What Beneficiaries Need to Know About Trusts and Money
If you’ve just inherited a windfall from a deceased relative’s trust, you’re probably wondering, “How does a beneficiary get money from a trust?” When your deceased relative created the trust, they set distribution guidelines for the timing 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 inheriting money from a trust, here are some things you should know.
A Financial Advisor can help you build an estate plan based on your family’s needs and goals.
What is a Trust?
Before diving into distribution methods, it is important to understand the different elements of a trust structure. A trust is a legal contract that provides a way to transfer assets to your heirs upon your death. The person who establishes the trust is known as the settlor or trustee. As settlor, you will appoint trustees who have a fiduciary duty manage trust 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 in accordance with the settlor’s wishes.
Trusts are often used as estate planning tool, so there is no consummation in how assets should be distributed upon the death of a settlor. The trust also protects the settlor’s assets against special gift and estate taxes. This way, you can maximize the amount your heirs will receive after your death.
What is a beneficiary?
A beneficiary is a natural person who inherits the settlor’s assets. When the settlor establishes a trust, they decide how the assets are distributed to the beneficiaries. All guidelines and conditions are described in the trust agreement.
For example, suppose a settlor wishes to establish a trust for the benefit of a child. In this case, they will 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. Settlors can change beneficiaries throughout their lifetime and change the terms of this type of trust.
However, with a irrevocable trustGenerally, the settlor cannot change the terms of the trust without the beneficiary’s approval. But the grantor still had the power to determine how the assets are distributed. For example, if the settlor wishes a portion of the assets to go towards a child’s college expenses, they will appoint a trustee to ensure that the assets are distributed in accordance with this wish. The appointment of trustees ensures that the beneficiaries do not have complete control over the distribution of your estate.
How does a beneficiary get money from a trust?
So how does a beneficiary receive funds? Well, if the settlor has a revocable trust, the assets will dissolve shortly after the settlor dies. On the other hand, the assets of an irrevocable trust can take years or even decades to distribute. It is 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 have to pay for maintenance and trustee fees.
That said, there are generally three main methods of distributing assets:
Pure and simple distribution of assets. The donor can create the trust, so that the money is distributed directly to the beneficiaries without any limit. The trustee can transfer real estate to the beneficiary by having a new deed drawn up or by selling the property and handing over the money, writing a check or handing over cash. Although this is a simple way to distribute trust, there is no protection; someone who is not good with money can quickly diminish their inheritance.
Distribution of assets over time. The settlor can also space out trust distributions, which means assets are paid out to beneficiaries over time according to their established rules. For example, the settlor may choose to administer the trust in a specific timed waysuch as after reaching a certain age, through monthly payments, when they reach certain milestones in life or get married.
Allocation of assets at the discretion of the trustee. Finally, the settlor can give the trustee the power to decide what the beneficiary acquires from the trust and when. If the beneficiary is young or has difficulties with money management, often 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 the assets?
According to inheritance law, trustees must distribute trust assets within a “reasonable” time. However, there are no strict guidelines as to when distribution should take place.
Trustees usually have a few months to review all the terms of the trust, obtain an asset valuation, and file the necessary paperwork. Depending on the complexity of the estate plan, this process may take a little longer. In some states, a beneficiary has a certain amount of time to challenge trust. If a lawsuit is filed, the trustee cannot distribute the funds.
Can a trustee hold trust funds from beneficiaries?
The simple answer is no. A trustee has fiduciary responsibility to respect the wishes of the settlor and the terms of the trust. Therefore, they must do what the trust says. However, a beneficiary can challenge the will of the trust in court. They may choose to do so to gain access to the full accounting of the trust, to force the distribution of funds, or to remove the trustee from the trust altogether. However, this process can end up costing the trust a lot of money in legal fees.
Trust taxes and distributions
Depending on the structure of the trust, a settlor may receive tax benefits for using an irrevocable trust. For example, it could help reduce inheritance and income taxes. Also, it can provide shelter to creditors’ assets.
Beneficiaries of the trust may also face tax implications. Depending on the trust, money or assets, and state inheritance laws, a tax payment may be required. For example, if a beneficiary receives trust income, he may have to pay taxes, but he is generally not liable to pay taxes on a capital distribution from the trust.
With all the types of trusts available, the more complex ones can help the beneficiary reap tax benefits. So if you’re worried about avoiding a gift tax for future generations, creating a credit shelter, giving a surviving spouse another source of income, or reducing capital gains tax, contact a estate planning lawyer for a consultation.
When you are a beneficiary of a trust, there are some things you should know. The settlor sets out distribution stipulations and may give the trustee the power to decide when you receive payments. The licensor may also provide installment payments based on milestones reached or at a specific age. Understanding the trust’s guidelines can help you know what to expect.
And, if you need additional questions about your inheritance, talk to a Financial Advisor and estate attorney for advice.
Estate Planning Tips
If you are the beneficiary of a trust, speak to a Financial Advisor can help you determine the best use of assets. Finding the right financial advisor that meets your needs doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
There are other legal documents you may need to include in your estate plan besides a trust. A will is one; a financier proxy is another. You can also write a advance health care directive to describe your wishes for medical care when you are unable to make decisions for yourself.
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