You know, or you think that you know, that you’re a named trust beneficiary. You may be a little unsure because it’s not always easy to know or find out if you are a beneficiary of a family trust. Unless you’re a professional in estate planning and fully familiar with its basics, you are likely to have numerous questions. Among them: What is the definition of a beneficiary of trust? Is the trust irrevocable? Is the trust revocable? What are the shortcomings of an irrevocable trust? A revocable trust? Is an heir also a trust beneficiary? Is a settlor the maker of a trust? Is a settlor the same as a trustee?
So, let’s start with trust basics. Living trusts are becoming ubiquitous, even for the middle class.
Testamentary trusts are also regularly utilized as a device to transfer family wealth. California’s Santa Clara County Superior Court has an excellent definition of a living trust and its advantages and differences from a testamentary trust:
“A Living Trust is a legal tool for financial planning that allows a person (Trustee) to hold another person’s (Settlor’s) property for the benefit of someone else (Beneficiary). Unlike a testamentary trust, a Living Trust goes into effect during the settlor’s lifetime. In most cases, the settlor, trustee, and beneficiary are the same person (at least until that person dies or becomes incompetent). In other words, if you set up a Living Trust, you can be the settlor, the trustee and the beneficiary of the trust.”
The Court’s website goes on to explain how living trusts avoid probate. “If all your property is in trust when you die (or become incompetent), then legally you don’t own anything in your name. This means, if you die, no probate (formal court administration of a decedent’s estate) is needed to pass your property on to your beneficiaries. Or if you become incompetent, no conservatorship (formal court proceedings to administer an incompetent person’s assets) is needed to manage your property. In either case, the person that you name in your trust as the successor trustee takes over. If you die, the successor trustee can distribute the trust property according to your wishes without having to go to probate court to authorize the distribution.
If you become incompetent, the successor trustee can manage the property for your benefit without having to go to court for a conservatorship and without ongoing court supervision.”
Management includes “paying bills, making financial decisions, even selling or refinancing assets… (The) successor will be able to do anything … (the settlor could do with their) trust assets, as long as it does not conflict with the instructions in … (the) trust document and does not breach fiduciary duty.”
Testamentary trusts are different in that they are not legally established until the death of the person holding the assets. The assets, after the death of the owner, are designed to be managed for the benefit of the maker’s loved ones. A Northwest Bank, Washington Trust Bank, explains the purpose of a testamentary trust.
“A testamentary trust is an arrangement you create in your will. When you die, the trustee you’ve chosen manages the trust assets for the benefit of your family or other beneficiaries. Under the arrangement, your trustee is directed to distribute trust income and principal at the times and in the manner you have specified in the trust created under your will. Your trustee makes all administrative and asset management decisions, relieving your beneficiaries of this responsibility.”
Testamentary trusts are very versatile and can play an important role in almost any estate plan. They can protect the interests of beneficiaries who are minors or simply inexperienced in financial matters, since the burden of decision making falls on your trustee. Knowing that your estate will be distributed exactly the way you have directed in your will can give you peace of mind in the present.
A trust is only as effective as the trustee you select to administer it. A well-qualified trustee has the knowledge and experience necessary to perform all the duties associated with managing and distributing trust assets—duties such as:
- Safeguarding the trust’s investment assets
- Maintaining accurate records of all trust transactions
- Distributing trust income and principal according to the directions in your will
- Answering any questions your beneficiaries may have concerning the trust
- Handling day-to-day financial matters for beneficiaries
- Reporting to the probate court, when necessary
- Providing detailed statements of account and tax reports to the trust’s beneficiaries
- Filing the trust’s income-tax returns.”
The explanation of the duties of managing and distributing trust assets provides an insight into why family members sometimes find it particularly difficult to administer testamentary trusts. The duties of asset protection and collection, investment oversight, tax payment and reporting and meticulous recordkeeping may simply be too much for little experienced nonprofessional trustees. If the trustee breaches their obligations in the administration of the trust, they may be liable for breach of fiduciary duty and personally responsible for damages done to the trust.
Beneficiaries Have a Right to Act
Alongside trust accountings, a beneficiary can petition for a special accounting when a trustee isn’t carrying out fiduciary duties. If the accounting uncovers wrongdoing by the trustee, bad documentation or failure to distribute funds, then the beneficiary can file for trustee removal and appointment of a new temporary trustee.
Revocable and Irrevocable Trusts: What’s the Difference?
One positive aspect of living trusts is that they’re flexible – they can be either revocable or irrevocable. In a revocable trust, the document is subject to revision, and all assets will go back to the trust maker. The trust maker controls the terms of the trust – how property and assets will be maintained both during their life and in the case of incapacity or death. The other good feature of revocable trusts is that they don’t go to probate court on the trust maker’s passing, which means they’re not exposed to the public. The drawback is that the trust maker must still pay estate and income taxes on trust property and assets. In the case of an irrevocable trust, meanwhile, once the document is signed, the assets are considered henceforth beyond the reach of the trust maker, while the trust itself will be responsible for payment of any income or capital gains taxes. When the trust maker dies, assets in an irrevocable trust don’t fall directly under the decedent’s estate, which means they won’t be levied with an estate tax.
Irrevocable Trusts: Bonus for Beneficiaries
Individuals who have built a considerable fortune can use irrevocable trusts to transfer property and assets to designated beneficiaries – and all while the trust maker is still living, without having to pay gift or estate taxes. Although a trust maker relinquishes a certain measure of control, an irrevocable trust is an effective means of transferring assets while not having to worry about tax penalties.
Being a trust beneficiary should be a net positive, but there can be unanticipated dangers, from trustee wrongdoing to elder financial abuse. Beneficiaries need to secure their interests, and sometimes this means litigation action or mediation. At Hackard Law, I lead a team of experienced trust litigation attorneys who help beneficiaries protect their rights and work towards a beneficial resolution. We represent clients across California, including in Orange, Los Angeles, Santa Clara, Alameda, Contra Costa and Sacramento. Call us today at 916-313-3030 to see how we can best help you.