Saturday, September 30, 2017

Retirees often become trustees themselves: know the rights of beneficiaries

Often the wishes of people for others (especially family) after they pass away are set up in trusts instead of just traditional wills alone, in order to avoid going through probate. Trusts are often revocable while the original owner is alive and become irrevocable after death. Typically the executor (who will often be one adult child) can then revise and amend the trust and make it a grantor trust to simplify IRS tax filing.

It is becoming more common, as people live longer, for even the adult children to have become seniors themselves, and to be dependent on the trust for their own income.  But there can be tricky areas.

Trusts typically have distribution provisions for various beneficiaries, which start after some number of months for paying claims.  Sometimes one or more family members may continue to live in a particular home owned by the trust.  Typically they have the right to sell and downsize, but sometimes this gets tricky if the new property has to remain within the trust.

A party can be a beneficiary of a trust without necessarily getting a scheduled distribution. Beneficiaries can be removed from or added to trusts when they are revised, although the language of the original trust can make this more difficult.  Beneficiaries may be persons or organizations, typically religious, political, cultural, or other non-profits. 

A beneficiary has a self-interest in the trust even without immediate distribution because of the expectation that it may receive a future benefit when a trustee himself or herself dies. But the beneficiary does not have the same standing as, say, a stockholder in a company.

Elderlaw has a piece on the responsibilities of the trustee to beneficiaries.  Somewhat controversial is the idea that trustees are supposed to report annually to beneficiaries, even those who receive not distributions.  This legal requirement makes more sense for individual beneficiaries than it does for organizations, who really don’t have the time and staff to keep up with estates that may pay them only in the future but not now.  Often a beneficiary gets a monthly small contribution from a trust through an automated process at a bank. Some organizations are not set up well to process these, and they don’t offer the opportunity for matches, and fall outside the usual fundraising for non-profits.  Also, an organizational beneficiary might not be tax-exempt (say, a PAC).

A trustee should be careful about adding a beneficiary if it’s an organization. The organization may believe, somewhat incorrectly, that the beneficiary status and occasional gifts imply absolute loyalty to all of the organization’s political objectives.  An established beneficiary organization in an "inherited" trust could pose ethical dilemmas for a trustee if he/she did not accept the purposes of the beneficiary. 

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