Roee Kaufman, partner at Keystone Law Group, discusses what to do when the trustee is not paying beneficiaries. Read the complete article below for more details. Click the YouTube “Subscribe” button to be notified when new videos are published.
Perhaps you were notified a while back that you are a trust beneficiary, but you still have not received any distributions from the trust.
Perhaps you receive trust distributions, but they are always incorrect or late.
Perhaps the trustee is withholding your due and payable trust distributions, claiming they don’t currently have the time to make them.
One of the primary reasons for conflicts between the successor trustee and beneficiaries of a trust is the trustee not paying the beneficiaries.
While it can be frustrating for beneficiaries to have to wait an extended period to be provided distributions from a trust, they must keep in mind that delays are often justified and not the trustee’s fault. For example, if a trust has substantial debts, the trustee may need to pay these debts prior to providing beneficiaries with their inheritances.
That said, there are times when delays are not justified. For instance, delays wouldn’t be justified if caused by the trustee being too busy with other obligations or squandering the trust’s assets.
By learning the ins and outs of how a trust works after someone dies, you will know under what circumstances a trustee not paying beneficiaries is justified, and under what circumstances it is not.
If it turns out the trustee is withholding trust distributions from beneficiaries for no justifiable reason, it’s crucial to discuss the matter with a skilled fiduciary misconduct lawyer, who can help assess the situation and devise a strategy for holding the trustee accountable.
At the end of the day, it’s important to remember that trusts are created for the benefit of beneficiaries, so beneficiaries have a right to receive the inheritance they were left, when they’re supposed to receive it.
How Do Trust Funds Pay Out?
Trust distributions can take a variety of forms — from lump-sum payments to staggered payments over time. Ultimately, how a trust fund pays out depends on the terms of the trust and the distribution schedule it calls for.
For instance, one trust may provide for trust fund distributions to beneficiaries to be made as one-time payments, whereas another trust may provide for trust fund distributions to beneficiaries to be made on a regular schedule for years or decades into the future.
Similarly, trust distributions can be made from the trust’s income, principal (i.e., assets the trust owned at the time of the trust creator’s death) or both.
Unless trust provisions expressly authorize the trustee to exercise discretion when distributing trust assets to beneficiaries, a trustee’s failure to follow the trust distribution rules set by the trust has the potential to lead to legal challenges for the trustee.
How Long Can a Trustee Hold Funds?
A trustee can hold funds for as long as is necessary to fulfill their fiduciary duties and carry out the provisions of a trust.
Some trusts are designed to remain active for years or even decades so a financial legacy can be left for future generations, whereas others are designed to terminate not long after the trust creator’s death.
In short, how long a trustee can hold funds depends on the nature of the trust and its specific provisions.
How Long Does a Trustee Have to Distribute Assets?
Because each trust is unique, there’s no universal timeline for how long a trustee has to distribute assets.
As an example, some trusts consist primarily of real properties (which can make them more complex to administer), whereas others consist entirely of liquid assets, like cash. Similarly, some trusts have no creditors (which might allow beneficiaries to receive their inheritances faster), whereas others have many. All of these factors can contribute to how long a trustee has — or how much time they will need — to distribute assets.
Beneficiaries should bear in mind that the trustee cannot typically make distributions of trust assets after death until they have completed the following:
- Accounted for and valued all the assets of the trust
- Paid all trust administration expenses
- Satisfied all valid creditor claims
- Resolved all trust disputes (e.g., trust contests, trust ambiguities, 850 petitions)
Keep in mind that there may be exceptions to this rule. For example, if it’s clear there are sufficient assets in a trust to pay its liabilities, it is not uncommon for the trustee to issue preliminary trust fund distributions to beneficiaries. On the other hand, it’s also possible for a trust to run out of funds before any distributions to beneficiaries have been made, since creditor rights generally trump trust beneficiary rights.
That said, creditors usually will seek repayment of debts from the decedent’s estate — especially if the debts belong to the decedent and not to the trust itself. In general, only when an estate does not have sufficient funds to satisfy the decedent’s valid debts might creditors pursue non-probate assets, such as the assets held by the decedent’s trust.
Remember that a trustee is not allowed to unreasonably delay trust distributions. If you are entitled to a distribution and have not yet received it — and the trustee has not provided a valid reason for the delay — it’s important to consult a trust attorney to understand your legal options.
Staying actively involved in the trust administration process can help ensure transparency around distributions and empower you to take timely action if the trustee fails to meet their obligations.
4 Valid Reasons for the Trustee Not Paying Beneficiaries
Although the trustee usually does not have the power to withhold trust distributions from beneficiaries indefinitely or refuse beneficiaries the gifts they were left, they may be authorized to temporarily withhold distributions in certain situations.
That said, a trustee has a duty to always act in the best interests of the beneficiaries — which includes making timely distributions in accordance with the trust’s terms whenever reasonably possible.
Unfortunately, trustees are not always mindful of this duty, leading beneficiaries to have to chase down their inheritances.
In the following sections, we discuss four scenarios in which the trustee withholding money from a beneficiary may be justified and legal.
1. Beneficiary Has Not Met Trust Conditions
If a trust makes a beneficiary’s inheritance conditional, the trustee may be obligated to withhold that beneficiary’s distributions until those conditions are met.
Conditions can be age-based, milestone-based or even behavior-based. An example of an age-based condition would be a trust providing for a beneficiary to receive their inheritance after they turn 25. An example of a milestone-based condition would be a trust providing for a beneficiary to receive their inheritance after they graduate college. A behavior-based condition would be a trust providing for a beneficiary to receive an inheritance after they’ve held a job for two years or longer.
If a beneficiary fails to meet the conditions set by a trust, the trustee may be justified in withholding the beneficiary’s distribution indefinitely. Whether they have the power to do this depends on the specific provisions of the trust.
2. Trust Is Discretionary
In general, a trustee with discretionary powers can withhold beneficiaries’ inheritances on the terms set forth in the trust.
With a discretionary trust, the trustee may be conferred with the authority to decide whether a beneficiary receives an inheritance, when they receive an inheritance and the amount of their inheritance.
Trustees often make discretionary distributions based on need. For example, a trustee may provide a beneficiary with a discretionary distribution so they can pay their college tuition.
Although the trustee of a discretionary trust may have considerably more power than the trustee of a standard trust, their powers are not without bounds, as they still owe fiduciary duties.
3. Trust Is Ambiguous / Invalid
If a trust is subject to a trust dispute, it would be reasonable for the trustee to withhold beneficiaries’ inheritances until the dispute is resolved.
For example, suppose the provisions of a trust are ambiguous or are suspected of having been altered by the trust creator as a result of undue influence. If the trustee were to distribute trust assets before the dispute is resolved, it could prove extremely difficult to recover them should the resolution of the dispute call for assets to be distributed differently from how the trustee originally distributed them.
That said, if a trust dispute only involves limited assets (e.g., if only one trust provision is ambiguous), the trustee may be able to proceed with distributing the trust’s other assets according to the terms of the trust.
4. Trust Has Financial Liabilities That Take Precedence
The trustee generally has the right to withhold beneficiaries’ inheritances until the outstanding financial liabilities of the trust have been settled.
Although the trustee could make preliminary distributions to beneficiaries before satisfying the trust’s financial liabilities, they cannot do so unless they are certain the trust has sufficient assets to satisfy its liabilities in full.
If a trust’s liabilities exceed the value of its assets, beneficiaries should prepare for the possibility they may not receive an inheritance. That said, before accepting this fate, beneficiaries should carefully review the inventory and trust accountings provided by the trustee to ensure the trustee has not made any errors in their calculations.
What to Do if the Trustee Is Not Paying Beneficiaries
If a trustee is withholding beneficiaries’ inheritances without good cause, it’s crucial beneficiaries take swift action to get to the bottom of why they are not being provided with their due and payable distributions from a trust.
In the following sections, we review the steps beneficiaries should take upon discovering their trust distributions are being withheld from them.
1. Review the Trust Instrument
If the trustee is not paying beneficiaries, the first step is to review the trust instrument. This will help you understand the specific terms of your inheritance, such as the distribution schedule, how much you’re entitled to and any conditions that might allow the trustee to withhold or delay payments. In addition, check to see if the trustee has been granted discretionary powers.
If you are struggling to interpret the trust instrument, or you are unsure about your rights or inheritance, consulting a trust attorney is recommended.
2. Communicate with the Trustee
If your due and payable trust distribution is delayed, it’s crucial to seek answers from the trustee as to why. If there is a reasonable explanation for the delay — and the trustee provides a concrete date or timeframe that you can expect the distribution — legal action may not be necessary.
On the other hand, if the trustee fails to respond to your requests or provides only vague responses, it may be wise to seek legal guidance to determine next steps.
It’s ideal to submit any requests for information to the trustee in writing, as this creates a paper trail that can serve as valuable evidence if legal action becomes necessary.
3. Consult with a Trust Attorney
At this stage of the process, if the trustee is refusing to comply with your request for information or issue a due and payable distribution — and you have not received a clear explanation as to why — it may be time to consult a trust attorney to devise a plan of action.
Perhaps involving an attorney will be enough to light a fire under the trustee, forcing them to comply with their duty to make timely distributions. However, if it’s not, your trust attorney may suggest a more drastic legal remedy, such as trustee removal or suspension.
4. Take Legal Action
If the trustee is refusing to make a due and payable distribution to you, they may be in breach of their fiduciary duties. In such a circumstance, taking legal action with help from a skilled trust attorney is strongly encouraged.
Your attorney may recommend filing a petition to compel the trustee to make due and payable distributions, but if the trustee has proven to be irresponsible time and again, more drastic remedies — such as suspension, removal or surcharges — may be more appropriate.
Your attorney can help you decide which legal remedy to seek based on the specifics of your case. It may be possible to resolve the dispute with the trustee outside of the court at mediation. However, if this is not possible, your case could proceed to trial, where you may be able to seek a reward of your attorney’s fees and costs from the trust or the trustee if you win.
Remember that the trustee is merely a custodian of trust assets. They are not entitled to decide who receives them and when unless they have discretionary powers.
FAQs: Can a Trustee Withhold Money From a Beneficiary?
There are very few valid reasons for the trustee not paying beneficiaries. If you are a beneficiary whose inheritance is being withheld, it’s crucial you take swift action against the trustee to ensure not only that your inheritance stays protected, but that you receive your inheritance in full.
Peruse the following FAQs to learn more about your right to timely distributions from the trustee. If you are unable to find the answers you’re looking for in our FAQs or are seeking personalized legal guidance, we encourage you to reach out to our firm directly.
What if the trustee is not communicating with beneficiaries?
Trustees have a duty to keep beneficiaries reasonably informed about the administration of the trust. If a trustee is not communicating with beneficiaries, beneficiaries will not have the information they need to effectively enforce their rights. This is a serious problem.
To obtain the information they need, beneficiaries should first try to send written requests to the trustee for the information they’re seeking. If the trustee fails to comply with beneficiaries’ requests, it may be necessary for the beneficiaries to escalate the matter and sue the trustee.
Beneficiaries must remember they are not entitled to information about every action the trustee takes. As such, their requests for information should be reasonable.
What happens when a trustee does not follow the trust?
A trustee is required to carry out the provisions of a trust exactly as they appear in the trust instrument. If they stray from the provisions of a trust, they are in direct violation of their fiduciary duties.
If a trustee is not following the trust because they are unclear about the meaning of its provisions, they should seek clarity by filing a petition for instructions with the court. They should never take it upon themselves to interpret ambiguous trust language themselves.
When a trustee does not follow the trust, it’s crucial beneficiaries hold the trustee accountable. If the trustee can easily reverse their improper actions, beneficiaries may wish to address their concerns with the trustee directly. However, if the trustee’s improper actions are irreversible or have irreparably damaged the trust, taking the trustee to court may be necessary.
Can a trustee take money from a trust?
Many beneficiaries are curious about when a trustee can withdraw money from a trust. To put it simply, a trustee can only take money from a trust to benefit the trust or its beneficiaries.
For example, a trustee can take money from a trust to distribute to beneficiaries in accordance with the trust’s provisions, maintain trust properties or pay a trust attorney for their assistance administering the trust.
A trustee cannot take money from a trust for personal gain or to benefit individuals or entities that are not involved with the trust. Even if the trustee is also a beneficiary, they are not authorized to provide themselves with anything beyond the inheritance they were left.
Can a trustee refuse to give accounting?
A trustee cannot refuse to give an accounting unless a beneficiary waived their right to an accounting in writing.
If a trustee is refusing to show accounting to beneficiaries, it is vital beneficiaries take action to compel an accounting from the trustee. Sometimes, a trustee’s failure to account is actually an attempt to conceal misdeeds. For this reason, it is not an issue beneficiaries should take lightly.
Accountings are one of the only ways beneficiaries can keep tabs on the trustee’s activities. If beneficiaries don’t have accountings to review, they will not be able to accurately gauge whether the trustee is following the trust or trust distribution rules in general. Likewise, they will have trouble gauging whether the trustee is causing financial harm to the trust.
Beneficiaries are entitled to at least one formal accounting for every year the trust remains active. They also are entitled to a formal accounting upon a change of trustees and termination of the trust. Informal accountings, on the other hand, can be requested from the trustee at any time.
Can a trustee ignore a beneficiary?
It generally is improper for a trustee to ignore a beneficiary. If a beneficiary is seeking an unreasonable amount of information or making other unreasonable requests, the trustee isn’t necessarily obligated to comply with them, but they should respond to the beneficiary and explain why they are unable to provide the requested information or fulfill their other requests.
When the trustee makes it a point to clearly communicate with the beneficiaries, it can go a long way in maintaining harmonious relations with them and preventing disputes.
If you are a beneficiary who is being constantly ignored by a trustee, it should raise red flags. You may wish to bring up your concerns with a trust attorney to see whether you may have legal recourse.
Can a beneficiary refuse a trust distribution?
Beneficiaries are always permitted to refuse, or “disclaim,” a trust distribution if they wish. Why would a beneficiary want to refuse a trust distribution of free money or property? There are many reasons.
For example, a beneficiary may wish to refuse a trust distribution if the distribution would place additional burdens on them (e.g., they were left the family business or an old home that needs substantial repairs).
Similarly, a beneficiary may refuse a trust distribution if it would disqualify them from receiving government benefits, such as housing and health care.
Another reason why a beneficiary may refuse a trust distribution is because they have creditors who likely would intercept it. As a result, they would rather see it go to someone else.
If a beneficiary wishes to disclaim their distribution from the trust, it’s crucial the trustee have them sign a disclaimer. This way, the trustee won’t be held liable if the beneficiary brings a claim against them down the road for failing to provide them with their inheritance.
When a beneficiary refuses a trust distribution, they will be regarded as having predeceased the decedent, and their portion of the trust will pass to the contingent beneficiary that is next in line to inherit. If no contingent beneficiary is named, the distribution could pass to the decedent’s estate, where it will be distributed according to the terms of their will or intestate succession laws.
Still have questions about what to do when a trustee is not paying beneficiaries?
Is a trustee not complying with their duty to make timely trust fund distributions according to the provisions of the trust? If so, you may have a serious problem on your hands.
A trustee withholding money from beneficiaries is not an issue that should be taken lightly or be dealt with later. It is an issue that requires immediate action.
From our experience, if a trustee is withholding money from beneficiaries without good cause, they likely are also engaged in other forms of misconduct.
Our talented team of trust attorneys regularly deals with uncooperative trustees and knows how to hold them accountable. Call our firm today to learn how we can help.
