Trust Fund Distribution Delays

A trust fund distribution to beneficiaries is in order 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 trust fund distribution to beneficiaries might not be the same in every trust – some trust 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 trust fund distribution 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.

On one hand, it is understandable that the trustee has many things they have to get to before they do a trust fund distribution to beneficiaries. On the other hand, a diligent beneficiary should not sit by idly for this entire temporal period, especially if he believes that an trustee is failing the nonwaivable duty to “exercise reasonable care, diligence, and prudence.”^[1] For example, a court may disqualify an 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 trust fund distribution 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 an accounting as long as 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 for either the beneficiary or the trust. Therefore, it is best to discuss trust fund distribution to beneficiary with a competent New York trust attorney.

Call the Law Offices of Albert Goodwin at 212-233-1233 and make an appointment to discuss your rights to a trust fund distribution to beneficiaries.

———————————————————————————————-

Mandatory vs. Discretionary Distributions

Trust distributions fall into two broad categories that affect the beneficiary's rights:

Mandatory distributions. The trust requires the trustee to make specific distributions 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 beneficiary has a right to insist on these distributions, and the trustee has limited discretion to delay or modify them.

Discretionary distributions. The trust authorizes but does not require distributions. The trustee decides whether, when, and how much to distribute based on standards set forth in the trust. Common discretionary standards include the beneficiary's "health, education, maintenance, and support," "comfortable support," "best interests," or "absolute discretion."

The standard set forth in the trust controls what the trustee may consider. "Absolute discretion" gives the trustee broad latitude, while a HEMS standard (health, education, maintenance, support) limits the trustee to those specific purposes.

HEMS Distributions in Detail

The HEMS standard (health, education, maintenance, support) is the most common discretionary distribution standard. The standard has both legal and tax significance:

• Health covers medical, dental, mental health, and related expenses for the beneficiary.
• Education covers school tuition, books, room and board, and related educational costs.
• Maintenance covers ordinary living expenses sufficient to maintain the beneficiary's accustomed standard of living.
• Support overlaps with maintenance and addresses the beneficiary's basic needs.

The HEMS standard is important for tax purposes because it qualifies as an "ascertainable standard" under Internal Revenue Code Section 2041. A beneficiary-trustee with distribution power limited to HEMS does not have a general power of appointment, so the trust assets are not included in the beneficiary-trustee's estate.

The Trustee's Discretion and Its Limits

Even "absolute discretion" is not unlimited. The trustee must:

• Exercise discretion in good faith.
• Consider the standards set forth in the trust.
• Treat similarly situated beneficiaries impartially.
• Not act arbitrarily or capriciously.
• Not use distribution decisions for personal benefit or to punish the beneficiary.
• Document the basis for distribution decisions.

A beneficiary who believes the trustee has abused discretion can petition the court for review. The court will not substitute its judgment for the trustee's on close questions, but clear abuses of discretion are correctable.

Income vs. Principal

Trusts often distinguish between income and principal:

• Income is the return generated by trust assets — interest, dividends, rents.
• Principal is the underlying corpus of the trust — the assets themselves.

Trusts may direct different distribution treatment for income and principal. A "current beneficiary" might receive all income with principal preserved for "remainder beneficiaries." The trustee must allocate receipts between income and principal under the Uniform Principal and Income Act adopted in New York.

Common Reasons for Distribution Delays

Trustees delay distributions for various reasons, some legitimate and some not:

• Tax matters. The trustee may need to file tax returns or address tax issues before distributing.
• Creditor claims. Trust property may be subject to creditor claims that must be addressed.
• Beneficiary disputes. If beneficiaries are fighting, the trustee may withhold distributions until disputes are resolved.
• Valuation issues. Hard-to-value assets may delay distribution until appraisals are obtained.
• Liquidity issues. The trust may not have cash for distributions and may need to sell assets first.
• Trustee delay or incompetence. Some trustees are simply slow or disorganized.
• Trustee bad faith. Occasionally trustees withhold distributions for improper reasons.

The Trustee's Accounting Duty

Beneficiaries are entitled to information about the trust's administration. The trustee's duty includes:

• Providing a copy of the trust instrument on request.
• Providing regular accountings of trust activity.
• Responding to reasonable beneficiary inquiries.
• Disclosing material information that affects the beneficiaries' interests.

If the trustee refuses to provide an accounting voluntarily, the beneficiary can petition the court to compel an accounting under SCPA § 2205. The petition is generally granted if the beneficiary has standing and the request is reasonable.

Compelling Distribution Through Court Action

If the trustee refuses to make required distributions, the beneficiary can petition the court for relief:

• A petition for distribution under SCPA § 2102 can compel the trustee to make mandatory distributions.
• A petition to remove the trustee under SCPA § 711 can be filed if the trustee's conduct warrants removal.
• A petition for accounting can require the trustee to disclose what has been happening with the trust.
• A petition for surcharge can recover losses caused by the trustee's misconduct.

Tax Treatment of Distributions

Trust distributions have specific tax consequences:

• Distributions of income generally carry out the trust's distributable net income (DNI), which is then taxed to the beneficiary rather than the trust.
• Distributions of principal are generally not taxable to the beneficiary because they represent return of trust corpus.
• Capital gains are typically retained at the trust level unless the trust specifically allocates them to income or the trust terminates.
• K-1 forms report taxable distributions to beneficiaries for inclusion on their personal returns.

The tax treatment can be complex, especially for trusts that have accumulated income or have foreign beneficiaries. Coordination between the trustee and the beneficiary's tax advisors is important for proper reporting.

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.