How Does A Trust Work?
How Does A Trust Work?
A loved one died and you know you’re going to inherit money from a trust - now what?
At this point, you probably have more questions than answers. It’s not your fault. All trusts are different, and most trust beneficiaries take YEARS to fully understand their trust's rules.
Lucky for you, you found me. I’ve got the details you need to understand your rights as a trust beneficiary and get the answers you need, NOW.
Posted on May 16, 2024 by Katherine Fox.
How Does A Trust Work?
After learning you will be inheriting from a trust, your first step is to start gathering information.
Ask the executor of the estate you are inheriting from these questions:
Who is the trustee of my trust?
Are there other trust beneficiaries?
What are the terms of my trust?
What income and distributions am I entitled to receive from my trust?
Can I see a copy of the trust document?
When should I expect to learn more about my trust?
Asking these questions is the easy part. Getting answers may be more difficult, especially if you are inheriting from a large, complex estate or if you have a difficult relationship with the estate executor or your trustee.
If you can’t get the answers you need, you’ll need to start educating yourself and advocating for your rights as a trust beneficiary.
I’m Katherine and I’m a CFP® and investment advisor for inheritors.
I’m here to help you through this journey, whatever your needs are.
If you’re trying to get up to speed, check out the 20 Terms Inheritors Need to Know.
And if you’re deep in the weeds and don’t know what to do next, schedule a FREE consultation to see how I can help you navigate your inheritance from a trust.
What are the types of trusts?
There are two different types of trusts:
Revocable trusts, sometimes called “living trusts,” are created by a trust grantor while they are alive.
The trust grantor maintains the right to move assets into and out of the trust, change the terms of the trust, terminate the trust, and otherwise keep full control over both the trust and assets held within it.
In legal speak, the trust grantor maintains “incidents of ownership.”
When the trust grantor dies, two things can happen to a revocable trust:
The trust distributes assets to trust beneficiaries and then dissolves
The revocable trust becomes irrevocable and holds money in trust for trust beneficiaries
Revocable trusts are generally established to facilitate the estate transfer process after death, as assets held in trust pass outside of probate directly to trust beneficiairies.
Irrevocable trusts are created by a trust grantor and can be:
Irrevocable upon drafting
Revocable trusts that become irrevocable upon the trust grantor’s death
The grantor of an irrevocable trust does not have the right to manage assets held within the trust or change the terms of the trust document. Except in certain limited circumstances, irrevocable trusts cannot be amended or changed.
In legal speak, the trust grantor gives up “incidents of ownership” when transferring assets into an irrevocable trust.
When the trust grantor dies, assets held in irrevocable trusts will continue to be managed by an appointed trustee on behalf of trust beneficiaries.
Irrevocable trusts are generally established to:
Provide tax savings, as assets held within an irrevocable trust may not be subject to estate tax on the grantor’s death
Control how and when beneficiaries can use inherited wealth from beyond the grave
How Does A Trust Work?
When you inherit money held in trust, there are three key parties: grantor, trustee, and trust beneficiaries.
Who manages a trust fund?
What is a trust grantor?
The trust grantor or settlor is the person who created a trust. If you are inheriting money held in trust, this person could be a parent or it could be a more distant relative. Some trusts are set up to endure across generations and can be in effect for 100 years or more.
What is the trustee of a trust?
The trustee of a trust is the person who has a fiduciary responsibility to oversee the terms of the trust, manage trust assets, and ensure all legal and tax obligations of the trust are being met. The trustee will be named in the trust document. A trustee could be a relative or close family friend, or you may have a corporate trustee who is hired, and paid a fee, to serve in the role of trustee.nsibilities should be assigned and agreed upon.
What are trust beneficiaries?
Trust beneficiaries are those individuals who have the right to receive money from a trust. All trust beneficiaries are not entitled to the same distributions from a trust. A trust document will detail what money beneficiaries are entitled to receive and what additional distributions they can request.
How does a trust work after someone dies?
After someone dies, a trust will work in one of two ways:
1.lThe trust distributes all its assets out to beneficiaries and then dissolves
If you inherit from a trust that will distribute assets out and then dissolve, you do not need to worry about the ongoing administration of a trust fund or your relationship with a trustee.
You should still carefully monitor assets held within the trust and potential trust expenses to ensure that you protect your inheritance and confirm that everything is being distributed in accordance with the trust document.
2. The trust continues to hold assets in trust for beneficiaries
If you inherit from a trust that will continue to hold assets in trust for your benefit, focus on building a relationship with your trustee and educating yourself on your rights as a trust beneficiary.
All trust beneficiaries have certain rights, including the rights to:
Be notified that a trust exists within 60 days after a grantor’s death
Be kept informed about the trust and its administration
Receive an annual accounting of trust income, expenses, distributions, and trustee compensation
Receive distributions as outlined in the trust document
Be treated impartially by the trustee
Hold the trustee accountable for any wrongful acts or omissions that affect their interests
“Although trusts are similar in their structure and the key role of trustee and beneficiary, each trust will set out different rules as to how and when beneficiaries can access trust funds. ”
How does a trust fund work after death?
If you are the beneficiary of an irrevocable trust, you need to understand how trust funds work after the grantor has died.
Although trusts are similar in their structure and the key role of trustee and beneficiary, each trust will set out different rules as to how and when beneficiaries can access trust funds.
After the grantor’s death, you should take steps to understand your right as a trust beneficiary.
Start by requesting a copy of the trust agreement from your trustee. When you receive the document, look for the following terms:
Successor trustee
Beneficiary
Remainder beneficiary
Income distributions
Principal distributions
Discretionary distributions
Mandatory distributions
Understanding who trust beneficiaries are and the terms that dictate payouts from your trust fund will help you start building a plan to manage your inheritance from a trust.
How do trust funds pay out?
All trust funds pay out differently, depending on the terms of the trust.
Common examples of trust fund payout structures include:
Age-based payouts
Trust beneficiaries may receive a portion of their inheritance from the trust at certain ages. For example, they may receive a 50% share of their inheritance when they turn 35 and the remaining 50% share when they turn 40.
Life milestone-based payouts
Trust beneficiaries may receive a portion of their inheritance from the trust upon completing certain life milestones. For example, they may receive a set payout upon graduating college, getting married, maintaining sobriety, or having children.
Income payouts
Some trust beneficiaries may be “income beneficiaries” meaning they are entitled to distributions of all or part of income generated by trust assets. This income is generally paid out to beneficiaries monthly or quarterly.
Discretionary distributions
Some trust beneficiaries may also have the right to request discretionary distributions from their trustees. Generally, these distributions are governed under the “Health, Education, Maintenance, and Support (HEMS)” standard. Trustees have broad latitude to approve or reject these requests based on trust beneficiaries current financial position, the “reasonableness” of the request, and the financial health of trust assets.
Let’s take the next step together
Understanding how trusts work is not easy. Beneficiaries can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms You Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to manage your inheritance from a trust.
