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Disbursement of Funds to Beneficiaries of a Trust. A Quick Guide.
Disbursement of funds to beneficiaries, if authorized by the trust, should happen within the timeframe specified in the trust. Here are some examples of the different types of trust disbursement arrangements for beneficiaries:
- An immediate disbursement upon the death of the person who made the trust
- An immediate disbursement upon reaching a certain age (for example, 18 or 25)
- Disbursement of principal
- Disbursement of income
- A monthly disbursement
- Disbursement at some specific point in time
The possibility of disbursement of funds to beneficiaries is not the same in every trust. Some trusts authorize disbursement to beneficiaries, some do not. You would have to have an attorney read the trust document to find out for sure, presuming that the trust document is not unclear (as some are). Some beneficiaries are entitled to disbursement of funds, some are entitled only to disbursement of income, and some are not entitled to any disbursement, possibly for a long time. Some beneficiaries are not entitled to any disbursement at all, such as contingent beneficiaries.
If you are concerned with disbursement of funds to beneficiaries of a trust and you need to consult an attorney, we at the Law Offices of Albert Goodwin are here for you. You can call us at 212-233-1233 or send us an email at [email protected].
Every month of delay of disbursement of funds costs the beneficiary loss of use and enjoyment of their share of the trust. If the trustee is taking too long, a trust attorney can go a long way in showing them that distributing the trust to the beneficiaries should be a priority.
As we said, disbursement to beneficiaries of a trust depends on the trust language. If you don’t have a copy of the trust, you can ask the trustee to provide a copy of the trust to you. If the trustee refuses, you can bring a court proceeding to compel the production of a trust.
On one hand, it is understandable that the trustee has many things they have to get to. On the other hand, a diligent beneficiary should not sit by idly for this entire temporal period, especially if he believes that a trustee is failing the nonwaivable duty to “exercise reasonable care, diligence, and prudence.”[1] For example, a court may disqualify a trustee on grounds such as commingling funds, mismanagement, dishonesty, and substance abuse.[2]
New York courts will step in if the trustee “endangers the trust” or “seriously impedes its administration.”[3] If the trustee is non-responsive a beneficiary can send a written demand for an accounting and disbursement of funds to beneficiaries. This request serves two purposes. First, it may be a requirement to commence any proceeding in court against the trustee.[4] And second, it gives the trustee notice that you are serious—which may give way to a faster disbursement. If the trustee does not respond to this written demand, the beneficiary may then commence a motion to compel accounting with the court.[5] New York courts generally compel such an accounting if there is “good cause” to do so.
It is a fine line between giving the trustee deference and desiring to receive the inheritance promptly. When a beneficiary knows that a trustee is mishandling the trust, a court should immediately get involved. In many cases, however, a quarrel with the trustee is not in the best interests of either the beneficiary or the trust. Therefore, it is best to discuss disbursement of funds to beneficiary with a competent New York trust attorney.
If you would like to discuss disbursement of funds to beneficiaries of a trust, we at the Law Offices of Albert Goodwin are here for you. You can call us at 212-233-1233 or send us an email at [email protected].
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References
[1] N.Y. Est. Powers & Trusts Law § 11-1.7(a)(1).
[2] N.Y. Surr. Ct. Proc. Act Law § 711.
[3] In re Braloff, 162 N.Y.S.2d 620, 623 (2d Dep’t 1957), affirmed, 173 N.Y.S.2d 817 (1958).
[4] N.Y. Surr. Ct. Proc. Act Law § 2102(1).
[5] See id.§ 2205, 2206.
Mandatory vs. Discretionary Disbursements
The trustee's disbursement obligations depend on the trust's language:
Mandatory disbursements. The trust requires the trustee to make specific disbursements at specific times. Examples include "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 limited discretion to delay or modify these.
Discretionary disbursements. The trust authorizes but does not require disbursements. The trustee decides whether, when, and how much to disburse based on standards in the trust. Common standards include the beneficiary's "health, education, maintenance, and support" (HEMS), "comfortable support," or "absolute discretion."
Common Reasons for Disbursement Delays
Trustees may delay disbursements for various reasons:
- Tax compliance. Tax returns must be filed before final disbursements.
- Creditor claims. The seven-month creditor period must run.
- Asset valuation. Hard-to-value assets need appraisals.
- Liquidity issues. Cash must be available for disbursement.
- Beneficiary disputes. Disagreements among beneficiaries may delay disbursements.
- Pending litigation. Lawsuits may affect available funds.
- Trustee performance. Some trustees are slow or disorganized.
The Beneficiary's Information Rights
Beneficiaries are entitled to information about the trust:
- A copy of the trust instrument.
- Periodic accountings of trust activity.
- Information about specific transactions on reasonable request.
- Notice of material developments affecting their interests.
- Annual statements of trust assets and activity.
The trustee's duty to inform is fundamental. Beneficiaries who cannot get information about their trust have grounds to compel disclosure through court action.
Demand Letters Before Court Action
Before going to court, beneficiaries typically send formal demand letters:
- Identify the trust and the beneficiary's interest.
- Request specific information or action.
- Set a reasonable deadline for response.
- Indicate that court action will follow if no response.
- Are sent by certified mail or other documented delivery method.
Demand letters serve two purposes: they may achieve the desired response without litigation, and they document the trustee's failure to respond if litigation becomes necessary.
The Petition to Compel
If the trustee does not respond to demands, the beneficiary can file a petition to compel under SCPA § 2102. The petition:
- Identifies the trust and the trustee.
- States the beneficiary's interest.
- Describes the trustee's failure to act or respond.
- Requests specific relief (accounting, disbursement, other action).
- Is served on the trustee, who must respond.
The court resolves the petition typically by ordering the trustee to comply with their duties or by addressing specific objections.
Petitioning for Trustee Removal
When trustee misconduct is more serious, removal may be the appropriate remedy. Grounds for removal under SCPA § 711 include:
- Dishonesty or fraud.
- Substantial neglect of duties.
- Inability or unwillingness to act.
- Conflict of interest substantially affecting administration.
- Mismanagement of trust assets.
- Refusal to comply with court orders.
- Failure to provide required accountings.
Removal is more drastic than other remedies and is typically reserved for serious misconduct.
Surcharge for Trustee Misconduct
If trustee misconduct caused losses, the court can impose surcharges — personal liability of the trustee:
- Returning misappropriated funds.
- Compensating for investment losses caused by imprudent decisions.
- Paying interest on funds wrongfully withheld from beneficiaries.
- Forfeiting commissions earned during the period of misconduct.
- Paying beneficiaries' attorney's fees in egregious cases.
Surcharges create real consequences for trustee misconduct. The trustee pays from personal funds, not from the trust.
Tax Treatment of Disbursements
Trust disbursements have specific tax consequences:
- 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 represent return of trust corpus.
- Capital gains are typically retained at the trust level unless specifically allocated to income or distributed on termination.
- K-1 forms report taxable disbursements to beneficiaries for inclusion on their personal returns.
Avoiding Disbursement Disputes
Both trustees and beneficiaries can take steps to avoid disbursement disputes:
For trustees:
- Communicate proactively about the timing of expected disbursements.
- Provide regular updates on trust matters.
- Respond promptly to beneficiary inquiries.
- Explain delays clearly when they occur.
- Document the reasoning behind discretionary decisions.
- Treat similarly situated beneficiaries equally.
For beneficiaries:
- Ask questions through reasonable channels rather than assuming bad faith.
- Provide cooperation when the trustee needs information.
- Be patient with legitimate administrative requirements.
- Document concerns rather than reacting emotionally.
- Consult counsel for guidance before taking aggressive action.
About the Author
Albert Goodwin Esq. is a licensed New York attorney with over 18 years of courtroom experience. His extensive knowledge and expertise 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].
