How to Get Trust Fund Distributions When The Trustee Is Not Paying Beneficiaries
- Keystone News
- 850 Petitions
- Attorney-Client Privilege
- Attorney's Fees
- Caretaker Issues
- Competency/Undue Influence
- Evidence / Procedure
- Fiduciary Misconduct/Removal
- Lis Pendens
- Marriage and Community/Separate Property
- No Contest Clauses
- Non-Probate Transfers
- Petition for Instructions
- Powers of Appointment
- Real Estate Disputes
- Spendthrift Clause
- Statute of Limitations
- Probate News
- Probate Services
- Who We Help
Roee Kaufman, Partner at Keystone Law Group, discusses what to do when the trustee is not paying the beneficiaries. Read the complete article below for more details. Click the YouTube Channel subscribe button to be notified when new videos are published.
Distribution of Trust Assets to Beneficiaries
If you have been named as a beneficiary of a trust, you probably have some questions, such as: How long before the distribution of trust assets to beneficiaries takes place? Are distributions from a trust taxable to the recipient? What are some remedies if the trustee is not paying beneficiaries? What is required in order to complete the transfer of trust property to a beneficiary?
Trusts can be complicated, and by extension, so can trust distributions. Unlike estate distributions, which generally are made as one-time payments by the executor of the estate, trust distributions can take a variety of forms (e.g., they can be one-time payments or multiple payments made over time). Trust distributions can also be made from the income the trust generates, from the principal (i.e., the property the trust owns), or both.
First Steps for Trust Beneficiaries
The first thing beneficiaries should do upon learning that they stand to inherit from a trust is to secure a copy of the trust from the trustee.
Next, beneficiaries should carefully review the terms of the trust in order to determine the type of trust it is (e.g., revocable trust, living trust, irrevocable trust, special needs trust, discretionary trust), which can play a role in how trust fund distributions to beneficiaries will be made.
Finally, trust beneficiaries should figure out whether any conditions must be met in order for them to receive their inheritance, and whether the transfer of trust property to beneficiaries will occur all at once or over time.
By finding out the aforementioned information, trust beneficiaries will have a clearer picture of what they will be entitled to in the way of trust distributions. If the terms of the trust are difficult to understand or seem ambiguous, a beneficiary representation lawyer can provide counsel to beneficiaries, and, if needed, seek clarification from the court.
When Trust Fund Distributions to Beneficiaries Are Made
One of the most common questions trust lawyers hear from trust beneficiaries is: How long before I receive my inheritance?
Even a simple trust may require 12-18 months before they can end trust administration and transfer of trust property to beneficiaries, although it can take several years if the trust is complex.
Trust beneficiaries should remember that distribution of trust funds after death will not occur until after the completion of trust administration, which requires:
- All administration expenses to have been paid.
- All creditors to have been paid.
- All trust disputes to have been resolved.
There may be exceptions to this rule. For example, it is not uncommon for trustees to issue preliminary distributions of assets to beneficiaries if there are sufficient remaining assets on hand to cover the trust’s liabilities.
If a trust runs out of funds before any trust fund distributions to beneficiaries are made, creditors could be prioritized over beneficiaries, who, in turn, could receive nothing. If the debt belongs to the decedent and not to the trust itself, the creditors will first resort to assets of the decedent’s estate to satisfy the debt; only if the estate does not have enough funds to cover the decedent’s debts can creditors pursue non-probated assets such as trusts.
The key is for beneficiaries – regardless of whether they are trust beneficiaries or estate beneficiaries – to play an active role in administration; by doing so, they will know when the distribution of trust assets to beneficiaries should be occurring and can take action if the trustee is not paying beneficiaries in a timely fashion.
What Happens When a Trustee Is Not Paying Beneficiaries?
It is a trustee’s duty to act in the best interests of trust beneficiaries at all times. While acting in a beneficiary’s best interest can have a variety of implications for trustees, in the context of trust distributions, it means not straying from the terms of the trust and making distributions of trust funds on time. Unfortunately, trustees are not always mindful of this duty, which can cause trust beneficiaries to have to chase after the inheritances to which they’re entitled.
When trustees breach their duties by failing to make timely distributions of trust assets to beneficiaries, beneficiaries can utilize the courts to compel the trustee to immediately make due and payable trust distributions. The best way for beneficiaries to do this is with help from a probate lawyer, who can file a petition with the court on their behalf.
While trustees can temporarily delay trust distributions if a valid reason exists for them doing so, they are rarely entitled to hold trust assets indefinitely or refuse beneficiaries the gifts they were left through the trust.
Temporary Holds on Trust Distributions
While the trust may give a trustee the right to delay distributions for valid reasons, they are rarely entitled to permanently hold on to a trust beneficiary’s interest in a trust.
Valid reasons for trustees delaying distribution of trust funds after death can include:
- The distribution is discretionary (i.e., it gives the trustee the authority to decide which beneficiaries will receive a distribution, in what amount the distribution will be, and when they will receive a distribution).
- The trust terms set forth certain conditions beneficiaries must meet in order to receive their inheritances (e.g., beneficiary cannot access trust fund until after they graduate from college or turn 24).
- The trust terms instruct the trustee to make distributions over time instead of as one-time payments.
If a trustee is withholding a beneficiary’s trust distribution without having a valid reason for doing so, or if the trustee is not providing a reason for why they are withholding a beneficiary’s trust distribution, the beneficiary should get in touch with a beneficiary lawyer, who can help them enforce their beneficiary rights and claim their rightful inheritance from the trustee.
Forcing the Trustee to Provide Final Accounting
Trust beneficiaries will not always receive the exact distribution listed in the trust because the decedent’s creditors and other expenses relating to the decedent’s death will generally need to be paid prior to the trustee making trust fund distributions to beneficiaries. To ensure they receive the full trust distribution they’re due, beneficiaries should examine the trustee’s final accounting, which should include the amount of their inheritance.
If a trustee has failed to provide a final accounting, a petition can be filed with the court to try to compel the trustee to share one. It is always advisable to have a beneficiary lawyer help with this process, as the lawyer could not only file the petition on the beneficiary’s behalf but also examine the final accounting to ensure they are set to receive the exact inheritance they are due.
How Does Real Estate Affect the Transfer of Trust Property to a Beneficiary?
Sometimes the property held by a trust is real property, such as a residence, apartment complex or commercial property. Because the county in which the real property is located keeps public records of title that must be changed when the property is transferred, the process for transferring real property will be different from and slightly more complicated than the process for transferring trust funds.
To distribute real estate held by a trust to a beneficiary, the trustee will have to obtain a document known as a grant deed, which, if executed correctly and in accordance with state laws, transfers the title of the property from the trustee to the designated beneficiaries, who will become the new owners of the asset. In addition to the grant deed, most counties have other required forms that must also be submitted to properly transfer title.
For tax purposes, it is important to note on the transfer documents that the transfer of trust property to beneficiaries was not a sale. In California, subject to limited exceptions, any transfer of real property will generally trigger a reassessment of the property for property tax purposes.
When completing the transfer, the beneficiaries (i.e., the new owners) must decide how they want to hold the title. Some options include:
- Tenancy in Common: Each person owns a distinct share of the property.
- Joint Tenancy With Right of Survivorship: The property is owned jointly by multiple tenants in equal shares; if one owner dies, the other parties will automatically take full ownership of the property.
- Community Property: The property is owned equally by two parties; each party will be entitled to dispose of their half through their will or trust.
- Community Property with Right of Survivorship: A form of ownership for spouses that combines community property with joint tenancy. During the spouses’ lifetime, the property is owned as community property, but upon one spouse’s death, the surviving spouse will automatically take full ownership.
While the aforementioned ways for holding title are the most common, other methods exist as well. If beneficiaries are having a hard time figuring out which title method best aligns with their needs, they should consult with a beneficiary lawyer before finalizing the deed transfer.
Transferring Real Property With a Mortgage
If the real property being transferred has an active mortgage, the responsibility for paying off the remaining debt will generally fall on the beneficiary, unless the trust document provides otherwise. The mortgage holder may examine the beneficiary’s credit and finances to determine whether they can assume the existing mortgage or whether they will need to refinance the property. In some cases, the mortgage holder will call the loan due upon learning of the homeowner’s death.
It is sometimes the case that the terms of the trust call for the trustee to pay off all debts before making the transfer of trust property to a beneficiary. If this is so, the beneficiary will only be required to sign a deed transfer to claim the property.
Inheriting Real Estate With Multiple Beneficiaries
Confusion can arise for the trustee when a trust’s terms say to distribute a piece of real property to several beneficiaries but fail to provide specific instructions for doing so. For instance, the trust may read: “The primary residence held by the trust should go to my children.” When this happens, the trustee will have to use their discretion when deciding how to proceed.
Trustees should strongly consider speaking to beneficiaries about their wishes before making a decision. Beneficiaries may agree that the best route of action is to sell the property and divide the proceeds equally among them. If a beneficiary is residing in the property, they may be able to work out an agreement with the other beneficiaries in which the property will transfer to them, but the other beneficiaries will receive an increased share of the other trust assets.
Because trustees can generally sell trust property without first consulting with beneficiaries, it is recommended for beneficiaries to voice their desires early in the administration process to avoid real property they want to inherit from being sold.
When ownership of a decedent’s real property has been transferred to multiple beneficiaries, but the beneficiaries cannot agree on how to dispose of the property, the beneficiaries seeking to terminate their interests in the property can bring a type of lawsuit known as a partition action. Forcing the sale of jointly owned property through a partition lawsuit has the potential to get complicated, so it is best to file partition lawsuits with help from a probate attorney.
Simple Asset Distribution
When a trust instrument calls for all trust assets to be distributed to a single beneficiary or identifies all the trust’s assets and calls for them to be directly transferred to specific beneficiaries, the process of making trust distributions should be relatively straightforward for the trustee.
Complex Asset Distribution
Most of the time, the terms of a trust direct the trustee to distribute percentages of trust assets to beneficiaries. For instance, a trust may read: “Trust assets should be divided 50/50 between my two children.” When this happens, the process for making distributions of trust funds after death will be slightly more complicated for the trustee. Steps trustees should follow when making trust fund distributions to beneficiaries include:
Find out how much the trust is worth.
It is impossible to distribute percentages of trust assets without first knowing the value of the trust as a whole. To determine this, trustees should consult with professionals (e.g., accountants, appraisers, real estate agents) to figure out the approximate value of each asset.
Communicate with beneficiaries and ask for their input.
Once trustees know what the trust and its assets are worth, it is advisable for them to meet with beneficiaries to determine how to proceed. For example, if assets are supposed to be divided 50/50 among two beneficiaries, one beneficiary may agree to inherit a car worth $70,000 and another beneficiary may agree to inherit a home worth $70,000. An arrangement like this would eliminate the need for the trustee to sell either piece of property. If the beneficiaries would rather sell the property and divide the proceeds, the trustee can move forward with facilitating the sale. The trustee may also transfer a 50% interest in each asset to each beneficiary.
While the trust may provide the trustee with discretion to proceed in whatever way they feel is best, it is always a good idea for them to take the beneficiaries’ preferences into account, and, if necessary, obtain help from a lawyer to settle any property disputes.
Be sure to check state laws relating to property transfers.
As previously mentioned, extra steps and additional documentation may be required to transfer certain kinds of trust property to beneficiaries. Every state has different laws regarding property transfers, so if trustees are unsure about the steps required for making a legal transfer of trust property to a beneficiary, it is crucial they solicit the help of a trust lawyer.
Distribute residual assets.
There will always be some trust assets that are not specifically designated to beneficiaries. The leftover property is known as the trust “residue.” Trustees can discuss these assets with beneficiaries to determine which beneficiaries want them to be included as a part of their share of the estate.
The main takeaway for beneficiaries and trustees is that it is wise to have an experienced probate lawyer on hand in case any questions or concerns arise about trust distributions. A probate lawyer can help trustees ensure they are following all the necessary rules and procedures when making distributions of trust assets to beneficiaries, and beneficiaries with enforcing their rights and claiming the trust distributions they’re due.
Are Distributions From a Trust Taxable to the Recipient?
Whether or not a trust beneficiary will be required to pay income tax on a trust distribution is a complicated question that will depend on the source of the distribution, namely on whether the distribution came out of the trust’s principal or out of its income.
If the trust distribution was made from trust income, beneficiaries may have to pay income taxes on it, while distributions of principal generally pass tax-free. If the trust distribution was made from a combination of trust principal and trust income, beneficiaries may have to pay taxes on the portion of the distribution that was income.
When the trustee of a trust makes a trust fund distribution to beneficiaries containing trust income, the trustee will usually deduct the distribution amount from the trust’s tax return and provide the beneficiary with a K-1 tax form, which is specific to trusts and distinguishes between how much of a beneficiary’s trust distribution is from trust principal and how much is from trust income. Using that form, the beneficiary can determine how much of their distribution to claim as taxable income when filing their taxes.