Our clients have told us that finding out they were beneficiaries of a trust was exciting as well as overwhelming and confusing. Questions abound – from how much to request from the trust, to how to interact with a trustee, to what the position as beneficiary means for your own planning. Despite the many benefits of trusts,1 a question we hear frequently, even from the most grateful beneficiaries, is “Why didn’t my family trust me?”
We have counseled beneficiaries who felt guilty about using or even having a trust for their benefit, or felt as though they wanted to “make it on their own” and no longer have that opportunity, and many who want to pay it forward to their own children and charitable causes. At the same time, as questions and concerns about the trust are percolating, there may not be many peers who can relate or help answer questions; some may not even want peers to know about the trust because of the negative stigma that can go along with “trust fund babies.” Especially when this is a first experience with a trust, there are sometimes more questions than answers, and trusted advisors who can answer those questions are few and far between.
This article sets forth some ideas for how trust beneficiaries can learn more about their roles and responsibilities. For those thinking about funding trusts, we recommend having some of these conversations with the beneficiaries of your generosity before signing on the dotted line.
1. Read the Agreement
From the outset, it is important to learn as much about the trust structure as possible. If your trustee doesn’t offer one, ask for a copy of the trust agreement. Then, make sure to read it! Organize any questions you have about the agreement and flow of information and assets. Make sure you are set up for periodic account statements, with the goal to review the information at least annually. You can review the account statement with the assistance of your relationship manager, wealth planner, trustee or any other trusted advisor. Familiarize yourself with the time horizon and tax implications of the trust, both income and transfer tax, which will have a direct impact on the asset allocation and investments in the trust account. It is also important to understand how taxes factor into the ordering of this account as an available source of funds and how a distribution may impact your personal income tax situation. You aren’t expected to know all of these things at the outset, which brings us to No. 2 …
2. Ask Questions
As a beneficiary, there are no questions that are too big or small. You should reach out to your trustee to understand the trust, both as a legal document and to measure the real life impact it may have on your family. Trusts have different types of beneficiaries, often distinguishing between beneficiaries who can get trust income vs. trust principal, get distributions now vs. after some future event, and even “primary” beneficiaries. (Those poor nonprimary beneficiaries! If you are one, we can explain, and it’s probably not personal.) There may be language giving the trustee the discretion to distribute “so much or all” of the trust to the beneficiaries for any purpose in the trustee’s discretion. That is not a blank check, however, so even with this seemingly vague language, there are limits to how much is prudent for a trustee to distribute. There will always be competing interests between current and future beneficiaries, which is especially true for dynastic or perpetual trusts designed to last several generations. Although most trust agreements do not require equal distributions among beneficiaries, there is a fundamental duty of impartiality, which means the trustee must consider what is equitable when making decisions. As you might expect, this can create tension between a trustee trying to do her job and a beneficiary who would like access to funds. Asking questions early on can help set expectations and build trust (no pun intended) and will open very important lines of communication between you and your trustee.
3. Learn the Process
How do you request distributions, and what documentation might you be required to provide? Depending on what the trust or letters in the trust file from the person who funded the trust explaining their intent say, you may be asked to provide a budget or copy of a recent tax return in connection with a request. While this can feel intrusive, the trustee has a duty to administer the trust in accordance with its terms and in a way that promotes transparency and fairness among all beneficiaries. Rest assured, the details of your request are not shared with other beneficiaries. You should also consider what the trust says about how and when distributions should be made. How will distribution requests be considered if a trust agreement provides for distributions for “health, education, maintenance and support”? Can you simply submit medical bills and expect reimbursement? How much education is “too much” education, if any? What in the world do “maintenance and support” mean? Knowing how your trustee interprets the trust agreement on these important points will again help guide you in requesting a distribution, submitting an invoice or funding certain expenses from your own non-trust accounts.
You may by now be sensing a theme: Communication is key. Knowing the role your trust plays in your overall plan can be a key component of long-term financial health and a good trustee/beneficiary dynamic. The options for a trust may seem like a choice between depletion for your current needs and safeguarding to preserve for future generations. However, another perspective is to envision how the trust can help you reach your personal financial goals and to help you establish your own independent source of support and stability.
Share your financial plans and goals with your trustee early in the process, especially if you would like to determine whether the trust can be used to help pay for your first home, further education or fund a new business venture. In certain circumstances, it may be better from a tax or creditor perspective to leave assets in the trust and draw on more traditional commercial funding. In those cases, a trustee’s confirmation of available trust assets, rather than an outright distribution, may be the best course of action.
Consider the trust in terms of your own estate plan as well. Many trusts provide powers of appointment, giving you the ability to determine to whom funds will flow at a certain point, usually at death. Knowing whether you can or should reference this trust in your own will is important to understand before you write one.
5. Call on Your Team
The best way to promote a good experience with this seemingly odd legal structure is to remain curious and involved. Establishing an open discourse with the trustee and other members of the team will make the process easier. Your Brown Brothers Harriman (BBH) team can help bring clarity and context to the trust, explain the nuances of administration and provide stories of when (and why and how) similarly situated beneficiaries had excellent experiences, or challenging ones. We also have tools to help you start these conversations with your family and make the most of this valuable role. To think about how to get started, contact your BBH trust officer, wealth planner or relationship manager.