Posted on June 18, 2024 by Katherine Fox.

6 Questions You NEED to Ask if Your Inheritance is in a Trust Fund

You may have thought your parents would be leaving you money outright.

Now you’re trying to understand how and when you will inherit family wealth.

You may have known your inheritance was coming from a trust.

Now you don’t know how much money you can access and what type of distributions you will get. 

You may have just learned your parents appointed a relative or corporate trustee you don’t know or trust. 

Now you’re sweating trying to figure out how to create a positive relationship with a stranger who has become, effectively, your new financial parent. 

Thankfully you’re here, which is the first step to getting the answers and education you need to help plan for your inheritance in a trust fund.

You might be wondering:

• What is a trust fund and how does it work?

• What are the legal rights of trust fund beneficiaries? 

• Can a beneficiary withdraw money from a trust fund?

• What expenses can be paid for from a trust fund? 

• What are the tax implications of withdrawing money from a trust fund?

• Who manages the investments in an inherited trust fund? 

I’m Katherine. I’m a CFP® and financial advisor for inheritance.

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 build a plan if/when you inherit a trust. 

What is a trust fund and how does it work?

“Trust fund” is shorthand for an irrevocable trust set up by a person, called the trust “grantor.” Trust funds can be set up to provide estate tax benefits and/or to safeguard and protect a grantor’s assets after death. 

Trust funds provide funds for beneficiaries in the form of income or principal distributions. They also set limits on:

• The purposes for which trust fund beneficiaries can use money 

• The amount of money that beneficiaries can withdraw

After a trust fund is established, there are three key parties to the trust:

A Trustee is an individual or corporate entity with a fiduciary responsibility to steward trust assets and manage the trust per the trust document. Often, the trustee is a family member or close friend. A trustee may also be an attorney or a professional trust company. 

An Investment Advisor for the trust is the person who oversees the management and investment of trust assets. Often, the trustee and the investment advisor of the trust are the same person. Most trust companies also have a separate investment management team that oversees trust portfolios. If your trustee is an individual, you may have a separate investment advisor for your trust. 

Beneficiaries are individuals listed in a trust document with some current or future right to trust assets. There are different tiers of trust beneficiaries based on how much they can withdraw from the trust and if they are current or future beneficiaries. 

6 Questions You NEED to Ask if Your Inheritance is in a Trust Fund

Trust fund beneficiaries have several key rights. 

Three of these rights are most important for 99% of the trust fund beneficiaries I work with at Sunnybranch Wealth.

What are the legal rights of trust fund beneficiaries? 

1.lThe right to a copy of the trust document

Many of the initial questions that trust fund beneficiaries have can be answered by a careful review of their trust document. But many trustees are not aware of this requirement and manyrefuse to provide beneficiaries with a copy of their trust. 

2. The right to be kept “reasonably informed” about the trust and its administration

“Reasonably” is a key word, open to significant variation and subjectivity. The point for trust fund beneficiaries to understand is that they do have a right to be kept abreast of key developments and changes in their trust funds. Your trustee should not, knowingly or unknowingly, be hiding information from you about the operation and management of your trust fund. 

3. The right to receive an annual accounting of the trust

If you are a trust fund beneficiary, you are due at least an annual accounting or statement from your trust fund. This statement should detail the current value of the trust and how the value has changed over the past year. It should also detail how the trust is invested, the funds distributed to beneficiaries, and the expenses the trust paid over the preceding year.  

Can a beneficiary withdraw money from a trust fund? 

Beneficiaries' right to withdraw money from a trust fund will depend on the terms of their trust documents. 

There are several tiers of trust fund beneficiaries. 

Income beneficiaries are required to be paid all income that is generated from trust assets on a regular basis. “Regular” generally means monthly, quarterly, or annually. 

Some trust beneficiaries may also withdraw funds from their trust fund’s principal (the main body of the trust’s investments) when certain conditions are met or at the discretion of their trustee. 

Current beneficiaries are trust fund beneficiaries who can access income and/or principal distributions from the trust currently. 

Remainder beneficiaries are trust fund beneficiaries who can only access income and/or principal distributions from the trust when certain conditions are met, usually after the current beneficiaries have died.

What expenses can be paid for from a trust fund?

Trust funds vary widely in the types of expenses they allow to be paid for and the discretion they give to trustees when distributing funds to trust beneficiaries. 

If you are an income beneficiary of a trust fund, you will receive all (or a portion) of the income from that trust. That income is yours to do as you like with - spend, save, give, or invest. 

If you request distributions from your trust fund, your trustee will have broad discretion to decide if they want to approve your request.

Decisions about expenses trust funds can pay for beneficiaries generally fall under the “HEMS” standard. 

HEMS stands for Health, Education, Maintenance, and Support. 

It means trustees can distribute funds to beneficiaries for anything they need to maintain their current standard of living.

However, trustees also have the right (and the obligation) to consider what other sources of income are available to beneficiaries before approving any decisions. 

Many trust funds also include provisions allowing beneficiaries to take larger distributions from principal when certain conditions are met or life milestones occur. This often includes:

• Going to college

• Graduating from college

• Getting married

• Buying a house

• Starting a business 

What are the tax implications of withdrawing money from a trust fund?

In the simpliest explanation, money that trust funds distribute to beneficiaries (distributable net income, or DNI) is treated as taxable income on the beneficiary's individual income tax return. 

If you are a trust beneficiary, you should receive a Form K-1 from the trust each year detailing the amount of money the trust paid out to you. The information from the From K-1 will flow through to your individual income tax return. 

Trusts pay much higher taxes than people, so it is preferred that trusts give all of their income out every year to avoid an unnecessary tax hit. 

If your trust realizes capital gains (i.e., from selling stock or other assets), those capital gains are generally treated as a return of principal and taxed at the trust level, with proceeds not distributed out to beneficiaries. 

There are exceptions to this rule depending on the state inheritance investment advisorwhere your trust is governed and the provisions contained in the trust document. 

Who manages the investments in an inherited trust fund?

Beneficiaries may exert control over funds in an inherited trust fund through the trust's investment management.

Generally, when the trustee of your trust is a trust company, that trust company also has an investment arm that manages trust assets. They will not let you select your own, independent investment advisor, as your investment management fee to them boosts their bottom line. 

If you have an individual trustee, you may have more leeway in asking them to select an investment advisor for your trust who can help invest trust assets in line with your values. 

Some trust beneficiaries also have the right to change the trustee of their trust. If this is the case, beneficiaries may be able to appoint an independent trust company that would allow them to select their own investment advisor for their trust. 

For trust fund beneficiaries who are consistently irked by the fact that older white men are managing all their money and they have no power in the relationship, working to add an independent inheritance investment advisor who focuses on values-aligned investing and can help you understand the investments in your trust fund can be a huge sigh of relief and an essential step in moving toward financial independence.

Let’s take the next step together

Understanding how to manage an inheritance held in a trust fund is not easy. Inheritors 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 fiduciary, fee-only financial planner to learn how Sunnybranch can help you build a plan to manage your inheritance held in a trust fund.