A trust beneficiary is the person who receives the benefit from a trust, such as trust property or income from the trust. As a trust beneficiary, you may believe that you are at the mercy of the trustee. But, depending on the type of trust, trust beneficiaries generally have rights that are protected by trust laws. Those protections are there to ensure the trust is properly managed for your benefit.
What is a trust and how does it work?
A trust is an agreement that is based on confidence and trust between the person creating the trust (the grantor) and the trustee. The trust agreement provides authority to the trustee so he or she can manage the trust assets and distribute them to the named beneficiaries. The trustee must do so within the terms of the trust document as it was drafted.
The primary benefits of a trust in general
Similar to your will, trusts can provide a great way to decide now how you want your estate to be handled after your death. However, unlike the will, trusts can also provide asset protection for those who have beneficiaries who may need special assistance in managing their inheritances.
How a revocable trust is different from an irrevocable trust
The main difference between a revocable trust and an irrevocable trust is whether the terms can be modified. An irrevocable trust, by definition, cannot be modified once it has been executed. For that reason, irrevocable trusts can have very favorable tax consequences. For instance, assets that are included in an irrevocable trust are generally beyond the reach of creditors. That means, despite losing some control over your assets, you can gain other benefits by using an irrevocable trust.
Tax advantages for a trust beneficiary
Certain types of trusts can provide tax advantages for both the grantor and the beneficiary. These particular types of trusts are often referred to as “credit shelter” trusts or “life insurance” trusts. There are also types of trusts that can be used to protect property from creditors, as well as, to preserve eligibility for Medicaid.
Current beneficiaries and remainder beneficiaries
The rights that a beneficiary enjoys will depend on the type of beneficiary they happen to be. There are two categories of beneficiaries: current and remainder. Current beneficiaries are the only ones who have a present entitlement to income from the trust. Remainder beneficiaries have an interest in the trust only when the current beneficiary’s interest has been terminated. Remainder beneficiaries are also referred to as contingent beneficiaries.
A common example of remainder beneficiary interests is when one spouse leaves income to the other spouse for life. The beneficiary spouse is considered the current beneficiary and the remainder of the property is left to the children, who are the remainder beneficiaries.
The rights of a current trust beneficiary
The exact rights that a beneficiary may have are established in the terms of the trust document, as well as the laws in your state regarding trusts. Nevertheless, there are some common rights that the beneficiary of an irrevocable trust typically has. Current beneficiaries have the right to payment of distributions as provided in the trust document. Current beneficiaries also have a right to receive information about the trust and its administration in order to enable them to enforce their rights.
Current beneficiaries also have a right to a detailed report of all income, expenses, and distributions from the trust, commonly referred to as an accounting. Usually, trustees must provide an accounting each year, depending on the specific terms of the trust. Beneficiaries are allowed to waive the accounting if they choose.
Rights shared by current and remainder beneficiaries
Both types of beneficiaries, current and remainder, have a right to petition the court for the removal of the trustee if there is ever a concern that the trustee is not performing in the best interest of the beneficiaries. Though it can be a challenge, trustees are required to balance the needs of the current beneficiaries with the needs of the remainder beneficiaries. Additionally, when both current and remainder beneficiaries are in agreement, a petition can be filed with the court to terminate the trustee, if necessary. The trust laws in each state might differ on this issue. Generally, when the purpose of the trust has been fulfilled, or has become impossible to fulfill, the trust can also be terminated.
Download our FREE estate planning worksheet! If you have questions regarding your rights as a trust beneficiary, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (913) 262-20000.