Also known as: reasonably definite external standards · objective standard · definite external standard
Written by attorneys · grounded in primary & secondary sources — see below
A statutory criterion that limits a trustee's discretionary power to distribute or accumulate trust income by reference to objective, ascertainable facts set forth in the trust instrument. The standard must be definite enough to be measured without resort to the trustee's personal or subjective preferences. It supplies the safe harbor under I.R.C. § 674(d) only when the power is held solely by independent trustees.
Rajesh Rao created a trust giving the independent trustee power to allocate income among his children according to their health and educational needs. The trustee distributed extra income to one child who had incurred large medical bills. A court upheld the allocation because the health and education needs supplied a reasonably definite external standard that could be verified from medical records and tuition statements rather than the trustee's personal views.
Rising Sun Electronics contracted to purchase land for a new plant subject to obtaining financing satisfactory to the buyer. When the buyer refused to close, the seller sued. The court enforced the contract because the financing requirement contained no reasonably definite external standard. The buyer's satisfaction was left to subjective judgment and therefore could not be measured by objective criteria.
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The standard must be capable of measurement by reference to facts or documents outside the decision-maker's personal feelings or preferences. Health needs, educational expenses, or market rates qualify because they can be verified objectively. A bare statement of personal satisfaction does not qualify.
Supporting sources
The phrase originates in the tax safe harbor of I.R.C. § 674(d), but courts apply the same objective-measurement concept when interpreting satisfaction clauses and conditions in contracts. When an agreement supplies no external benchmark, courts treat the standard as subjective and test it for good faith instead.
The power falls outside the § 674(d) safe harbor. The grantor is treated as the owner of the trust for income-tax purposes unless another exception applies, because the trustee's discretion is not sufficiently constrained by objective criteria.
Supporting sources