You begin sorting your mail and see a letter from a law firm. Cue the apprehensive deep breath. However, this letter informs you that a recently deceased family member named you as a beneficiary in their trust. The mixed feelings of gratitude and sadness slowly subside, leaving uncertainty in their place. What do I do next?
What follows are some steps that trust beneficiaries should take after receiving that initial notice. The steps are not comprehensive as each trust administration often takes on a life of its own. Yet following these steps will help alleviate that lingering feeling of uncertainty.
Gather the Information
Becoming informed is the most important step any trust beneficiary can take. Ohio law entitles a trust beneficiary to far more than simply being notified that they are a beneficiary. To start, a trust beneficiary should request a copy of the trust agreement. The Ohio Trust Code requires a trustee to provide a copy of the trust agreement upon the request of a beneficiary.
When requesting a copy ensure that the request is for the entire trust agreement. If the request is not for the entire trust agreement, then a trustee is permitted to send a redacted version of the trust agreement showing only the provisions of the trust agreement relevant to the beneficiary’s interest in the trust.
Along with a copy of the entire trust agreement, a beneficiary should request a trust report. The contents of a trust report should include a list of the assets in the trust along with each asset’s fair market value, a list of any trust liabilities, an itemization of receipts coming into the trust and disbursements going out of the trust, and the source and amount of the trustee’s compensation. If the administration of the trust is just beginning, then only a list of the assets may be available. Even so, that asset list provides essential information.
Be mindful that trust reports are not a one-time deal. Remaining informed is as important as becoming informed. The Ohio Trust Code allows a beneficiary to request a trust report at least annually and in some instances a trustee is required to send the trust report at least annually.
Assess the Information
With the trust agreement and trust report in hand, the next step is to understand what you received. Start with the trust agreement. The trust agreement will state the terms of your beneficial interest in the trust. You might only be entitled to the annual income generated by the trust assets, you might only be entitled to distribution of a certain percentage of the trust assets on an annual basis, or you might be entitled to an outright distribution. You might only be able to access trust funds upon reaching a certain age or upon reaching certain milestones in life.
The trust agreement might also put limitations on how you can use distributions. A common limitation is that distributions can only be used for your health, education, maintenance, and support. What kind of uses fall within the realm of your health, education, maintenance, and
support might be defined in the trust agreement itself, or you may need to work with the trustee, or your attorney, to reach an understanding of permissible uses.
Regardless of the exact terms of your beneficial interest in the trust, understanding those terms is paramount. Knowing when you get access to trust assets, how you get access to trust assets, and what limitations are in place help set and manage your expectations.
Having gathered and assessed the trust information, the next immediate step is to plan ahead. Mark your calendar for making annual requests for trust reports. Schedule annual meetings or establish the most effective means of communicating with the trustee to review the status of your beneficial interest in the trust.
Planning ahead also includes being mindful of any tax consequences. Distributions from a trust often have income tax implications, so adjust when needed. You may need to increase your estimated tax payments or even start making estimated tax payments for that matter.
Understand how the trust interacts with your personal estate plan as well. If assets remain in the trust at your death, the trust might give you power to direct who receives those assets. If so, figure out how to exercise that power within the confines of your estate plan. Also, be wary of unintended income or estate tax outcomes. Trusts are drafted based on the tax laws in existence at the time. Those tax laws do often change and may undercut the purposes of the trust or generate a tax not originally anticipated.
Try not to get lost amid the technical aspects of being a trust beneficiary. Remember that you are a beneficiary of a trust because someone else gave you a gift. Nobody is entitled to be a beneficiary of a trust, so always be mindful of that fact. Take some time to reflect and be grateful.
If you find yourself as a beneficiary of a trust and in need of guidance and advice please do not hesitate to contact your attorney at Carlile Patchen & Murphy or any member of the Family Wealth & Estate Planning Group.