Back to Basics: Trusts, Trustees and Beneficiaries

Family Estate Planning document and fountain pen

While anything from planning your next vacation to planning your next trip to the dentist can seem more fun than reviewing your estate plan, taking time to think about how your assets will flow after you are gone is extremely important. Aside from ensuring that your desires are met, thoughtful estate planning will also be immeasurably valuable to your loved ones.

You might be surprised how important an understanding of your estate plan is to your adult children, other important members of your family, and friends who you have elected to play a role in your estate plan. This understanding of roles and responsibilities is especially critical if your estate plan includes a trust. In this space, we’ll discuss a few things of which the beneficiaries (or any interested party) of your trust should be aware.

Trusts may name a variety of individuals to specific roles, each with its own responsibility for the trust to be successful. A trust typically has one or more:

• Grantors
• Trustees
• Beneficiaries

Grantors
A trust begins when the owner of property creates a trust for the benefit of himself, herself, or others. This person is known as the Grantor. The Grantor also has the responsibility of creating the terms or rules of the trust and determining who will benefit from the assets.

Trusts typically fall into two core categories — living trusts (also referred to as inter-vivos trusts) and testamentary trusts. Living trusts are created while the individual is still alive; testamentary trusts are established through a last will and testament and do not come into existence until you die. A living trust is a document that creates a process to manage and distribute an individual’s assets during their lifetime. Living trusts exist in two forms: revocable and irrevocable.

1. Revocable Trust – a trust in which the provisions may be altered or revoked at will. The grantor, or creator, of the trust maintains complete control over it. Assets titled in the name of the trust can be reclaimed at any time.
2. Irrevocable Trust – a trust in which the person who created the trust cannot terminate or change the terms of the trust. A trust also becomes irrevocable when the person who created the trust dies.

Trustees
The trustee is the person in charge of administering the trust. The trustee has a fiduciary duty to all beneficiaries of the trust, meaning they are expected to act in the best interest of the beneficiaries. The trustee must follow all of the terms of the trust document and is responsible for: the investment and protection of the assets in the trust, tax return filings, reporting to the beneficiaries and making distributions as permitted by the trust.

Beneficiaries
A beneficiary is an individual or entity (a charity, for example) who is identified to receive the funds from a trust. There are two broad categories of trust beneficiaries – current and remainder. Current beneficiaries are those who are presently receiving benefits; remainder beneficiaries (often the grantor’s children) begin to benefit only after the current beneficiaries have died. Conflicts can arise when the remainder beneficiaries feel that the current beneficiaries’ needs and/or wants are draining “their” inheritance; this can be addressed proactively by having an open discussion explaining the grantor’s desires to the beneficiaries.

The rights of a trust beneficiary depend on the type of trust and the type of beneficiary.

• If the trust is a revocable trust, the grantors have full control. Beneficiaries other than the grantor have very few rights. The grantor can change the trust at any time, and he or she can also change the beneficiaries at any time.
• Irrevocable and testamentary trusts cannot be changed except in rare cases by court order. Beneficiaries of an irrevocable or testamentary trust have rights to information about the trust and to make sure the trustee is acting properly. The limit to these rights depends on the type of beneficiary.

The following are five common rights given to beneficiaries of irrevocable and testamentary trusts:

1. Payment. Current beneficiaries have the right to distributions as set outlined in the trust document.
2. Right to information. Both current and remainder beneficiaries have the right to be provided with enough information about the trust and its administration to have the knowledge to enforce their rights.
3. Right to an accounting. Current beneficiaries are entitled to an accounting- an annual detailed report of all income, expenses, and distributions from the trust.
4. Remove the trustee. Current and remainder beneficiaries have the right to petition the court for the removal of the trustee if they believe the trustee isn’t acting in their best interest.
5. Terminate the trust. In some circumstances, if all the current and remainder beneficiaries are in agreement, they can petition the court to terminate the trust.

Yeske Buie is always here to support you in having these conversations with the members of your estate plan. We also offer family meetings to facilitate the conversation and answer any questions you might have. If you have any questions about any aspect of estate planning or would like to schedule a family meeting don’t hesitate to reach out to a member of our financial planning team!