Two immediate questions that trust beneficiaries want answered are what do I receive, and when do I receive it. For answers we look first to the trust.
Trusts typically provide that most, if not all, of the trust estate – i.e., all the trust assets – shall be divided into separate shares for each of the beneficiaries. The shares may be equal or unequal. Other distributions may involve monetary bequests and specific gifts of real and/or personal property.
For example a trust may say, “upon my death, the trust estate shall be divided into equal shares: one share for each surviving child of mine and one share for each deceased child of mine with issue who survive me.” Applied to a deceased settlor with two surviving children and one deceased child who leaves three surviving children, the trust estate is divided into three equal shares; the three grandchildren share their deceased parent’s share.
Next, when is each share to be distributed?
If the Trust says that distributions “shall be made upon the settlor’s death” then the trustee must distribute the shares in the normal course of the trust administration — the word “shall” means “must”. Distribution of the trust estate only occurs after the Trustee has paid – or has kept a reserve to pay — all trust administration expenses and all the decedent’s reasonably foreseeable legal debts and taxes, both owed and anticipated. The Trustee must wait until such foreseeable expenses, debts and taxes are ascertained to avoid personal liability due to premature or excessive distributions.
Distributions do not always occur after the settlor’s death. Sometimes a trust provides that some or all distributions shall not occur until a certain time, requirement, or a condition, is satisfied. For example, the trust may say that distributions shall occur in stages, such as, one-half once the beneficiary reaches 30 years of age, and the balance when the beneficiary reaches 40 years of age.
Sometimes the Trust gives the Trustee discretion to withhold distribution of either part or all of a beneficiary’s share. For example, the Trust may provide that if compelling circumstances exist that would justify withholding the beneficiary’s inheritance – e.g., the beneficiary has judgement debts, a pending divorce, or suffers from drug addiction — then the Trustee may withhold the beneficiary’s inheritance while such circumstances exist. During the withholding period the trust may allows the trustee utilize the withheld assets to make certain payments on the beneficiary’s behalf, like paying for drug rehabilitation.
Next, how is the distribution made? Trust instruments may provide that assets must be sold, must be distributed in-kind, or may either be sold or distributed in-kind as the Trustee sees fit. Recently, in the Trolan v. Trolan appellate court decision, California’s Court of Appeal, Sixth Appellate District, held that where the Trust allows the Trustee discretion on whether to liquidate or to distribute assets in-kind, the Trustee’s decision must be respected by the Court.
With in-kind distributions a beneficiary may either receive an undivided partial ownership or an exclusive ownership of an asset. Unless beneficiaries receive the same percentage each distributed asset – a pro rata distribution — as their percentage share in the trust estate the Trustee will have to value assets for distribution purposes.
For example, consider a trust estate with a residence worth $300,000, stocks worth $200,000 and $100,000 on deposit to be divided equally between two children. If non pro rata distributions are allowed, usually the case, the Trustee may distribute the residence to one child and the other assets to the other child; each receives $300,000 in value. The foregoing simplified example ignores the income tax effect of distributing assets on a non-pro rata basis.
When the trust does not answer these, or other, trust administration questions the trustee, or beneficiary, often petitions the court for instructions, and significant legal expenses are incurred. Having a well drafted trust that addresses the important issue helps to prevent going to court.