What Does It Mean To Be a Trust Beneficiary?

12.17.2019 - Theresa A. McGinley


Whenever a trust is established, there are three main players: the grantor who creates the trust, the trustee who will oversee and administer the trust, and the beneficiaries who will eventually receive property from the trust.

The terms of the trust, including details about the relationship among all three parties, are spelled out in a legal document called the trust agreement.

The trust agreement provides directions to the trustee, including the parameters for when and how the trustee exercises discretion over investment decisions and distributing assets. The trustee is subject to a variety of fiduciary duties to the beneficiaries, but most important is the trustee’s duty to follow the terms of the trust.

If you have been named a beneficiary of a trust, understanding exactly what you are entitled to, now or in the future, can be confusing. Here, Director of Trust Administration Theresa McGinley explains how best to work with your trustee to receive the full benefit of being named a beneficiary.

Q: I've been named beneficiary of a trust. Where do I begin?

THERESA: The starting place for any beneficiary is to get a copy of the trust instrument. Trust instruments sometimes require assistance to understand. Your trustee or, when necessary your attorney, will help you understand your rights as a beneficiary and what those provisions mean.

At a basic level, the trust agreement contains four key elements:

1) A description of any current distributions you might be entitled to.

2) An explanation of any additional distributions you might receive, either when certain conditions are met or at the trustee’s discretion.

3) Details about whether those distribution provisions will change in the future.

4) Notice of when the trust will terminate and what happens to the remaining trust property when it does.

Of course, there are many other provisions in the trust agreement that are likely to be relevant. But if you understand these four items you will have a general understanding of the distributions you are entitled to receive.

Q: What does it mean for distributions to be made under "certain conditions"?

THERESA: As a beneficiary, it’s important to keep in mind that your trustee’s actions are governed and guided by the terms of the trust agreement. The trustee is not free to do whatever he or she wants. In addition, the trustee has general fiduciary duties which include prudently managing (investing and monitoring) trust assets, dealing fairly and impartially with beneficiaries, acting in the best interests of current and future beneficiaries when it comes to both investments and distributions, and furnishing beneficiaries with information. The overarching goal of the fiduciary standard is to ensure that the grantor’s intent is followed and the interests of all beneficiaries are protected.

The phrase “under certain conditions” refers to language in the trust agreement that restricts distributions, typically specifying that the funds must be used for specific purposes—such as a down payment on a home, seed money for a business, education or health care expenses. Distributions may also be permitted for broader categories like “maintenance,” “support,” or even “reasonable luxuries.”

The trust agreement might also include language authorizing the trustee to make distributions at his or her discretion. But even if the trustee has sole and absolute discretion, he or she must always balance the desires of current beneficiaries (usually, distributions today) with the interests of future beneficiaries (growth of assets today and distributions in the future). As a result, the trustee must always be prepared to demonstrate that each distribution is aligned with the grantor’s intent and the terms of the trust instrument.

Q: What does it mean to receive distributions for "support"?

THERESA: Standards like “health” and “education” are fairly clear, and there is usually little controversy over what they cover. Even a vague term like “maintenance” is easy to understand (it typically refers to a beneficiary’s current standard of living).

“Support” is a more relative term. Determining what constitutes a reasonable level of support typically takes various factors into consideration, including the beneficiary’s age and the size of the trust as a whole. Your need for support changes as you grow older and your financial situation evolves. Some trust instruments are very explicit about which circumstances should be considered and how a trustee should determine an appropriate level of support, as well as lifestyle decisions and behaviors that should not be supported financially.

When the trust document does not offer explicit guidelines, we often look at the trust’s income as a guideline for appropriate distributions. That helps balance the interests of current beneficiaries, ensuring the trust remains available for the remainder of their lives, and the interests of future beneficiaries. We encourage all of our clients to sit down with a trust officer, review the terms of the trust and, importantly, discuss how the trust will be managed and administered.

Q: What are my responsibilities when I request a distribution?

THERESA: Some trustees require beneficiaries to provide various documents—including their personal budgets, tax returns, and sometimes even a “statement of purpose”— when considering a distribution request. Then the information is presented to a committee, which decides whether the distribution should or should not be made.

At Fiduciary Trust, we prefer a more personal approach. The conversation begins by discussing your goals, assets, cashflow and financial plan for assets you hold outside of the trust. Then we initiate an open and honest discussion about the trust’s assets, asking questions such as: “How do you plan to use assets you receive as distribution?”

If you don’t have a formal plan for your financial future, or your vision is not as clear as it could be, we can help you to firm it up. We typically ask about your financial goals and needs over the long term, not just for one particular distribution.

The bottom line is that when you open up and start discussing your entire financial life with our wealth advisors, a real relationship starts to take root. Then your long-term financial plan becomes much clearer, including the role of the trust over the long term.

Q: Do you use modern technologies to collaborate with beneficiaries?

THERESA: Absolutely. Today, it is very easy to build a model that illustrates the impact distributions can have on a trust and on your financial situation. Over the long term, for example, we can show how significantly the financial picture improves if you withdraw 3% of the trust’s assets each year instead of withdrawing 5%. When we provide these types of visual graphics, it becomes very easy for a beneficiary to understand the implications of various withdrawal patterns.

The same is true when we look at your “big picture” financial life, including assets you own outside of the trust, your income and your expenses. Depending on the terms of the trust agreement, it may be appropriate to include trust property as an asset on your balance sheet. Or it may be more appropriate to include the trust as a source of income.

This is where the guidance of our trust officers pays dividends. They can help you find the most appropriate withdrawal rate, identify any gaps in your financial plan and ensure you remain on track toward achieving your long-term financial goals.

This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2019, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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