Distribution of Irrevocable Trust Assets to Beneficiaries

When you have been named as beneficiary of a trust, you probably would like to know is when a distribution of trust assets will be made to the beneficiaries. Distribution of trust assets to beneficiaries depends on the terms of the trust agreement and the discretion of the trustee regarding distribution. Other factors also come into play when trust assets are distributed, such as the type of trust (revocable vs. irrevocable) involved, whether the distribution was income or principal of the trust, and whether the distribution is personal or real property.

Distribution According to the Terms of the Trust Agreement

The first thing you should do when you learn you are a beneficiary of the trust is to request for a copy of the trust agreement. This trust agreement is a very important legal document that will tell you whether the trust is revocable or irrevocable when distributions are to be made, which distributions are mandatory or discretionary, and the extent of powers of the trustee.

Revocable vs. Irrevocable

Revocable trusts are trusts that can be amended, modified, or changed by the grantor. Irrevocable trusts, on the other hand, cannot be modified by the grantor anymore. Once executed, the grantor’s assets that have been transferred to the irrevocable trust cannot be taken back.

Why is the revocability of the trust important with regard to distribution?

• Guaranteed distributions. If the trust is revocable, future distributions are not guaranteed and may be revoked by the grantor at any time. Revocation of the grantor is prospective and does not affect previously made distributions.

• Tax treatment of distributions. Distributions to beneficiaries in a revocable trust are not taxed to the beneficiary, but to the grantor who reports the revocable trusts’ income under his own social security number. Distributions to beneficiaries in an irrevocable trust, on the other hand, are taxable to the beneficiary up to the tax deduction claimed by the trust.

Timing of Distributions

The trust agreement will also tell you when trust distributions will be made. Generally, there are three types of distribution: outright, staggered, and discretionary.

Outright distributions are the easiest types of distribution to administer because trust assets are given to the beneficiary upon the death of the grantor. Administration is usually limited to the payment of taxes and the grantor’s debts, in case the estate is not sufficient. This type of distribution is similar to an estate distribution because payments are made immediately upon the death of the grantor/

Staggered distributions are payments made to the beneficiaries on a periodic basis or upon the happening of an event. Staggered distributions are usually imposed by a trust agreement when the beneficiaries are minors. Administration of the trust, in this case, can be more expensive because the trustee has to administer the trust until it is terminated by the happening of an event or arrival of a period. For example,

Discretionary distributions are payments made to the beneficiary depending on the trustee’s discretion. These types of discretionary distributions could either be absolute or subject to a standard. For example, a trust can authorize the trustee to make distributions for the beneficiary’s health, education, maintenance, and support. However, the trustee has discretion to decide whether such expense of the beneficiary is for that particular purpose. Sometimes, trusts will grant the trustee absolute discretion to make a distribution. A sample provision would state, “The Trustee shall have the absolute discretion, at any time and from time to time, to make payments or distributions to or among the beneficiaries.” In a pure discretionary distribution provision with no standard, the beneficiary cannot compel the trustee to make a distribution.

Mandatory vs. Discretionary Distributions

The trust agreement will usually state what type of distribution the beneficiary is entitled to.

As previously discussed, a discretionary distribution can be pure or subject to a standard. Mandatory distributions, on the other hand, require the trustee to make a distribution, whether or not there is enough income generated to make the distribution. For example, the trustee is required to give $10,000 a month to the beneficiary. When the trust’s income is insufficient, the trust agreement authorizes the trustee to invade the principal to complete the $10,000 mandatory distribution to the beneficiary.

Distribution of Trust Income or Principal to the Beneficiaries

When the trust makes a distribution, it is important to know whether the amount distributed was income or principal of the trust. If the distribution came from trust income, the beneficiary has to pay income taxes. If the distribution came from trust principal, the beneficiary does not need to pay income taxes because the law assumes that taxes have already been paid on the principal. Any other income that remains undistributed for that year is taxable to the trust.

Distribution of Personal vs. Real Property

Distribution of cash to beneficiaries is easy because it is a simple matter of writing checks to the beneficiaries. Bonds can also easily be transferred to beneficiaries without having to sell them. Stocks can be transferred through a brokerage account for securities and through the transfer of stock certificates for privately-held businesses.

For real estate, the trustee can transfer the property to the beneficiaries through a deed or can sell the real property and distribute the proceeds to the beneficiaries. It really depends on the agreement between the trustee and the beneficiaries on how the beneficiaries want to receive the real estate (or its corresponding value).

When all assets of the trust have been distributed, the trust is terminated. The trustee will request you to sign a release, stating that you agree to the accounting after all facts have been fully disclosed. If you do not agree with the accounting, you can compel the trustee to file a formal accounting with the court.

Trusts can be complex to administer. It is important to have a trust lawyer with you who can guide you through the process. Disgruntled beneficiaries who want the distributions to be made immediately can allege that a trustee has abused his power and make the trustee personally liable for damages.

To ensure that your administration of the trust can withstand legal scrutiny, get counsel from a trust attorney. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].