Navigating The Trust Beneficiary Journey: All You Need to Know

Individuals who are the beneficiaries of a trust find they have many things to be thankful for. However, being in this position comes with drawbacks a person must know. While the individual might find they no longer need to work or can devote more time and money to things they are passionate about, they must adhere to the trust.

The individual who created the trust, often referred to as the settlor, dictated how the funds should be managed. Beneficiaries may not like how the trust is managed, but they don’t get much say in this. What should they know about trusts? What can they do if a disagreement arises regarding trust management? Where do they turn? The following guide answers these questions and more.

Understand the Trust Structure

A trust beneficiary must spend time learning about the trust structure. The trust agreement contains all the information this person needs to know. While reviewing the document, make a list of questions regarding the documents and how information and assets will flow.

The trust beneficiary should receive regular account statements and review the information each year with a trusted advisor. This may be a wealth planner, trustee, or other person with knowledge of the trust. However, don’t delegate all responsibility to this professional. It falls on a trust beneficiary to know the tax implications of the trust along with the time horizon.

The income tax and transfer tax directly impact how assets will be allocated. Furthermore, they affect how the trust will be ordered when it comes to available sources of funding. Finally, the beneficiary must know how any distributions will affect their personal income taxes.

Trust Types

Trusts fall into two basic categories. A person creates a living trust and transfers property to this trust while they are living, just as the name suggests. They may oversee this trust or appoint another person to do so. A testamentary trust, in contrast, is not established until a person’s passing. This trust is designed to provide for named beneficiaries. A testamentary trust is also overseen by a trustee who must adhere strictly to the terms of the trust. The trustee for either type of trust has a fiduciary duty to act in this manner.

Requesting Distributions

The beneficiary of a trust must understand the process for requesting distributions. They need to know what documentation they must provide when doing so. For example, a recent tax return or budget might be required before funds will be distributed. Beneficiaries often dislike being required to provide this information, but find they must to move forward with the distribution process.

The trustee needs this information to ensure the trust is being handled exactly as the creator intended. In addition, this process helps promote transparency while ensuring all beneficiaries receive fair treatment. Other beneficiaries receive no details of this request.

When reviewing the documents, pay attention to what the trust says about distributions and how and when they should be made. For example, the trust may outline how distributions for health and education are handled. Will the trust pay medical bills if they are submitted, or will the beneficiary pay them and put in for reimbursement? Is there a limit on the funds reserved for education?

The trustee bears the responsibility of interpreting the agreement. Knowing how they view these topics and others is of great help when requesting a distribution. Nobody wants to pay a medical bill, for example, only to learn they won’t be reimbursed because the bill needed to go directly to the trustee to be paid. Working closely with the trustee and understanding their interpretation of the trust will help to eliminate misunderstandings and hard feelings.

The Trustee’s Role

The trustee takes on several jobs when they accept this role. They collect any assets that belong to the trust and protect those assets. For instance, they will take possession of a property included in the trust and ensure it is maintained and kept in good condition. They also oversee any investments in the trust and ensure they are generating income.

Another duty of the trustee is to handle all tax matters related to the trust. They report any income and pay tax on the income that is not distributed. The trustee also pays taxes on any capital gains related to the trust. However, beneficiaries might also be required to pay taxes on any distributions they receive. The trustee helps them determine when distributions must be reported on personal income tax returns.

Any recordkeeping related to the trust falls under the duties of the trustee. This individual must record every transaction related to the trust accounts. In addition, before the final settlement, the trustee must show all assets and income have been handled properly and in accordance with the trust.

Navigating a Dispute

Beneficiaries should strive to reduce conflict. Doing so isn’t always easy, but they need to try. One way to reduce conflict is to keep communication lines open. Beneficiaries need to be clear about their values and priorities. If they don’t share this information, conflicts may arise. However, all beneficiaries of the trust need to recognize they aren’t the only ones impacted when decisions are made regarding the trust. They need to listen to and consider the viewpoints of others.

Compromise is key to navigating a dispute successfully. Trustees are often asked to step in to manage conflicts and help all parties reach a compromise. When doing so, the trustee needs to preserve the wealth of the trust and ensure the funds are being used as the creator intended. Often, to achieve this goal, the trustee must educate the beneficiaries on trusts and how they operate.

Most people are thrilled to learn they have been named a beneficiary of a trust. Before they get too excited, they need to understand what this designation means for them, as many people have misconceptions about trusts. With the help of a trusted advisor, a person can navigate the challenges associated with being a trust beneficiary while benefitting from this designation. Reach out for help today and get the most from the trust a loved one left in your name.