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Distribution of Trust Assets to Beneficiaries

distribution of trust assets to beneficiaries

A beneficiary is entitled to a distribution of trust assets if the trust authorizes such distribution. Here are some examples of the different types of trust distribution arrangements for beneficiaries:

  • An immediate distribution upon the death of the person who made the trust
  • An immediate distribution upon reaching a certain age (for example, 18 or 25)
  • A distribution of principal
  • A distribution of income
  • A monthly distribution
  • A distribution at some specific point in time

Keep in mind that the possibility of distribution of trust assets to beneficiaries might not be the same in every trust.  Some trusts authorize distribution 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 distribution of assets, some are entitled only to distribution of income, and some are not entitled to any distribution, possibly for a long time. Some beneficiaries are not entitled to any distribution at all, such as contingent beneficiaries.

Every month of delay of distribution of trust assets 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, a distribution 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.

Types of distribution arrangements according to timing

Based on the timing of the distribution, there are three different types of trust distribution arrangements: 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, the happening of an event, or the arrival of a period. It is usually a one-time lump-sum payment. For example, trust assets are distributed to the beneficiary when the beneficiary gets married (i.e., the happening of an event), or when the beneficiary turns 25 years old (i.e., the arrival of a period).

Staggered distributions are payments made to the beneficiaries on a periodic basis. 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, the trust agreement would authorize a monthly or quarterly distribution to the beneficiary to be taken from the income of the trust.

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.

Outright, staggered, and discretionary distributions are not mutually exclusive. All of these types of distributions can appear in one trust agreement. For example, the trust agreement may provide that the trust principal will be distributed to the beneficiary when the beneficiary turns 30 years old (an outright distribution). Prior to turning 30, the trustee shall make monthly distributions to the beneficiary in the amount of $5,000 (a staggered distribution) to be taken from the income of the trust. The trust agreement can also provide that, if the monthly distribution is insufficient, the trustee has discretion to make distributions to the beneficiary for the purposes of education and health (a discretionary distribution).

Types of distribution arrangements according to source

The trust agreement can also provide limitations on the source of trust distribution. A distribution to a beneficiary can be limited to the income or can include the invasion of principal. For example, the trust agreement could state that all income of the trust is for the benefit of the beneficiary. However, the beneficiary is not allowed to invade the principal. Or it could state that the trustee has discretion to invade the principal for the beneficiary’s health and education, in case income is insufficient.

It is important to know whether the amount distributed came from the income or principal of the trust because of taxes. 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. Above tax treatment applies to irrevocable trusts because in revocable trusts, income is reported under the grantor’s social security number.

Types of distribution arrangements according to discretion

Distribution arrangements can also vary depending on the trustee’s discretion. Distributions can be mandatory or discretionary. When the distribution is mandatory, the trustee can be compelled through court order to make the distribution. When the distribution is purely discretionary, the trustee cannot be compelled to make the distribution. On a discretionary distribution subject to a standard such as health, education, maintenance, and support, the beneficiary can sue the trustee to compel the trustee to make the distribution based on the beneficiary’s interpretation. For example, if the trust agreement allowed a distribution for purposes of education and the trustee refused to pay for a beneficiary’s room and board expenses between college semesters because the beneficiary was not actively in school at that time, the beneficiary may file a lawsuit in court to request for an interpretation that education includes support between college semesters.

Ultimately, distributions will depend on the language of the trust agreement. It is recommended that you review the trust agreement with your trust lawyer so that you can understand the trust provisions well. If you are a trustee who has reservations about making a distribution, consulting with a trust lawyer will help clarify any doubts as to the legality of such distribution.

Keep in mind that the possibility of distribution of trust assets to beneficiaries might not be the same in every trust – some trusts authorize distribution 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 distribution of assets, some are entitled only to distribution of income, and some are not entitled to any distribution, possibly for a long time. Some beneficiaries are not entitled to any distribution at all, such as contingent beneficiaries.

Every month of delay of distribution of trust assets 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, distribution 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 to the trustee for an accounting and distribution of trust assets 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 distribution. 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 it’s for good cause.

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 distribution of trust assets to a beneficiary with a competent New York trust attorney.

If you are concerned with a distribution of trust asset to beneficiaries, we at the Law Offices of Albert Goodwin are here for you. You can give us a call at 718-509-9774 or send us an email at attorneyalbertgoodwin@gmail.com.

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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.