Inheriting wealth: What it means to be a beneficiary

Inheriting wealth can be a confusing and complicated process. The following are some considerations to assist you with the process and aid you in managing the legacy you have received.

Inheriting wealth, either outright or in trust

When you inherit wealth, it can include financial assets like cash, stocks, bonds or an ownership stake in a business. It can also include more unique assets like artwork, precious metals, real estate, or intellectual property such as a trademark, patent, or copyrighted material. These assets can be inherited outright, allowing you to take ownership and control relatively quickly, or placed in a trust, with the assets managed by a trustee and distributed over time according to the terms specified in the trust document.

You are a beneficiary of a trust. Now what?

As a beneficiary of a trust, you have the right to receive a copy of the trust document, which details the terms governing the administration of the assets, including under what circumstances the trustee can distribute assets to the beneficiaries. Depending on the terms of the trust and your status as a current or remainder beneficiary of the trust, you may have the right to receive additional information on the management of the trust assets. The trustee of the trust has an obligation to keep the beneficiaries informed and to respond to a beneficiary’s request for information.

When will I receive distributions?

Trusts are complex legal entities that can be constructed in various ways that influence the frequency and size of your distributions. The grantor, or creator of the trust, designed the terms of the trust to accomplish various planning goals, such as ensuring access to financial resources for future generations.

We often see trusts structured in a way that gives the trustee the discretion to distribute the income or principal of a trust if the request from a beneficiary meets a certain standard. In this case, it is within the discretion of the trustee to determine if your request meets the terms of the trust document.

In other trusts, the terms of the trust direct that assets are distributed upon the happening of certain events, such an age attainment.

 After meeting with your trustee, you should have a clear understanding of the circumstances under which you may receive income or principal, which are usually treated differently.

How long with the trust continue?

The duration of a trust depends on the terms of the trust and the needs of the beneficiaries. The terms of the trust may provide for the trust to terminate on the occurrence of an event, such as the beneficiary reaching a certain age, the expiration of a specific amount of time, or the death of a beneficiary. A trust may also contain provisions allowing the trustee to terminate the trust, at the discretion of the trustee, if the assets held in trust are small enough that the administration has become uneconomical. Trusts may also terminate based on the dissipation of the assets through distributions. Terminating a trust can be a complicated and lengthy process or a straightforward and expedient process depending on the reason for the termination, how long the trust was in existence and the number of beneficiaries.

Who is responsible for managing the trust assets?

The trustee has a duty to manage the day-to-day administration of the trust, maintain records, and invest the trust's assets in a prudent manner taking into account several factors, such as the initial funding of the trust and the anticipated needs of the beneficiaries. As a beneficiary, it's important to have ongoing conversations with the trustee about the investment objective of the trust, especially when there is a shift in the trusteeship or beneficiaries. If the trust allows flexibility in distributions, communicating with your trustee about how much money you will be requesting from the trust and when it may be distributed gives your portfolio managers time to make the best decisions about what to sell and when to sell it if the trust needs to raise cash.

Are distributions from the trust subject to personal income taxes?

In general, beneficiaries are not required to pay income taxes on distributions that are considered part of the trust's principal but are responsible for paying taxes on distributions to the extent they represent the ordinary income of the trust. A beneficiary that has received distributions from the trust can expect to receive a tax form known as a K-1, which reflects information that should be included in the beneficiary’s income tax calculations. For more information about how taxes impact different types of inherited assets, see When will inheritance result in income taxes?

What if there are multiple beneficiaries of a trust?

It is not uncommon for a trust to have more than one beneficiary. If beneficiaries span multiple generations, there may also be conflicting interests—current beneficiaries may want maximum income, while future (remainder) beneficiaries want the trust to appreciate over the long term. The trustee works closely with the portfolio manager to design an investment strategy that can provide a balance between the interests of the current beneficiaries and remainder beneficiaries. The trustee may also be able to take advantage of trust administration powers provided under state law that allow for adjustments to be made between income and principal to provide greater flexibility in achieving an equitable outcome for both income and remainder beneficiaries.

Developing a plan for your new financial circumstances

Whether it's a large estate or a personal item of sentimental value, you've been entrusted with someone's legacy and possessions that often represent a lifetime of hard work, dedication and planning.

In many cases, a trust is a significant financial resource that's meant to support the beneficiary for a lifetime.

As you become part of someone else's plan, it's a good time to focus on your own planning. At Fiduciary Trust, we can help you put your inheritance in the context of your own financial circumstances, develop an investment strategy and a plan to meet your personal goals.