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SmartAsset: How Does a Beneficiary Get Money From a Trust?

If you’ve just inherited a windfall from a deceased relative’s trust, you’re likely wondering, “How does a beneficiary get money from a trust?” When your deceased relative created the trust, they set distribution guidelines for the time of distributions or milestones that the beneficiary must meet before they can receive any money. So, to help you better understand what to expect when you inherit money from a trust, here are some things you should know.

A financial advisor could help you put an estate plan together for your family’s needs and goals.

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 contract that offers a way to transfer assets to your heirs when you 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 consuming in how assets should be distributed upon a grantor’s passing. Trust also protects 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. In that case, they would set up a revocable trust, which will distribute the assets after the child reaches a certain age. Then the beneficiary can use the assets as they wish. Grantors can alter the beneficiaries throughout their lifetime and change the terms with this type of trust.

However, with an irrevocable trust, typically, the grantor cannot alter the terms of the trust without the beneficiary’s approval. But the grantor still had 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 your wealth.

How Does a Beneficiary Get Money From a Trust?

SmartAsset: How Does a Beneficiary Get Money From a Trust?

So, how does a beneficiary receive funds? Well, if the grantor has a revocable trust, the assets will dissolve soon after the grantor passes away. On the other hand, assets in an irrevocable trust may take years or even decades to distribute. 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 distributes 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; someone who isn’t good with money may diminish their inheritance quickly.

Asset distribution over time. The grantor can also space out trust distributions, meaning the assets are paid to the beneficiaries over time according to their set rules. For instance, the grantor may decide to administer the trust in a specific timed manner, such as after they reach a certain age, by monthly payments, when they reach certain milestones in life or get married.

Asset distribution at 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, often times, a discretionary trust is created. Some examples of this type of trust are special needs or spendthrift 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

SmartAsset: How Does a Beneficiary Get Money From a Trust?

Depending on the trust structure, a grantor may receive tax advantages for using an irrevocable trust. For example, it could help lower estate and income taxes. Also, it may provide shelter for assets from creditors.

Trust beneficiaries may also have to deal with tax repercussions too. Depending on trust, money or assets, and the estate laws within the state, a tax payment may be required. For example, if a beneficiary receives a 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

When you’re a trust beneficiary, there are a few things it’s wise to know. The grantor sets forth the stipulations for distribution and can give the trustee the power to decide when you receive payments. The grantor can also set out timed payments depending on milestones reached or at a specific age. Understanding the guidelines of the trust can help you know what to anticipate.

And, if you need additional questions regarding your inheritance, speak with a financial advisor and estate attorney for guidance.

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 the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.

Photo credit: ©iStock/FatCamera, ©iStock/courtneyk, ©iStock/JodiJacobson

Ashley Kilroy Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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