What is a Beneficiary of Trust [Obligations and Duties Owed to a Trust Beneficiary]

August 14, 2018
Written by: Steven Gibbs | Last Updated on: June 20, 2024
Fact Checked by Jason Herring and Barry Brooksby (licensed insurance experts)

Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.

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Trust Beneficiary

A trust beneficiary is the person, or persons, for whom a trust is established. In some cases, the grantor who creates the trust is also trustee of the trust, either alone or with others, managing the trust on behalf of the beneficiary or beneficiaries.

While the grantor, or settlor, who creates the trust can also be a trustee, the trustee (in general) cannot be the only beneficiary of a trust.

There are two basic types of trusts, living trusts and testamentary trusts.

A living trust is established during the lifetime of the grantor and managed for the beneficiaries by its trustee or trustees.

A testamentary trust is set up only upon the death of the grantor, with its terms typically outlined in his or her last will and testament. Such trusts are often used to provide income and/or transfer assets to beneficiaries.

Revocable vs Irrevocable

Trusts can be further categorized as either irrevocable or revocable trusts.

Major changes in areas such as naming new beneficiaries typically can’t be made to types of irrevocable trusts, while the latter is more flexible, allowing changes to be made to all aspects of the trust such as beneficiaries, trustees, etc.

As a beneficiary you may receive income from a trust or receive assets from it upon certain events, such as the death of the grantor, reaching a certain age, or some other criterion. This type of approach is often found with revocable trusts, which may terminate upon a certain event at which point the trust’s assets are transferred to its beneficiaries.

The grantor of such a trust selects the beneficiaries, who can be changed at any time prior to a trust’s termination.

The grantor of an irrevocable trust also chooses the beneficiaries and sets the terms of the trust, which generally can’t be altered without the consent of the beneficiaries. Such trusts may be established to, among other purposes, provide funds to pay for a beneficiary’s education, with the trustee empowered to pay these expenses without giving the beneficiary control over how the money is spent.

Trusts known as incentive trusts stipulate that specified criteria must be achieved before a beneficiary receives distributions. An example would be a trust specifying that a beneficiary has to receive a college diploma prior to receiving income payments.

Some trusts include a spendthrift clause, which gives the trustee discretion over income payments made to beneficiaries. This prevents creditors from forcing a trustee to make payments to them if the beneficiary falls into financial distress. Such a clause means that the creditors would need to try to collect any amounts owed to them from the beneficiary after he or she has been paid by the trustee rather than trying to collect from the trust.

Living Trust vs Irrevocable Trust Pros and Cons

The assets placed in a revocable trust may be removed at any time and returned to the grantor. Revocable trusts do not need to be filed with probate court upon the death of the grantor, enabling greater privacy than the use of a will, which must be filed with the probate court to take effect. Taxes must be paid on assets placed in a revocable trust by the grantor as if such assets were directly owned.

On the other hand, assets in an irrevocable trust are typically not counted as part of the grantor’s estate, so income and capital gains generated within the trust are the responsibility of the trust itself. Furthermore, upon the death of the grantor, any assets in such a trust are typically not deemed to be a part of the grantor’s estate for purposes of federal and state inheritance taxes.

A benefit of an irrevocable trust is that, in return for the grantor giving up a certain amount of control over the trust, such a trust can allow him or her to start the process of moving assets to beneficiaries without triggering gift or estate taxes. However, a three-year survival period might apply in certain scenarios, such as the case with an irrevocable life insurance trust. Assuming this test is met, after the grantor’s death appreciation of remaining assets in an irrevocable trust will not be included in estate tax calculations.

Irrevocable Life Insurance Trust

One of the advantages of a life insurance trust is that you can set up the terms of your trust prior to your death that detail out the specifics of how you want your trust beneficiary to receive the funds from your life insurance death benefit proceeds. Rather than give your heirs a lump sum carte blanche, you can dictate the terms in your trust that the trustee will use as a guide on how to benefit your trust beneficiaries.

Apart from leaving money to a loved one, such as your children, you can also set up your irrevocable trust to benefit a charity. Charitable trusts provide a way to create a legacy far beyond your initial gift. Further, there are tax benefits to charitable trusts that may provide further incentive to consider when deciding on the best estate planning strategy.

A trustee must manage a trust as a fiduciary. The duties of a trustee are different from state to state, but typically require that the trustee manages the trust in accordance with its stated goals and objectives while exercising the duty of loyalty and the duty of care.

The duty of loyalty means that the trustee is not allowed to place his or her own interests ahead of the interests of the trust’s beneficiaries.

The duty of care requires that the trustee must manage trust assets and conduct trust business with the same prudence and diligence that a person would reasonably be expected to use when managing his or her own affairs.

There are a variety of specific of tasks a trustee must carry out when performing trust business, including:

Overseeing trust investments:

The trustee is charged with establishing and implementing a plan to invest the trust’s assets in accordance with the objectives recorded in the trust document. The investments in a trust are generally expected to provide sufficient income for current beneficiaries, while at the same providing enough growth to also meet the needs of future beneficiaries. Some trusts give a trustee the authority to distribute portions of the trust’s principal to beneficiaries from time to time.

Management and safeguarding of trust assets:

Assets can be safeguarded by ensuring that, in the case of real estate, for instance, adequate insurance is procured, and proper upkeep is performed. If the trust holds securities, the trustee must also establish accounts for the benefit of the trust’s beneficiaries that are properly registered to hold such assets.

Tax reporting:

The trustee is charged with reporting any income received on trust assets and making sure that the proper amount of tax is paid on this income, as well as any capital gains. The trustee must also report to the beneficiaries any amounts that they are required to report on their own income taxes as a result of trust distributions.

Record maintenance:

The trustee must keep track of and document all transactions that occur in the trust. Before the trust is terminated the trustee is responsible for reporting to trust beneficiaries that all trust assets and income have been properly managed and accounted for.

Beneficiary of a Trust
What are the Rights of a Beneficiary of a Trust?

As a trust beneficiary, you are entitled to receive benefits as specified in the trust. This may include income payments and the inheritance of assets upon the death of the grantor.

The specific rights you have as a trust beneficiary are covered by the laws of the state where the trust is domiciled.

Generally, as a beneficiary you have the right to be given information about actions the trustee takes within the trust to enable you to monitor the trustee’s management of the trust to ensure that he or she is acting in the best interests of its beneficiaries.

Typically, a trustee will provide annual reports of trust activity to the trust’s beneficiaries. These reports will include such data as the gains and losses on assets within the trust, and expenses that have accrued as a result of trust activities. If no such report is sent by the trustee, as a beneficiary you have the right to petition the court for a report that accounts for the assets in the trust.

If you as a beneficiary believe that a trustee has breached his or her fiduciary duty to the trust, you have the right to commence legal action against the trustee. Such action is typically taken by the filing of a petition at probate court.

Breaches of fiduciary duty can take the form of the mismanaging of trust assets or other malfeasance. In certain situations, a trustee may be found to be liable for losses of trust principal as well as lost income as a result of his or her actions. This can include making extremely bad investment choices, self-dealing at the trust’s expense, bribery, and similar acts.

Besides the regular yearly report detailing the performance of trust assets, beneficiaries have the right to ask the trustee to deliver a special accounting report if there is reason to believe that there are issues with regard to the trustee’s performance of his or her fiduciary duties.

If such a suit, usually filed via petitioning the local probate court, is found to have merit, the beneficiaries can take legal action which may include the removal and replacement of the trustee.

When all beneficiaries who are considered to be “adults of sound mind” are in agreement that it is time to terminate a trust, legal action can be initiated by the beneficiaries for this purpose. The court would generally need to rule that the goals established by the grantor have been achieved or that they aren’t able to be met prior to terminating the trust.

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