How to distribute trust assets to beneficiaries

There are a few different ways for your loved ones to receive their inheritance.

Elissa

Published December 28, 2020|4 min read

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Editorial disclosure

There isn’t a standard way of distributing trust assets to beneficiaries, but rather the grantor, the person who creates the trust (also known as the settlor or trustor), determines how the trust assets should be disbursed. The trust can pay out a lump sum or percentage of the funds, make incremental payments throughout the years, or even make distributions based on the trustee’s assessments. Whatever the grantor decides, their distribution method must be included in the trust agreement drawn up when they first set up the trust. This flexibility and control over how the beneficiaries receive assets are what make a trust an integral estate planning option.

Assets in a living trust are distributed outside of probate, but it can still take a while (months or a year) for beneficiaries to receive the trust property, and even longer if certain conditions are not met. If the trustee withholds trust funds in violation of the trust document, they can be brought to court by the beneficiaries.

KEY TAKEAWAYS

  • After the grantor’s death, a trustee or successor trustee is responsible for managing and distributing assets to beneficiaries

  • Trust administration might take months, depending on how complex the trust is

  • The trustee has a fiduciary duty to act in the trust’s best interests

How do you distribute trust assets to beneficiaries?

There are three main ways for a beneficiary to receive an inheritance from a trust:

  • Outright distributions

  • Staggered distributions

  • Discretionary distributions

Once all trust funds are distributed, the trust is typically dissolved. A revocable trust may be created to distribute assets after the grantor’s death (and close shortly after), while an irrevocable trust can continue to exist for years, even decades. The longer a trust is open, the more costly it becomes due to extended maintenance costs.

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Distribute trust assets outright

The grantor can opt to have the beneficiaries receive trust property directly without any restrictions. The trustee can write the beneficiary a check, give them cash, and transfer real estate by drawing up a new deed or selling the house and giving them the proceeds. This type of trust distribution is straightforward, but it doesn’t come with any protections — a spendthrift beneficiary may squander their inheritance very quickly.

Distribute trust assets over time

You can have your trust make staggered distributions of trust assets, which means the beneficiaries receive them over time based on rules that you set. For example, the grantor may choose to distribute trust funds on a timed basis, like monthly, or only after certain triggering events, such as when the beneficiary turns 18 or gets married.

Related article: Can a trustee remove a beneficiary from a trust?

Distribute trust assets at the trustee’s discretion

You can have your trustee determine when and what a beneficiary receives from the trust. A discretionary trust is commonly created for a beneficiary who has trouble managing their money. (Examples of discretionary trusts might include a spendthrift trust or special needs trust.)

If you decide to distribute trust funds this way, then take extra consideration when picking a trustee since they’ll be making decisions.

Learn more about choosing a trustee.

How long does a trustee have to distribute assets?

Trustees may be required to distribute assets within a reasonable time according to probate law, but there aren’t any specific guidelines.

Depending on how complex the estate was, trust administration may take a few months to over a year after the grantor’s death. Before assets can be distributed, the trustee reviews everything in the trust, gets assets appraised, files necessary tax returns, and pays taxes.

Some states may have a window of time during which beneficiaries can contest the trust, so a trustee may not to distribute assets if a lawsuit has been filed.

Can a trustee withhold money from beneficiaries?

A trustee is a fiduciary, which means they have legal responsibility to act in the trust’s best interests. The trustee must follow the state’s probate and trust law and cannot do anything that goes against the grantor’s wishes. A trust beneficiary can bring legal action against the trustee in court to obtain a full trust accounting, force the trustee to make a distribution, or even have the trustee removed, which can get costly if an estate attorney is involved.

Learn more about when a trustee can withdraw money from a trust.

Trust distributions and taxes for beneficiaries

A properly constructed irrevocable trust, can provide a grantor with many tax advantages, like lowering estate tax and income tax liability and providing asset protection from creditors. (Only a very wealthy grantor needs to worry about estate tax, which is levied on estates valued over $11.7 million in 2021.)

A trust beneficiary faces tax consequences as well. They may have to pay taxes when they inherit money, depending on the type of trust and what type of income or assets they receive. (For example, the beneficiary usually doesn’t pay income tax on a trust distribution if it comes from the trust principal, but they may have to pay taxes if they receive trust income.)

There are many different types of trusts and the more complex ones can help beneficiaries reap tax benefits. If you have tax concerns — like decreasing capital gains, preserving gift tax for future generations, creating a credit shelter, or providing a surviving spouse with a stream of income — you should consult an estate planning attorney.

You can learn more about taxes here.

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