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Trusts can be complicated. By extension, so can trust fund distributions to beneficiaries. Unlike estate distributions, which generally are made by an executor or administrator once approval from the probate court is obtained, trust distributions can take a variety of forms and typically are made by a trustee without court involvement as soon as assets are ready to distribute.
For instance, some trusts provide for the trustee to make trust distributions to beneficiaries as one-time payments, whereas others provide for the trustee to make trust distributions to beneficiaries on a staggered basis for years or decades into the future.
Similarly, the trustee can make trust distributions from the income the trust generates, from the principal (i.e., assets the trust held at the time of the trust creator’s death) or from both.
Trustees must abide by the provisions outlined in the trust. Unless trust provisions expressly authorize a trustee to bypass trust distribution rules or give them discretionary powers, straying from a trust’s terms exposes them to personal liability.
What Is a Trust Distribution?
A trust distribution makes it possible for the creator of a trust (known as the settlor, grantor or trustor) to transfer their wealth to the beneficiaries of a trust.
During the settlor’s lifetime, trust distributions are generally limited to the settlor. Upon the settlor’s death, distributions are made to beneficiaries according to the trust’s instructions.
While trusts are generally more complex than estates, they offer the settlor greater flexibility and control over how and when assets are distributed to beneficiaries. For instance, a settlor with young children may structure their trust to delay distributions until the children reach a certain age or graduate from college.
Trust distributions also differ from estate distributions in terms of when they can be made. Estate distributions generally cannot be made until after all the estate’s financial liabilities have been settled, all disputes involving the estate have been resolved and the probate process is complete. In contrast, trusts are usually not subject to formal probate proceedings, which means trust distributions can potentially be made as soon as the trustee accounts for the trust’s assets.
That said, before making any distributions of trust assets to beneficiaries, trustees must ensure the trust has sufficient funds to cover trust administration costs and any other financial liabilities the trust may have, as these expenses tend to take priority over distributions.
Types of Trust Distributions Explained
Because every trust has its own provisions, there’s no single method for distributing trust assets to beneficiaries. What matters is that the trustee follow the instructions outlined in the trust document.
We review the most common types of trust distributions to beneficiaries below. Keep in mind the list provided is not comprehensive.
Form of Trust Distributions
It’s important for trustees to determine the form of distributions required by the trust. In most cases, distributions are made either in cash or in kind.
In-Cash Trust Distributions
In-cash trust distributions consist of the trustee distributing cash that already exists within the trust or converting an asset to cash through liquidation and then distributing it.
In-Kind Trust Distributions
In-kind trust distributions consist of the trustee distributing trust assets in their existing form, rather than converting them into cash.
For beneficiaries, in-kind distributions mean they will receive the actual assets in question — regardless of whether these assets are real properties, stocks or personal property — instead of their cash equivalent.
Take the example of a trustee who transfers a property to a beneficiary in kind rather than selling the property and distributing the sale proceeds. Because of the money and time the trustee will have saved by not selling the property, the beneficiary’s inheritance may be greater.
Timing of Trust Distributions
In addition to varying in form, trust distributions can also be influenced by the timing specified in the trust’s provisions. For example, a trust may call for trust distributions to be made outright or in trust.
Outright Trust Distributions
Outright distributions from a trust consist of the trustee releasing each beneficiary’s inheritance as soon as the assets are ready to be distributed. Outright distributions can be made either in cash or in kind.
When a trust calls for outright distributions, the process of transferring trust assets to beneficiaries is streamlined, potentially leading to reduced administrative costs for the trust — savings that often benefit the beneficiaries directly.
Distributions in Trust
Distributions in trust, also called periodic distributions, involve the trustee retaining trust assets and distributing them to beneficiaries over time.
For example, a trust might require the trustee to distribute 25% of each beneficiary’s share annually on the anniversary of the settlor’s death, continuing each year until the beneficiary has received their full inheritance.
Distributions in trust are usually more complex than outright distributions, often resulting in substantially higher administrative costs and the trust staying active for a longer period.
Authority Over Distributions
A trust may also specify the extent of a trustee’s authority in making distributions. Some trust distributions may be mandatory, while others are discretionary.
Mandatory Distributions
Mandatory trust distributions are determined by the settlor and require the trustee to transfer trust assets to beneficiaries according to the schedule or conditions outlined in the trust document. The trustee has no authority to modify or withhold these distributions and must follow the trust’s instructions precisely.
If a trustee withholds trust distributions from beneficiaries that are mandatory, they may face claims of misconduct and could be held financially and legally accountable.
Discretionary Trust Distributions
Discretionary trust distributions authorize the trustee to decide which beneficiaries receive assets from a group of predetermined recipients. These types of trust distribution typically allow the trustee to select the form of the distributions, whether they originate from the trust’s income or principal and the timing of each payment.
Trustees must understand that they can only make discretionary distributions if the trust explicitly grants them the authority to do so. Making such distributions without proper authorization can expose them to financial and legal repercussions.
Additionally, even if a trustee has the power to make discretionary trust distributions, they are still bound by their fiduciary duties. For example, suppose a trustee is also a beneficiary. If the trustee has discretionary powers, this does not mean they would be entitled to transfer most of the trust’s assets to themselves. In fact, if they were to do so, they likely would be accused of misconduct.
How to Distribute Trust Assets to Beneficiaries
Almost all the responsibilities of a trustee — from creating an inventory of trust assets to preparing trust accountings — are for the purpose of making timely and accurate distributions of trust assets to beneficiaries according to a trust’s terms.
While transferring money or property from a trust to beneficiaries may seem straightforward, it is not uncommon for complications to arise — which is why it’s advisable for trustees to involve a knowledgeable trust attorney in the process.
Learn about the steps trustees can take to ensure the proper distribution of trust assets to beneficiaries after death below.
1. Review the Trust Instrument
Before taking any action, trustees should carefully read the trust document from start to finish to ensure they fully understand its terms.
Even if trustees don’t intend to hire an attorney for trust administration, it can be wise to consult one to interpret the trust’s provisions. This small investment of time can help prevent misunderstandings and ensure the administration proceeds smoothly.
2. Create an Inventory of Trust Assets
Once a trustee assumes their role and gathers the trust’s assets, they must create an inventory showing each asset and its value at the time of the settlor’s death. This inventory is essential in keeping beneficiaries informed and guiding trust administration.
It’s easy to see why an inventory is so important. Without it, neither the total value of the trust nor the value of its individual assets can be determined. Since many trusts direct distributions based on percentages of the overall trust or specific assets, accurate valuations are essential. For complex assets, trustees may need to rely on professionals, such as appraisers or accountants, to establish their value.
Although simple trusts are usually easy to track, complex trusts often hold many different assets. Creating a well-organized inventory can make managing them easier and more efficient.
Once the inventory is complete, it’s crucial to share it with the beneficiaries so they understand the assets the trust holds and their respective values. Doing so makes it easier for beneficiaries to detect potential mismanagement or misappropriation of trust assets and hold the trustee accountable.
3. Keep Beneficiaries Reasonably Informed
When a trustee assumes management of a trust, it is generally because the settlor has died, causing the trust to become irrevocable. Once a trust is irrevocable, the trustee is required to prepare a formal notice — called a Notification by Trustee — to serve the trust’s beneficiaries and the settlor’s legal heirs.
The Notification by Trustee provides beneficiaries and heirs basic details about the trust and informs them of their right to contest the trust within 120 days of receiving the notice or 60 days of receiving a copy of the trust — whichever is later.
After that, trustees are required to keep beneficiaries reasonably informed about the administration of the trust. Even though trustees often have the authority to make certain decisions without beneficiaries’ input or consent, regularly communicating with them and providing them with updates can go a long way in building trust and maintaining harmonious relations.
When possible, trustees should also aim to consider the preferences of the beneficiaries. For example, a beneficiary with a sentimental attachment to a piece of real estate may object to its sale and instead prefer to receive the property in kind.
Because settling a trust’s financial obligations could require the trustee to dip into beneficiaries’ inheritances, it’s important for trustees to communicate this possibility to the beneficiaries early on. By doing so, the trustee can manage their expectations, and beneficiaries won’t be surprised if their inheritance ends up being smaller than anticipated.
4. Determine Whether a Preliminary Distribution is Feasible
Trustees should consider whether a preliminary distribution of trust assets to beneficiaries is feasible before paying administration expenses and the trust’s other liabilities. For loved ones of the decedent, such a distribution can provide crucial financial support while they await their full inheritance.
To provide a preliminary distribution, the trustee must confirm there are sufficient funds in the trust to do so, while also retaining a reasonable reserve for administrative expenses, debts and potential claims.
5. Pay Administration Costs and Other Liabilities
The trustee must pay all administrative costs — which range from their own trustee fees to fees for third-party professionals and legal counsel — along with any other financial liabilities of the trust, before closing out trust administration.
While trusts can have creditors, it is more common for decedents to have them. In such cases, creditors typically seek repayment from the decedent’s estate rather than their trust. Only if the estate lacks sufficient funds might creditors pursue trust assets.
Trustees should also be prepared to handle any potential claims that arise against the trust or that they may need to bring on the trust’s behalf. For example, if someone outside the trust is in possession of trust property, the trustee may need to file an 850 petition to recover it. Because litigation can be costly, trustees must plan ahead and preserve funds to address any such disputes.
Although a trust exists for the benefit of its beneficiaries, they are generally last in line for payments. If the trust does not have enough funds to cover all its liabilities, beneficiaries may receive only a minimal distribution or nothing at all.
6. Resolve All Disputes Involving the Trust
Not all trusts will be engaged in legal disputes, but when they are, it may be necessary for the trustee to resolve them before making distributions of trust assets to beneficiaries.
For example, if litigation is brought to set aside the trust instrument, it would be ill-advised for a trustee to distribute any portion of the assets at issue until the court determines which version of the decedent’s estate plan is valid. That said, if litigation only surrounds one asset, the trustee may be able to proceed with distributing the trust’s other assets to beneficiaries.
7. Account to Beneficiaries
Generally, the trustee is obligated to account to beneficiaries at least every year — that is, unless beneficiaries have waived their right to a trust accounting in writing.
This is an important step, because unless beneficiaries are kept informed about the trust’s finances, they will face difficulties enforcing their rights. In addition, they will be unable to detect if the trustee is engaged in any misconduct that’s harming the trust.
According to California Probate Code section 16063, trust accounting must include:
- A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.
- A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.
- The trustee’s compensation for the last complete fiscal year of the trust or since the last account.
- The agents hired by the trustee, their relationship to the trustee, if any, and their compensation for the last complete fiscal year of the trust or since the last account.
- A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.
- A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.
8. Make Accurate and Timely Trust Distributions
Once the trustee has completed all the necessary steps, they can proceed with distributing the trust assets to the beneficiaries. It is essential, however, that they strictly follow the terms of the trust when making distributions, as a failure to do so could expose them to personal liability.
For example, if the trust specifies that distributions are to be made annually on the settlor’s death anniversary, the trustee should make distributions only on that date and once per year to each beneficiary.
Every distribution should be meticulously documented, along with supporting records. This documentation can prove invaluable if a beneficiary later claims they were not provided a due and payable distribution.
Maintaining detailed records of each distribution — including the amount, date and recipient — is also helpful when preparing the required annual accounting.
Understanding Trust Distribution Rules
There are very few trust distribution rules that apply across the board, since different trust types have different rules.
If you encounter challenges, consulting a probate attorney can always help provide clarity. Even seasoned trustees often have an attorney in their corner to guide them during the administration process.
How Long Does a Trustee Have to Distribute Assets?
Because each trust is subject to varying provisions and rules — and may also differ in terms of complexity — there is no general 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. Similarly, some trusts have no creditors, whereas others have many. All of these factors can contribute to the trust distribution timeline.
That said, if a trustee has completed most or all of their administrative tasks, it typically means they should get the ball rolling on making due and payable trust distributions to beneficiaries. A trustee is generally never permitted to unreasonably delay trust distributions or intentionally withhold them without proper justification.
How Do Distributions of Trust Income to Beneficiaries Work?
Distributions of trust income to beneficiaries must be made according to the provisions of the trust instrument. Because the trustee is responsible for managing trust assets, it is they who must identify what constitutes “income” versus “principal.”
Trust income usually refers to money the trust has accumulated. It may include everything from interest and dividends to capital gains. When beneficiaries receive a distribution that originated from the trust income, they may need to pay taxes on it if the trustee hasn’t already done so.
Trust principal, on the other hand, is the money and property that originally funded the trust. Beneficiaries generally aren’t required to pay taxes on trust distributions originating from trust principal since it’s presumed taxes have already been paid on these assets.
In most cases, the trust instrument will outline whether the trust income or principal is to be distributed to beneficiaries and under what conditions. The trustee is required to precisely adhere to the trust provisions when making distributions. If the provisions don’t specify whether trust distributions are to originate from the income or principal, the trustee generally has the power to decide.
How Do Distributions of Irrevocable Trust Assets to Beneficiaries Work?
The rules for distributing assets from an irrevocable trust after death are not very different from the rules for distributing assets from a revocable trust after death. This is partly because revocable trusts generally become irrevocable by default after the settlor dies or becomes incapacitated.
The few differences that arise between the two types of trusts mostly have to do with tax consequences for beneficiaries and asset protection. For example, assets in an irrevocable trust may be more difficult for creditors of beneficiaries or the trust’s own creditors to reach. Similarly, irrevocable trust assets are known to be taxed at lower rates than revocable trust assets in certain situations.
When Is It Appropriate to Make a Partial Distribution of Trust Assets?
It may be appropriate for a trustee to make a partial distribution of trust assets (also referred to as a preliminary trust distribution) if the trust provisions don’t prohibit it and the distribution would not harm the trust.
A partial distribution consists of the trustee distributing only a portion of a beneficiary’s inheritance. In other words, it’s a distribution of select trust assets before the trust is fully administered.
If a trustee is concerned that a trust does not hold sufficient assets to cover its financial liabilities, it may be wise for them to postpone partial distributions until all necessary expenses have been paid.
Partial distributions are intended to accommodate beneficiaries who have an urgent need for funds. The trustee generally can use their discretion in deciding whether or not to provide them.
How Does Distribution of Property From a Trust to a Beneficiary Work?
Distributions of non-liquid assets can be complicated. The transfer process depends on the type of asset being distributed, and on whether the asset is being distributed in cash or in kind.
To transfer real property to beneficiaries in kind, trustees generally will need to fill out either a quitclaim deed or grant deed and then have it notarized. This would have the effect of formally transferring the property’s title from the trustee to the beneficiary. The trustee will then need to record the deed with the county clerk’s office. They may also need to file additional documents with the county clerk and the county assessor’s office to formalize the deed transfer.
To transfer non-liquid assets in kind, such as stocks and bonds, the trustee can instruct the brokerage to distribute the stocks and bonds to new accounts established by the beneficiaries. Business interests, such as membership stakes in an LLC owned by a trust, may also be able to be transferred in kind to beneficiaries through the execution of legal documents known as assignments.
For liquid assets, distributions to beneficiaries can be effectuated by either wiring funds to a bank account in the beneficiary’s name or issuing a check to the beneficiary.
Does a Trustee Have to Provide Accounting to Beneficiaries?
It is usually required for trustees to provide an accounting to beneficiaries at least once a year for every year a trust remains open, upon a change of trustees and upon termination of a trust. That said, beneficiaries can waive their right to an accounting if they wish to prevent the administrative delays and added costs that are likely to result from this requirement.
Beneficiaries, even if they’ve waived their accounting rights, retain the ability to request an informal accounting from the trustee at any time. If such a request is made, the trustee must comply, providing beneficiaries with the information they’re seeking within a reasonable timeframe.
It’s important for trustees to take their accounting duties seriously, because if a beneficiary detects errors or other red flags in their accountings, they could challenge the accountings in court. Similarly, if a trustee fails to provide a beneficiary with an accounting, the beneficiary could petition the court to compel an accounting.
How Do Simple Trust Distribution Rules Differ From Complex Trust Distribution Rules?
Complex trusts tend to have more detailed terms and restrictions around trust distributions than simple trusts. For example, complex trusts may stipulate for the trustee to make staggered trust distributions on a conditional basis.
In general, complex trust distribution rules, more than simple trust distribution rules, are designed to fulfill certain objectives, such as providing long-term financial support to beneficiaries or mitigating their tax consequences.
What Happens After Final Distribution of Trust Assets?
After a trustee distributes all of a trust’s assets, their obligations will largely come to an end. Nevertheless, they will still be required to formally terminate the trust.
To terminate a trust, the trustee must do the following:
- Provide a final accounting to the beneficiaries
- File a final tax return and pay outstanding expenses
- Seek an order from the court discharging them or a written release from beneficiaries
- Maintain trust records in the event future disputes arise around the trust
Is a Final Trust Distribution Letter to Beneficiaries From the Trustee Required?
A final trust distribution letter to beneficiaries from the trustee isn’t required by law, but it isn’t a bad idea for the trustee to provide one anyway. To draft one, trustees can search for sample trust distribution letters online.
A final trust distribution letter formally documents the distribution of trust assets. It not only promotes transparency, but it ensures that beneficiaries are aware of the final accounting of trust assets and the closure of the trust.
Is It Required for Trustees to Send a Receipt of Distribution From the Trust?
While not required, it is wise for trustees to have beneficiaries sign a receipt of distribution. This can serve as proof that the trustee made the required distributions should they ever be accused of not providing a due and payable trust distribution.
Trustees can never be too cautious. The last thing a trustee should want is to be held liable for misconduct they did not commit.
Can a Beneficiary Refuse a Trust Distribution?
Beneficiaries can always refuse, or “disclaim,” a trust distribution. Why would a beneficiary want to refuse a trust distribution? There are many reasons.
For example, a beneficiary may wish to refuse a trust distribution if the distribution would place additional burdens on them, such as having to manage the family business or make substantial repairs to an old home.
Likewise, a beneficiary may refuse a trust distribution if it would disqualify them from receiving government benefits, such as housing or health care.
Finally, a beneficiary may refuse a trust distribution because they have creditors who could intercept it. As a result, they would prefer to see it go to someone else.
That said, if a beneficiary has expressed to the trustee that they wish to refuse their distribution from a trust, it is advisable for the trustee to have them sign a disclaimer. This way, the trustee won’t be held liable if the beneficiary later accuses them of failing to provide a due and payable trust distribution.
When a beneficiary refuses a trust distribution, they will be regarded as having predeceased the decedent, and their portion of the trust generally will pass to the contingent beneficiary that is next in line to inherit.
FAQs: Trust Distribution Rules
Still confused how distributions of trust assets to beneficiaries work? We don’t blame you — trust distribution rules can be extremely complicated to navigate.
Have a look at the frequently asked questions below for additional clarity or reach out to our firm directly for legal guidance tailored to your needs.
What happens when a trust beneficiary dies before distribution?
In California, if a trust beneficiary dies before distribution, where their share of the trust will go depends, in large part, on whether they survived the settlor or predeceased the settlor.
If the beneficiary died before the settlor, their share will generally pass to the first contingent beneficiary in line to inherit as provided in the trust. If nobody is listed as a contingent beneficiary, it’s possible the beneficiary’s own heirs will inherit their share.
If the beneficiary dies after the settlor but before distribution, the beneficiary’s share has “vested,” meaning it cannot lapse. In this scenario, it’s likely their share will pass to their beneficiaries or heirs according to their own estate plan (if they had one).
How do distributions of trust assets to beneficiaries before death work?
Distributions of trust assets to beneficiaries before the death of the settlor may allow for more flexibility than distributions of trust assets to beneficiaries after the death of the settlor.
In most instances, when a settlor creates a trust, they will appoint themselves as the trustee for their lifetime and name a successor trustee to take over management of the trust once they lose capacity or die.
If this was the approach used, then the settlor will retain control of trust assets for the remainder of their lifetime (provided they retain capacity) and can distribute them to whomever they please, whenever they please, as the only person they have to answer to is themselves.
On the other hand, if the trustee appointed someone other than themselves as trustee, that person will have to abide by the terms of the trust when making distributions. For example, if the trust provisions call for them to make distributions to beneficiaries annually on the settlor’s birthday, they generally will need to follow that schedule.
Are trust distributions taxable?
In California, trust distributions generally are only taxable if they originate from trust income. For example, if a trust earns dividends from stocks, the dividends are considered trust income and typically would be taxable.
On the other hand, trust distributions originating from trust principal generally are not taxable. Trust principal consists of assets that were held by the trust at the time of the settlor’s death. Because the settlor most likely had already paid taxes on these assets, it usually is unnecessary for them to be taxed again.
Trust administration and taxation is a complex topic that is best navigated with the assistance of a tax professional or qualified attorney.
Are family trust distribution rules different from standard trust distribution rules?
Family trust distribution rules are generally no different from standard trust distribution rules. A family trust is, quite simply, a trust that benefits the family members of the settlor. It can be revocable, irrevocable or even discretionary.
Ultimately, the category it falls under will determine the trust distribution rules the trustee will need to abide by.
How do discretionary distributions from a trust work?
Discretionary distribution rules are determined by the provisions of the trust. In general, a discretionary trust grants the trustee the authority to decide which assets to distribute to beneficiaries, which beneficiaries to distribute them to, and when.
That said, a trustee with discretionary powers is still responsible for acting in good faith and in the best interests of the beneficiaries when making distributions. They may wish to consider factors such as each beneficiary’s financial situation and needs.
To ensure the discretionary distributions they are making are proper and in line with their fiduciary duties, the trustee should always keep in mind the settlor’s aim in creating the trust. Was it to ensure their children could go to college? Was it to ensure their financially dependent family members would be taken care of?
It’s important that the trustee not overlook these factors when deciding to whom they should make discretionary distributions.
What are the guidelines for special needs trust distributions?
Special needs trusts are designed to preserve beneficiaries’ eligibility for government benefits, such as Medicaid and food stamps. Distributions from special needs trusts should solely be used for supplemental needs not covered by government benefits, such as care custodians, education and recreation.
Trustees must carefully manage special needs trust distributions to avoid directly paying the beneficiaries in cash, as this could jeopardize their eligibility for government benefits. Rather, the trustee should make special needs trust distributions directly to the suppliers of goods and services.
Can a trustee sell property without beneficiaries approving?
The role of a trustee often requires them to sell trust property, but when can a trustee sell property without the beneficiaries approving and when can they not? Unless the terms of a trust forbid the trustee from selling property, trustees generally are permitted to sell property without the beneficiaries approving. There are a few caveats to be mindful of, however.
For example, trustees should not sell trust property for below fair market value without first obtaining unanimous consent from the beneficiaries. If they fail to do so, they could be held personally liable for any harm their actions caused the trust.
Even if not required, it’s always best for trustees to discuss any plans they may have to sell trust property with beneficiaries prior to listing the property in case beneficiaries wish to keep the property in question.
While the trustee doesn’t necessarily have to take the beneficiaries’ wishes into account, consulting with them can go a long way in minimizing conflicts.
Still confused about how to make distributions of trust assets to beneficiaries after death?
As a trustee, making distributions of trust assets to beneficiaries is not your only job. There are many other administrative duties on your to-do list. If your tasks seem overwhelming, we don’t blame you. A trustee’s job can be even more stressful than a full-time job because of the complex nature of the work it involves.
That said, there is nothing to prevent you from seeking the help of professionals who administer trusts for a living. Not only can working with a trust attorney ease your burden, but it can help ensure the job gets done right.
Call us today to discover how our talented team of trust attorneys can help you make distributions of trust assets to beneficiaries after death on time and in accordance with the law.
