Trusts are one of the most effective estate planning tools you can use. There are many different types of trusts, but they all generally allow you to set aside your assets to pass on to your family after you’re gone. They can also be effective at potentially saving your family from probate, while also minimizing taxes. The people who receive assets from a trust are known as beneficiaries. Understanding how trust funds pay out and distribute assets to beneficiaries can be helpful for those who are interested in establishing a trust and their future heirs.
A financial advisor can help you pull together an estate plan for a future where you’re gone.
What Is a Trust?
Before diving into the distribution methods, it’s important to understand the different elements of a trust structure. A trust is a legal entity that holds a person’s assets and offers a way to transfer to them to heirs when they pass away.
The person who establishes the trust is known as the grantor or trustor. As the grantor, you will designate the trustees who have a fiduciary duty to manage the trusts’ assets in accordance with the terms and guidelines of the trust itself. One of the trustee’s responsibilities is to distribute the assets to the beneficiaries, abiding by the wishes of the grantor.
Trusts are often used as an estate planning tool, so there is no confusion to how assets should be distributed upon a grantor’s death. Trusts also protect the grantor’s assets against particular gift and estate taxes. Therefore, you can maximize the amount your heirs receive after your death.
What Is a Beneficiary?
A beneficiary is an individual who inherits the assets from the grantor. When the grantor establishes a trust, they decide how the assets are distributed to the beneficiaries. All guidelines and terms are outlined in the trust agreement.
For example, let’s say a grantor wants to establish a trust for the benefit of a child. The grantor may set up a revocable trust, which will distribute the assets after the child reaches a certain age. At that point, the beneficiary could use the assets as they wish. If a trust is revocable, it means it can be amended or revoked while the grantor is still alive. For example, a grantor could change beneficiaries or tweak the terms of their revocable trust.
However, with an irrevocable trust, the grantor typically cannot alter the terms of the trust without the beneficiary’s approval. But the grantor still has the authority to determine how the assets are distributed. For example, if the grantor wants a portion of the assets to go toward college expenses for a child, they will appoint a trustee to make sure the assets are distributed according to this wish. Appointing trustees helps ensure beneficiaries don’t have complete control over the distribution of their wealth.
How Does a Beneficiary Get Money From a Trust?
So, how does a beneficiary receive funds from a trust? It depends on the terms of the trust. It may happen quickly or it could take years or even decades for assets to be distributed. It’s important to point out that the longer it takes to distribute the assets, the more money it will cost to keep the trust active since you must pay for maintenance and trustee fees.
That said, there are usually three main methods for distributing assets:
Outright Distribution of Assets
The grantor can set up the trust, so the money is distributed directly to the beneficiaries free and clear of limitations. The trustee can transfer real estate to the beneficiary by having a new deed written up or selling the property and giving them the money, writing them a check or giving them cash. Although this is a straightforward way to distribute the trust, it is without any protection. A beneficiary who isn’t good with money could squander their inheritance quickly.
Distribution Over Time
The grantor can also space out trust distributions, meaning the assets are paid to the beneficiaries over time according to their prescribed set rules. For instance, the grantor may decide to administer the trust when beneficiaries reach a certain age or when they reach certain milestones like marriage.
Distribution at the Trustee’s Discretion
Lastly, the grantor may give the trustee the power to decide what the beneficiary acquires from the trust and when. If the beneficiary is young or struggles with money management, oftentimes, a discretionary trust is created. Some examples of this type of trust funds are special needs trusts and spendthrift trusts.
Steps for Beneficiaries to Receive Funds
While the process of receiving assets from a trust may vary based on the grantor’s distribution stipulations, adhering to a few basic best practices can increase the likelihood that the transfer goes smoothly.
- Review the trust document: Understand the terms and conditions governing the trust. This document outlines the distribution schedule, any conditions for receiving funds, and the trustee’s powers.
- Communicate with the trustee: Establish a clear line of communication with the trustee. This helps in understanding the distribution process and any necessary documentation.
- Fulfill any conditions: Some trusts have specific conditions that beneficiaries must meet before receiving funds, such as reaching a certain age or achieving educational milestones.
- Request distributions: Depending on the trust terms, beneficiaries may need to formally request distributions. This can involve submitting written requests or fulfilling specific requirements outlined in the trust document.
- Receive Payments: Once all conditions are met and the trustee approves, payments will be made according to the distribution method specified in the trust.
Is There a Time Limit for a Trustee to Distribute Assets?
According to probate law, trustees must distribute trust assets within a “reasonable” amount of time. However, there are no strict guidelines for when the distribution must occur.
Trustees usually have a few months to review all of the terms of the trust, get an asset appraisal and file the necessary paperwork. Depending on the complexity of the estate plan, this process could take a little longer. In some states, a beneficiary has a certain amount of time they can contest the trust. If a lawsuit is filed, the trustee cannot distribute the funds.
Can a Trustee Withhold Trust Funds From Beneficiaries?
The simple answer is no. A trustee has a fiduciary responsibility to uphold the wishes of the grantor and the terms of the trust. Therefore, they must do what the trust says. However, a beneficiary can contest the wishes of the trust in court. They may choose to do this to gain access to complete accounting for the trust, force the distribution of funds or remove the trustee completely from the trust. However, this process can end up costing the trust a lot of money in legal fees.
Trust Taxes and Distributions
Depending on the trust structure, a grantor may receive tax advantages for using an irrevocable trust. For example, it could help reduce income taxes while they’re alive and estate taxes after they die. Also, it may shelter their assets from creditors.
Trust beneficiaries may also have to deal with tax repercussions, too. Depending on the trust and the estate laws within the state, a tax payment may be required. For example, if a beneficiary receives trust income, they may have taxes to pay, but they usually aren’t required to pay income taxes on a distribution from the trust principal.
With all the types of trusts available, the more intricate ones can aid the beneficiary in drawing tax benefits. So, if you are worried about preventing a gift tax for future generations, creating a credit shelter, bestowing a surviving spouse with another income source or decreasing capital gains taxes – reach out to an estate planning attorney for a consultation.
Bottom Line
Understanding how trust funds pay out is essential for beneficiaries to effectively manage their inheritances and make sound financial decisions. By familiarizing themselves with the trust’s terms, maintaining clear communication with the trustee, and seeking professional advice when needed, beneficiaries can navigate the distribution process smoothly and ensure their financial well-being.
Tips for Estate Planning
- If you’re the beneficiary of a trust, speaking with a financial advisor can help you determine the best use of the assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- There are other legal documents you may need to include in your estate plan besides a trust. A will is one; a financial power of attorney is another. You may also want to draft an advance health care directive to outline your wishes for medical care when you’re not able to make decisions on your own.
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