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Disbursement of Funds to Beneficiaries of a Trust. A Quick Guide.
Disbursement of funds to beneficiaries, where the trust authorizes it, should happen within the timeframe the trust specifies. Trusts arrange disbursement in many ways: an immediate distribution on the death of the person who made the trust, a distribution when a beneficiary reaches a certain age (18 or 25, for example), distributions of principal, distributions of income, a monthly payment, or a distribution at some other fixed point in time.
Not every trust permits disbursement, and not every beneficiary is entitled to one. Some beneficiaries are entitled to principal, some only to income, and some, such as contingent beneficiaries, are entitled to nothing until a future event occurs, possibly a long time away. The only way to know is to have an attorney read the trust document, assuming it is not unclear, as some are. If you do not have a copy of the trust, ask the trustee for one; if the trustee refuses, you can bring a court proceeding to compel its production.
Mandatory and discretionary disbursements
The trustee’s obligations depend on the trust’s language. A mandatory provision requires the trustee to make a specific disbursement at a specific time: “the trustee shall distribute all income to the beneficiary quarterly”, or “the trustee shall distribute the principal to the beneficiary on her 30th birthday.” The trustee has little room to delay or modify these.
A discretionary provision authorizes but does not require disbursement. The trustee decides whether, when and how much to distribute under the standard the trust sets, commonly the beneficiary’s “health, education, maintenance and support” (HEMS), “comfortable support”, or the trustee’s “absolute discretion.” A beneficiary of a discretionary trust has a much weaker claim to a particular payment, though the trustee must still exercise the discretion in good faith.
Why disbursements get delayed
Every month of delay costs the beneficiary the use and enjoyment of their share. Some delay is legitimate, and some is not. The usual causes are these.
| Cause of delay | What it means for the beneficiary |
|---|---|
| Tax compliance | Tax returns must be filed before final disbursements can safely be made. |
| Creditor claims | For a trust funded from an estate, the estate’s seven-month creditor period must run before the executor can safely fund the trust, and the trustee cannot distribute what has not yet arrived. |
| Asset valuation | Hard-to-value assets such as real estate or a business need appraisals first. |
| Liquidity | Cash has to be available; assets may need to be sold before there is anything to distribute. |
| Disputes among beneficiaries | Disagreements over shares or over the trustee’s decisions hold everything up. |
| Pending litigation | A lawsuit involving the trust may affect how much is available. |
| Trustee performance | Some trustees are simply slow or disorganized. This is the delay a beneficiary does not have to accept. |
It is a fine line between giving the trustee reasonable deference and insisting on the inheritance promptly. A trustee understandably has many things to get to. But a diligent beneficiary should not sit idly by for the whole period, especially if the trustee appears to be failing the non-waivable duty to “exercise reasonable care, diligence, and prudence” (EPTL § 11-1.7(a)(1)). When a beneficiary knows the trustee is mishandling the trust, the court should be involved without delay. In many cases, though, a quarrel with the trustee serves neither the beneficiary nor the trust, and the better course is a measured demand.
The beneficiary’s right to information
A beneficiary is entitled to a copy of the trust instrument, to periodic accountings of the trust’s activity, to information about specific transactions on reasonable request, to notice of material developments affecting their interest, and to annual statements of trust assets and activity. The trustee’s duty to inform is fundamental. A beneficiary who cannot get information about the trust has grounds to compel disclosure through the court.
The written demand
If the trustee is unresponsive, the beneficiary’s first step is a written demand for an accounting and for disbursement. The demand identifies the trust and the beneficiary’s interest, requests the specific information or action, sets a reasonable deadline, states that court action will follow if there is no response, and goes by certified mail or another documented method of delivery.
The demand serves two purposes. It may be a prerequisite to commencing a proceeding against the trustee in court (SCPA § 2102(1)), and it tells the trustee the beneficiary is serious, which often produces a faster disbursement on its own. If it does not, the demand documents the trustee’s failure to respond for the litigation that follows.
The petition to compel
If the trustee does not respond, the beneficiary may petition the court under SCPA § 2102 to compel the trustee to act, and under SCPA §§ 2205 and 2206 to compel an accounting. The petition identifies the trust and the trustee, states the beneficiary’s interest, describes the trustee’s failure to act or respond, requests the specific relief sought, and is served on the trustee, who must answer. New York courts generally compel an accounting where there is “good cause”, and typically resolve the petition by ordering the trustee to comply with their duties or by ruling on specific objections.
Removal and surcharge
New York courts will step in where the trustee “endangers the trust” or “seriously impedes its administration” (In re Braloff, 162 N.Y.S.2d 620, 623 (2d Dep’t 1957), affirmed, 173 N.Y.S.2d 817 (1958)). Where the misconduct is serious, removal may be the appropriate remedy. The grounds under SCPA § 711 include dishonesty or fraud, commingling of funds, substantial neglect of duties, inability or unwillingness to act, a conflict of interest that substantially affects administration, mismanagement of trust assets, substance abuse, refusal to comply with court orders, and failure to provide required accountings. Removal is more drastic than the other remedies and is reserved for serious cases; we discuss it further on our trustee removal page.
If the trustee’s misconduct caused a loss, the court can also surcharge the trustee, meaning impose personal liability payable from the trustee’s own funds rather than the trust. A surcharge can require the trustee to return misappropriated funds, to make good investment losses caused by imprudent decisions, to pay interest on funds wrongfully withheld from beneficiaries, to forfeit commissions earned during the period of misconduct, and in egregious cases to pay the beneficiaries’ attorney’s fees.
Tax treatment of disbursements
Income disbursements generally carry out the trust’s distributable net income, which is taxed to the beneficiary. Principal disbursements are generally not taxable to the beneficiary, because they are a return of trust corpus. Capital gains are typically taxed at the trust level unless the trust allocates them to income or distributes them on termination. The trustee issues a Form K-1 reporting the taxable disbursements for inclusion on the beneficiary’s personal return.
Avoiding a dispute in the first place
A trustee can head off most disbursement disputes by communicating proactively about when distributions are expected, providing regular updates, responding promptly to inquiries, explaining delays clearly when they occur, documenting the reasoning behind discretionary decisions, and treating similarly situated beneficiaries equally.
A beneficiary, for their part, does better by asking questions through reasonable channels rather than assuming bad faith, cooperating when the trustee needs information, being patient with legitimate administrative requirements, documenting concerns rather than reacting emotionally, and getting advice before taking aggressive action.
If you would like to discuss disbursement of funds to the beneficiaries of a trust, whether you are the beneficiary waiting for a distribution or the trustee deciding when one can safely be made, call the Law Offices of Albert Goodwin at 212-233-1233 or email [email protected].
About the Author
Albert Goodwin Esq. is a licensed New York attorney with over 18 years of courtroom experience. His extensive knowledge and experience make him well-qualified to write authoritative articles on a wide range of legal topics. He can be reached at 212-233-1233 or [email protected].
