Inheriting Wealth: What It Means to Be a Beneficiary



An inheritance is often a bittersweet occurrence, both because it often means we’ve lost someone we love, and because it can be a confusing and complicated process.

We can help you create a roadmap for managing and best using your wealth for yourself and your family today and to benefit future generations.

Inheriting Wealth, Either Outright or in Trust
In most cases, an inheritance means financial assets like cash, stocks, bonds or an ownership stake in a business. But it can also include physical assets like artwork, precious metals or real estate, or intellectual property such as a trademark, patent or copyrighted material.

These assets can be inherited outright, allowing you to take ownership immediately, or placed in a trust, with assets maintained and distributed over time according to the terms specified in the trust document.

Developing a Plan for Your New Financial Circumstances
Whichever way you receive an inheritance, either outright or in trust, someone has made a conscious decision to leave you something of value. Whether it is a large estate or a personal item of sentimental value, you have been entrusted with someone’s legacy and possessions that often represent a lifetime of hard work, dedication and planning.

As you become part of someone else’s plan, it is a great time to focus on your own planning as well.

At Fiduciary Trust, we can help you develop an investment strategy and financial plan to help protect your inheritance from taxes and creditors, and provide potential growth to benefit future generations.

You Are a Beneficiary of a Trust. Now What?
You have certain rights as a beneficiary of assets that are held in a trust. These include the right to examine the trust document which spells out the exact terms and conditions of how the trust should be managed and how its assets should be distributed.
Beneficiaries often have questions of the trustee regarding how they can use and access the trust assets.

Q. What are my rights as a trust beneficiary?
Most importantly, all beneficiaries have the right to know exactly how the trust is being managed. You are entitled to an accounting of all income, expenses and distributions from the trust and periodic updates on the holdings and performance of investment accounts.

Trustees are usually required to provide a financial report to beneficiaries annually, but that may vary, depending on the terms of the trust. If you believe your trustee is not acting responsibly, you also have the right to petition the court for the removal and replacement of the trustee.

Q. When will I receive distributions?
Trusts are complex legal entities that can be constructed in a variety of ways that will influence the frequency and size of your distributions. We often see trusts structured in a way that gives the trustee the discretion to distribute all income earned by the trust each year.

Trusts may also include provisions that allow you to request special distributions for large expenses. It’s usually up to the discretion of the trustee to determine if your request meets the terms of the trust document.

In other trusts, the trustee may have full discretion to make distributions, but often distributions can only be made for specific purposes like education and health. After meeting with your trustee, you should have a clear understanding of the circumstances under which you will receive income or principal, which are usually treated differently.

Q. How long will the trust continue?
The duration of a trust depends on the terms of the trust and the needs of the beneficiaries. Many trusts are designed to last for the entire life of the beneficiary while others may terminate at a pre-determined time. For example, the trust may provide instructions for the trustee to distribute one-third of the assets when the beneficiary reaches age 35, the next third at age 40 and the remaining assets at age 45. Then the trust would be dissolved.

If a trust is not required to terminate at a set time, the life expectancy of the trust will likely depend on your lifestyle, spending habits and how heavily you rely on the trust as a source of income. Smaller distributions, less frequent “special requests,” strong investment performance and the effects of compounded growth can extend the trust’s lifespan, possibly for multiple generations.

Q. Who is responsible for managing the trust assets?
The trustee has a legal obligation to manage the day-to-day administration of the trust, maintain records and invest the trust’s assets in a responsible manner.

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. For example, if the assets were previously being managed for an elderly parent or grandparent, its investment strategy may be too conservative for a younger beneficiary and the investment strategy may need to be revised. Also, if the trust allows for flexibility in distributions, communicating with your trustee about how much money you will be requesting from the trust and when it will 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. 

Q. Are distributions from the trust subject to per-sonal income taxes?
The taxation of trust distributions can be complicated. In general, beneficiaries are not required to pay taxes on distributions that are considered part of the trust’s principal (which was presumably taxed before it was put in the trust) but are responsible for paying taxes on distributions to the extent they represent the ordinary income of the trust. Capital gains taxes on the sale of trust property are typically paid by the trust.

We can help you evaluate the income tax impact of distributions you receive from a trust.

Q. Will I pay estate taxes on my inheritance?
If the estate was subject to estate tax, these taxes would usually be paid by the estate before you received your inheritance.

If assets in the estate exceeded the federal estate tax exemption amount, any assets transferred above this amount would be subject to a 40% estate tax. In addition, 20 states and the District of Colombia currently impose their own estate tax. Rates can be
as high as 20% and the exemption amounts may be significantly lower than the federal level estate tax.

Q. What if there are multiple beneficiaries of a trust with different goals?
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. 

To reconcile these opposing viewpoints, we recommend trust documents offer a degree of flexibility, allowing us to invest and distribute assets in a manner that balances the desires of both types of beneficiaries.

Lacking that flexibility, such as when the trust prohibits the distribution of principal, we fall back on the terms of current trust law to address this “income versus growth” conflict. Most states allow the trustee to recharacterize income and principal. This can provide income beneficiaries with a reasonable level of income while investing most of the principal for the remainder beneficiaries.

Q. How will I know if I’m overspending?
In many cases, a trust is a significant financial resource that’s meant to support the beneficiary for a lifetime. The trust document may even instruct the trustee to consider beneficiaries’ other financial resources before making distributions of the trust’s principal to help ensure assets last.

At Fiduciary Trust, we work with beneficiaries on planning strategies to prevent overspending and preserve the trust. This entails a thorough evaluation of the beneficiary’s current standard of living, including current income and expenses, and detailed conversations about the lifestyle and spending patterns you expect in the years ahead.

This communication is intended solely to provide general information. The information and opinions stated 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.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA institute.


Succession Plans that Work for Every Generation

07.05.2019 Gerard F. Joyce

Succession Plans that Work for Every GenerationNEXT POST


Is Your Financial Professional a Fiduciary? What it Means and Why it Matters


Is Your Financial Professional a Fiduciary? What it Means and Why it MattersPREVIOUS POST