People create trusts for many reasons. When the trust provisions are documented in someone’s last will and testament, to take effect upon the death of the person who made the will, these trusts are referred to as a testamentary trust. Many people who create revocable living trusts in order to avoid probate will include in those revocable living trusts provisions for beneficiaries that will cause the trust to remain in existence after the death of the settlors of the trust. These trusts are often referred to as living trust sub-trusts. The result is a trust in which you may be named as a beneficiary. That trust will go on after the death of the person or persons who established the trust (these people who establish trusts are often referred to as “settlors” in the legal documents). Each trust will have a trustee or co-trustees and will include provisions on managing assets and making distributions to or for beneficiaries.
The trustees of these trusts can be in over their heads. Many people who set up a trust often name their best friend or a close relative as a trustee of the trust. Many trustees get thrown into the position of trustee without ever having been a trustee before. As a result, many individual trustees do not know the investment and accounting rules required of trustees. The key for a trust beneficiary is if you are a beneficiary of a trust, you may need to be proactive to understand the trust terms and understand what’s going on with the trust property before something goes wrong that costs you in the future. It may be helpful to support the trustee and suggest they get the appropriate legal and accounting advice if you are concerned.
Basic information is not available
If you are a beneficiary of a trust and can’t get information about the trust or the trust dealings, know that you have a right to information. However, it is crucial to understand that your right to information as a beneficiary can be subject to two things: the terms of the trust documents; and applicable state trust law.
Here are a few basic guidelines. First, while the settlor of that living trust is alive, you are not entitled to any information. Think about it - if you are named as a beneficiary of a revocable living trust, you don’t have any rights until the settlor (the person who set up the trust) dies. At that point, the trust becomes irrevocable (the trust terms cannot be changed), and now you have certain rights as the beneficiary of an irrevocable trust. The fact that beneficiaries of trusts have the right to information can hold trustees accountable and ensure that trustees fulfill their duties and obligations as trustees.
If the trust owns real estate, there may be a Certificate of Trust recorded in the county or parish land records where the real estate is located. That may give basic information about the trust. How much information is in the Certificate of Trust depends on the applicable state’s requirements.
As a beneficiary of an irrevocable trust, you (again, subject to the terms of the trust instrument and state trust law) have the right to a copy of the trust document. Generally, upon your request, the trustee must give accurate information to the beneficiary within a reasonable period of time as to the nature and amount of trust property. The trustee must also permit you to inspect the documents relating to the trust. In addition, a trustee is under a duty to keep and render transparent and accurate accounts of the trust’s administration and render, at least once a year, a clear and precise account covering the trustee’s administration for the preceding year.
Trustee is not cooperating or fulfilling their duties
But what if the trustee does not provide the information that they are required to provide? Well, then a beneficiary may have to hire an attorney to bring an action to compel the trustee to perform their duties, or perhaps even remove the trustee through a court.
Trust beneficiaries commonly must report as taxable income the distributions they receive from the trust’s income. In addition, trust beneficiaries typically receive a Form K-1 which indicates how much of their trust distribution was taxable income versus nontaxable principal. This information is required for the beneficiary to report taxable income on their annual income tax return accurately. On the other hand, trust beneficiaries typically do not have to report any distributions they receive from the trust’s principal as taxable income.
If you are a beneficiary of a testamentary trust created in the last will and testament of another, know that the terms of the trust will be public record since the last will and testament of the person who created the testamentary trust will be filed in the public probate record. However, if you are the beneficiary of a sub-trust to a revocable living trust, those terms may remain private since, generally, trusts are not recorded in the public records.
Protecting your inheritance
When receiving your inheritance, whether you receive your inheritance outright or you receive your inheritance in the form of principal distributions from a trust, you should consider the long-term consequences of how you handle these distributions. Many people who receive principal distributions from a trust wisely keep those assets separate from assets they may own jointly with their spouse, potentially protecting those assets in the event of a divorce between the trust beneficiary and their spouse.
The bottom line is that being a trust beneficiary comes with both responsibilities and rights. Be proactive in understanding the trust terms, and don’t assume everything will be taken care of for you. If you have the least bit of suspicion that, either intentionally or unintentionally, things aren’t right, you need to act immediately to gather the information you need to hold the trustees and other responsible parties accountable for fulfilling their duties.