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.
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.
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.
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.
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.
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.
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.
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.