Distribution of Trust Assets to Beneficiaries After Death

Trustees usually distribute trust assets to beneficiaries after the grantor’s death. However, this is not always the case. Distribution of trust assets usually depend on the terms of the trust agreement, and not the death of the grantor. In some trusts, however, the death of the grantor triggers the termination of the trust, which then leads to the distribution of trust assets to the beneficiaries.

Types of Distributions

Time-Dependent Distributions

When trust assets are distributed depends on the terms of the trust. In most revocable trusts, the death of the grantor leads to the distribution of trust assets to the successor beneficiaries. In some cases, however, distributions are made upon the happening of a triggering event or condition, such as the beneficiary’s graduation from college, when the beneficiary turns a particular age, or when the beneficiary needs the funds for health, education, or maintenance expenses.

When a beneficiary obtains a right to receive distributions depends on the terms of the trust. If a beneficiary has any doubts, the beneficiary needs to get a copy of the trust document and have it reviewed by a trust attorney for interpretation.

Mandatory vs. Discretionary Distributions

Distributions can also be categorized into mandatory and discretionary. In most revocable trusts where the grantor is the trustee and beneficiary, distributions to successor beneficiaries are mandatory upon the death of the grantor. Sometimes, a grantor directs the distribution when the beneficiary turns a certain age. In this case, the distribution is still mandatory because once the beneficiary reaches the required age, the trustee does not have any discretion to decide whether to make the distribution or not. The trustee must make the distribution.

However, there are times when the grantor directs the trustee to have discretion in making the distribution. This is very common in spendthrift or supplemental needs trusts in order to protect disabled or financially irresponsible beneficiaries in ensuring that trust distributions are protected from creditors. The usual parameters for discretionary distributions are health, education, maintenance, and support (HEMS). Some trusts, however, grant the trustee absolute discretion without limitation.

New York courts, however, have required trustees to exercise this discretion reasonably. If a beneficiary has any doubt as to whether the trustee is exercising discretion reasonably, judicial review may be requested. For example, if the trust states that distributions may be made for a beneficiary’s health, education, maintenance, and support, and the trustee refuses to make a distribution for the beneficiary’s monthly rent for room accommodation while attending university, this question can be raised to the court for resolution. In determining whether the trustee exercised the discretion reasonably, courts will normally look into the intent of the testator based on the provisions of the trust. If you have any doubts regarding the interpretation of a trust provision, you can seek the advice of a trust attorney.

Income vs. Principal Distributions

Distributions can also be made from the income or the principal of the trust. The terms of the trust agreement will dictate whether distributions shall be made using trust income or principal. When distributions are made using trust income, the beneficiary might have to pay tax to receive the distribution.

Distributions by Categories of Trust Assets

Once you have determined the type of distribution and the due and demandability of such distribution, the method of distribution will depend on the type of trust assets.

Cash

Cash assets are the easiest to distribute because it simply requires writing a check and giving it to the beneficiary.

Real estate

Real estate can either be deeded to the beneficiary/ies or sold with its proceeds divided among the beneficiaries. The language of the trust agreement will control the manner of distribution. If the trust agreements requires specific real property to be deeded to the beneficiaries, the trustee has the fiduciary duty to comply with this mandate. Beneficiaries can either hold it jointly with rights of survivorship or as tenants-in-common. How beneficiaries will hold specific real property depends on the language of the trust and the intent of the grantor. In the absence of specific language, the beneficiaries can agree amongst themselves how to co-own the real estate property.

Even if the trust agreement requires specific property to be deeded to the beneficiaries, the unanimous consent of beneficiaries allows them to direct the trustee to sell the real estate and divide the proceeds among the beneficiaries instead. As previously mentioned, consent of the beneficiaries in this case must be unanimous.

Stocks and bonds

Similar to real estate, stocks and bonds can be transferred to beneficiaries outright by transferring it to the beneficiaries’ individual brokerage accounts or these securities can be sold and its proceeds distributed to the designated beneficiaries.

Residual assets (percentage)

Residual assets are more complex to distribute. It requires an accounting to know the total value of the trust to know how much each beneficiary will receive. Residual assets are usually distributed based on a percentage. In this case, beneficiaries may object to the accounting and to the expenses of the trust, which could lead to more conflict and the intervention of lawyers.

It is Important to Get Releases from Beneficiaries Before Making Distributions

A major part of trust distribution of assets, whether upon death of the grantor or other triggering event, is the execution of the receipt and release agreements by the beneficiaries. Before the beneficiaries receive their distributions, they receive a copy of an informal accounting and if they agree, sign receipts, release, and refunding agreements, confirming their acceptance of the informal accounting and releasing the trustee from further liability.

As previously mentioned, when beneficiaries do not agree to the informal accounting, they may request the court for the trustee to submit a formal accounting. This is a more formal proceeding which will require lawyers and which can eat up the beneficiaries’ distributions because legal fees will be taken from the trust assets.

For this reason, when a trustee foresees objections, it is important for a trustee to already secure the services of a lawyer in preparing the accounting to ensure that any questions and objections on the accounting can be easily answered by the submission of bank statements and other supporting documents.

Should you have inquiries regarding trust distribution, 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].