those trusts are part of the enacting jurisdictions' 
trust codes addressing the rights of beneficiaries' creditors, not the 
relationship between the trustee and beneficiaries, and appear intended 
to apply only in the creditors' rights context.'').
    OGE reviewed one of the cases cited in Professor Newman's article. 
In that case, the Seventh Circuit wrote,

    We see no reason why a beneficiary, simply by virtue of being 
the beneficiary of discretionary trust, should be denied the 
ordinary equitable rights that flow from the fiduciary duty that 
runs from a trustee to a beneficiary. Included in those rights is 
the right to bring an action for breach of trust.

    Scanlan v. Eisenberg, 669 F.3d 838, 844 (7th Cir. Ill. 2012). The 
plaintiff in

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that case, a beneficiary of several trusts, sued for malpractice and 
breach of fiduciary duty after the trusts invested millions of dollars 
in a real estate investment trust that later went bankrupt. The Seventh 
Circuit found that an eligible beneficiary possessed the required stake 
to establish standing as a result of her interest in the trust. Id. at 
846. To the extent that the plaintiff had standing by virtue of being 
affected by the trust's potential for gain or loss, that ``stake'' 
would appear to meet OGE's definition of a disqualifying financial 
interest for purposes of the conflict of interest prohibition. See 5 
CFR 2640.103(b) (``the term financial interest means the potential for 
gain or loss'').
    Other cases also seem to lead to this conclusion. For example, a 
New York court similarly provided the following guidance, under the 
trust law of that state, as to the rights of the beneficiary of a 
discretionary trust:

    In the present case, the trustees' discretion is absolute and 
not limited by any standard. However, even in such a case, the 
trustees may be compelled to distribute funds to the beneficiary if 
they abuse their discretion in refusing to make distribution.

Estate of Gilbert, 156 Misc. 2d 379, 383 (N.Y. Sur. Ct. 1992). 
Likewise, a California court held that, under that state's trust law, a 
trustee who has discretion to make or withhold a payment, may not 
withhold a payment with the intent of avoiding child support. Ventura 
County Dept. of Child Support Services v. Brown, 117 Cal. App. 4th 144, 
150 (Cal. App. 2d Dist. 2004) (quoting Prof. Russell Niles, consultant 
to Cal. Law Revision Com., Memo Re Spendthrift and Related Trusts (Nov. 
6, 1984)). In the California case, the outcome may well have been 
determined in part by language in the trust instrument requiring that 
the trust be administered for the benefit of the beneficiary's children 
in the event of the beneficiary's death, see id. at 148; however, this 
contributing factor would serve only to complicate the issue for OGE by 
leaving open the possibility that subtle variations in trust language 
may be relevant in determining the existence of a financial interest 
for purposes of the conflict of interest law.
    Because it is not clear to OGE whether these materials represent 
the rule, an exception, or differing approaches to trust law in various 
jurisdictions, OGE would benefit from the input of members of the 
public who have expertise in trust law. Specifically, OGE seeks expert 
input concerning the following question: Are there any circumstances 
under which an eligible income beneficiary of a discretionary trust 
might, in the absence of a vested remainder interest, be able to compel 
the trust to make a distribution or payment? Should this question be 
appropriately answered in the affirmative, OGE may need to revisit the 
premise underlying its 2008 guidance memorandum on discretionary 
trusts--i.e., that such a beneficiary could never have enforceable 
right to a distribution or payment from the trust. OGE will take into 
consideration all relevant expert input submitted by the public within 
60 days of the date of this notice in response to the question posed 
before evaluating the continuing validity of OGE's guidance memorandum, 
Discretionary Trusts, DO-08-024 (2008). To be considered, any 
submission exceeding five (5) pages in length must include a one-page 
summary of key points and conclusions. Commenters are requested to 
state briefly the nature of their expertise in trust law.

    Approved: December 23, 2016.
Walter M. Shaub, Jr.
Director, U.S. Office of Government Ethics.
[FR Doc. 2016-31583 Filed 12-30-16; 8:45 am]
 BILLING CODE 6345-03-P