As a Beneficiary Of A Trust — What Should I Look Out For?

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 individuals who create revocable living trusts to avoid probate will include provisions for beneficiaries that ensure the trust remains in existence after the death of the settlers. These trusts are often called living trust sub-trusts. The result is a trust in which you may be named as a beneficiary, allowing it to continue after the death of the person or persons who established it. Each trust will have a trustee or co-trustee and will include provisions for managing assets and making distributions to or for beneficiaries.

The Role of Trustees

Trustees of these trusts often find themselves in over their heads. Many individuals set up trusts and name a close friend or relative as a trustee, who may have little to no experience in this role. As a result, many individual trustees lack the knowledge of the investment and accounting rules required of trustees. For trust beneficiaries, it’s essential to be proactive in understanding the trust's terms and monitoring the trust property to avoid potential issues. If you have concerns, it may be helpful to encourage the trustee to seek appropriate legal and accounting advice.

Your Right to Information

If you are a beneficiary of a trust and cannot obtain information about the trust or its dealings, it’s important to know that you have a right to that information. However, your right can be subject to the terms of the trust documents and applicable state trust law.

Here are a few key points to keep in mind:

• While the settlor of a living trust is alive, you are not entitled to any information. You gain rights as a beneficiary only after the settlor's death, when the trust becomes irrevocable.
• The right to information helps hold trustees accountable and ensures they fulfill their obligations.
• If the trust owns real estate, a Certificate of Trust may be recorded in the land records, providing basic information about the trust.
• As a beneficiary of an irrevocable trust, you have the right to request a copy of the trust document and receive accurate information about the nature and amount of trust property. The trustee is obligated to permit you to inspect trust documents and provide a clear annual account of the trust's administration.

Addressing Uncooperative Trustees

What if the trustee fails to provide the information required? In such cases, a beneficiary may need to hire an attorney to compel the trustee to fulfill their duties or, in some instances, seek the trustee's removal through a court.

Tax Implications for Beneficiaries

Trust beneficiaries typically need to report distributions received from the trust’s income as taxable income. They usually receive a Form K-1 indicating how much of their distribution was taxable income versus nontaxable principal, which is essential for accurately reporting taxable income on their annual tax return. However, distributions from the trust’s principal are generally not considered taxable income.

Privacy Considerations

If you are a beneficiary of a testamentary trust created in someone else's will, the trust terms will be public record due to the will being filed in probate court. Conversely, if you are a beneficiary of a sub-trust within a revocable living trust, those terms may remain private, as trusts are not generally recorded in public records.

Protecting Your Inheritance

When receiving your inheritance, whether outright or as principal distributions from a trust, consider the long-term implications of how you manage these assets. Many beneficiaries choose to keep trust assets separate from jointly owned assets with a spouse to protect those assets in case of divorce.

Conclusion

Being a trust beneficiary comes with both rights and responsibilities. It's crucial to proactively understand the trust terms and not assume everything will be taken care of for you. If you suspect any issues, take immediate action to gather the necessary information to hold the trustees and other responsible parties accountable for fulfilling their duties.

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