Trust Fund Distributions to Beneficiaries: Can a Trustee Withhold Money From a Beneficiary? (2024)

If you have been named as a beneficiary of a trust, you probably have some questions, such as: How long before the distribution of trust assets to beneficiaries takes place? Are distributions from a trust taxable to the recipient? Are there legal remedies for the trustee not paying beneficiaries? What is required in order to complete the transfer of trust property to a beneficiary?

Trusts can be complicated, and by extension, so can trust distributions. Unlike estate distributions, which generally are made as one-time payments by the executor or administrator of an estate, trust distributions can take a variety of forms (e.g., they can be one-time payments or multiple payments made over time).

For instance, some trusts provide for trust fund distributions to beneficiaries to be made as one-time payments, whereas others provide for trust fund distributions to be made on a regular schedule for years or decades into the future.

Similarly, trust distributions can be made from the income the trust generates, from the principal (assets the trust owned at the time of the settlor’s death), or from both.

Ultimately, the trust distribution rules a trustee must abide by will come down to the terms of the trust. Unless trust provisions expressly authorize the trustee to use their discretion when making distributions of trust assets to beneficiaries, their straying from the terms of the trust is considered a breach of duty for which they potentially could face trustee removal and/or a surcharge.

If you’ve been informed that you will be inheriting a trust fund, there are steps you can take as a trust beneficiary to ensure you get what you’re owed from a loved one’s trust. It is always better to take proactive steps to protect your inheritance than to try recover your inheritance after it has been wrongfully withheld, reduced or eliminated.

The first thing beneficiaries should do upon learning that they are inheriting a trust fund is to secure a copy of the trust instrument from the trustee.

Next, beneficiaries should carefully review the terms of the trust to determine what type of trust it is (e.g., revocable trust, irrevocable trust, special needs trust, discretionary trust), which can play a role in how trust fund distributions to beneficiaries will be made.

For example, family trust distribution rules may be structured differently than the rules governing discretionary trusts. In the same vein, irrevocable trust disbursem*nts can have different tax implications than disbursem*nts from revocable living trusts (even though these trusts usually become irrevocable upon the settlor’s death or incapacitation).

Finally, trust beneficiaries should figure out whether any conditions must be met in order for them to receive their inheritance, and whether the trust fund distributions will be made all at once or over time.

By finding out the aforementioned information, trust beneficiaries will have a clearer picture of what they are entitled to in the way of trust distributions. If the terms of a trust are ambiguous or difficult to understand, a probate lawyer can help you interpret them, and if necessary, seek clarification from the court.

One of the most common questions trust lawyers receive from trust beneficiaries is: How long can a trustee hold funds?

Unfortunately, there is not a one-size-fits-all response to this question, as every trust is different.

As an example, some trusts consist primarily of real properties (which can make them more complex to administer), whereas others consist entirely of liquid assets. Similarly, some trusts have no creditors (which may enable beneficiaries to receive their inheritances faster), whereas others have many.

Trust beneficiaries should remember that the trustee generally cannot make distributions of trust assets to beneficiaries after death until the following trust administration steps have been completed:

• All trust assets have been accounted for and valued (i.e., trust accounting).
• All administration expenses (including trustee fees) have been paid.
• All valid creditor claims have been paid.
• All trust disputes (e.g., trust contests, trust ambiguities, 850 petitions)have been resolved.

There may be exceptions to this rule. For example, it is not uncommon for trustees to issue preliminary trust fund distributions to beneficiaries if there are sufficient assets remaining in the trust to cover the trust’s liabilities.

If a trust runs out of funds before any trust fund distributions to beneficiaries are made, it’s unlikely beneficiaries will receive an inheritance, as creditor rights generally will trump beneficiary inheritance rights in such a situation.

On the other hand, if the debt belongs to the decedent and not to the trust itself, creditors usually will first try to seek repayment of the debt from the decedent’s estate. If the estate does not have enough funds to cover the decedent’s debts, then the creditors can try to pursue non-probated assets, such as the decedent’s bank accounts and trust.

The key is for beneficiaries – regardless of whether they are trust beneficiaries or estate beneficiaries – to play an active role in administration. By doing so, they will know when to expect a distribution of trust assets and can take action if the executor or trustee is not paying beneficiaries in a timely fashion.

It is the trustee’s duty to act in the best interests of trust beneficiaries at all times. While acting in a beneficiary’s best interest can have a variety of implications for the trustee, in the context of trust distributions, it means not straying from the terms of the trust and making distributions of trust assets to beneficiaries on time.

Unfortunately, trustees are not always mindful of this duty, which can cause trust beneficiaries to have to chase after the inheritances they’re due.

Valid reasons for trustees delaying distributions of trust funds after death can include:

• The distribution is discretionary (i.e., the trustee was granted the authority to decide which beneficiaries will receive a distribution, in what amount the distribution will be, and when to make the distribution).
• The trust terms set forth certain conditions beneficiaries must meet in order to receive their inheritances (e.g., beneficiaries cannot access their trust funds until after they graduate from college or turn 24).
• The trust terms instruct the trustee to make distributions over time instead of as a one-time payment.
• The trustee has reason to believe the beneficiary will squander the distribution due to serious mental illness, substance abuse issues or a lack of capacity.

As previously mentioned, trustees generally cannot withhold money from a beneficiary for no reason or indefinitely. Similarly, trustees cannot withdraw money from a trust to benefit themselves, even if the trustee is also a beneficiary.

If a trustee does not have valid reasons for failing to make due and payable distributions, it’s crucial beneficiaries get in touch with a probate attorney, who can help them claim their rightful inheritances from the trustee.

If trustees have reached a point where they can start making distributions of trust funds to beneficiaries, it means they either already have paid the trust’s debts and taxes or have determined that there are sufficient funds in the trust to cover these liabilities after making preliminary trust fund distributions.

This is not the time for trustees to get lazy or negligent, as trust distributions should be made in a timely manner and in accordance with the terms of the trust and state laws; otherwise, the trustee could be held personally liable.

Distribution of trust assets to beneficiaries can vary considerably from trust to trust. Trusts can be straightforward and easy to distribute, or complex and complicated to distribute.

Factors playing a role in how trust distributions are made include:

• Whether there is a sole beneficiary or multiple beneficiaries
• Whether all the assets in the trust have been identified and are designated to go to specific beneficiaries
• Whether beneficiaries are designated specific gifts or percentages of the trust (e.g., “Trust assets should be divided 50/50 between my two children.”)
• The types of assets held by the trust (e.g., real property, personal property or money)

As we’ve already discussed, trust fund distributions can be made to beneficiaries in a variety of ways. However, it is not up to the trustee to decide the manner in which to distribute the trust; they will need to abide by the instructions provided by the trust document.

Many trustees wonder whether distributing assets in an irrevocable trust is different from distributing assets in a revocable trust, but differences usually arise only in terms of tax implications, not in terms of how distributions are made.

Outright trust distributions are usually the simplest types of trust distributions and can save the trust a substantial amount of money in administrative costs. They consist of the trustee releasing each beneficiary’s inheritance without any restrictions. Outright distributions can either be made as a single lump sum, or periodically.

Prior to making outright trust distributions, the trustee will need to pay the trust’s debts and taxes. Once all of the outright trust distributions have been made and the trust has no assets remaining in it, the trustee can close the trust. At this point, the trustee’s administrative duties will be complete.

Compared to outright trust distributions, distributions in trust are more complex and can significantly raise the cost of administration. This is because distributions in trust will require the trustee to hold trust assets so they can be distributed to beneficiaries over time.

For example, a trust could call for equal shares of a trust estate to be distributed to separate trusts created for each of the settlor’s children. The trust may further provide for the trustee to distribute a percentage of each beneficiary’s share of the trust to the beneficiary every year on the anniversary of the settlor’s death until the trust has no assets remaining in it, or it may provide for the trustee to make partial distributions of the trust’s principal to each beneficiary when they reach a certain age (e.g., 50% of the principal upon turning 25 and the remaining 50% upon turning 35).

Despite the higher administrative costs of making distributions in trust, there are benefits to these kinds of distributions. Suppose that a decedent is survived by their children, all of whom are young adults. Because these beneficiaries likely lack the financial expertise to manage large sums of money, it may be preferable to release only a portion of their inheritances to them every year, so they do not spend their inheritances all at once.

Discretionary trust distributions are unique because they are the only type of trust distribution in which the trustee has the authority to decide which beneficiaries among a group of predetermined beneficiaries will inherit, how much they will inherit, when they will inherit, and whether they will inherit from the principal or income of the trust.

In order for a trustee to be able to make discretionary trust distributions, the settlor should have expressly granted them the authority to do so within the terms of the trust.

Making distributions of trust assets to beneficiaries is not always an easy process, but trustees can always turn to a probate lawyer for help. In fact, it often is preferable to enlist the help of a lawyer to ensure trust distributions are made properly, on time and in accordance with the provisions of the trust, because if they’re not, the trustee could be held personally liable. Additionally, trustees generally can use trust funds to pay for the services of professionals.

In the following subsections, you will find steps trustees can take to ensure the proper distribution of trust assets to beneficiaries.

It is impossible to distribute percentages of trust assets without first knowing the value of the trust as a whole, as well as the value of each of its assets. To determine these values, it’s recommended that trustees consult with professionals (e.g., accountants, appraisers, real estate agents).

Trustees should create an inventory of trust assets and their value at the time of the settlor’s death. They can update the inventory as necessary if the value of an asset changes, or if an asset enters or leaves the trust.

Once trustees know what the trust and its assets are worth, it is advisable for them to meet with beneficiaries to determine how to proceed.

For example, if assets are supposed to be divided 50/50 among two beneficiaries, one beneficiary may agree to inherit a car worth $100,000 and another beneficiary may agree to inherit a real property worth $100,000. An arrangement like this would eliminate the need for the trustee to sell either piece of property. If the beneficiaries would rather sell trust properties and divide the proceeds between them, the trustee can move forward with facilitating sales. The trustee can also transfer a 50% interest in each asset to each of the beneficiaries.

While the trust may provide the trustee with the discretion to proceed in whatever way they feel is best, it is always a good idea for them to take the beneficiaries’ preferences into account. If there are any property disputes, the trustee can turn to a probate lawyer for help resolving them.

Whether you’re a beneficiary or a trustee, it is wise to have an experienced probate lawyer on hand in case any questions or concerns arise around trust fund distributions.

A probate lawyer can help trustees understand and navigate trust distribution rules, and they can help beneficiaries enforce their inheritance rights. Beneficiaries should keep in mind that the trustee’s lawyer is not their lawyer. If they want a lawyer to represent them during administration, they will need to hire one themselves.

If a person has been named as a beneficiary of a trust, they generally will not need to take any further steps to receive their trust fund distribution.

That said, trust beneficiaries would be wise to keep tabs on administration to ensure it is progressing on schedule and the trustee is being diligent about fufilling their duties. They also should review the trust accountings trustees are required to provide them to ensure the trustee is not engaged in any misoconduct that could compromise their inheritance.

If beneficiaries have a trust distribution that has become due and payable, but the trustee is not paying beneficiaries, then beneficiaries may need to work with a lawyer to get the money or property they’re entitled to from the trust.

Beneficiaries are always permitted to refuse, or “disclaim,” a trust distribution if they wish.Why would a beneficiary want to refuse a trust distribution? There are many reasons.

For example, a beneficiary may wish to refuse a trust distribution if the distribution would place additional burdens on them (e.g., they stand to inherit the family business or an old home that needs substantial repairs). Likewise, a beneficiary may refuse a trust distribution if it would disqualify them from receiving government benefits, such as housing and health care. Another reason why a beneficiary may refuse a trust distribution is because the beneficiary has creditors who likely would intercept it, which is why they would rather see it go to someone else.

If a beneficiary has expressed to the trustee that they wish to refuse their distribution from the trust, the trustee should have them sign a disclaimer. This way, the trustee won’t be held liable if the beneficiary brings a claim against them down the road for failing to provide them with their trust fund distribution.

When a beneficiary refuses a trust distribution, they will be regarded as having predeceased the decedent, and their portion of the trust will pass to the contingent beneficiary that is next in line to inherit.

As we’ve already touched on, trust distributions can vary considerably depending on type of trust you’re working with, the types of assets that are in the trust, and the types of distributions that are being called for by the trust.

Some trusts contain specific devises of real or personal property to beneficiaries. For example, a trust could provide that the settlor’s diamond wedding ring be distributed to the settlor’s daughter, or that the settlor’s primary residence be distributed to the settlor’s son. If a trust contains a specific devise of either real or personal property to a beneficiary, those devises generally must be honored by the trustee, unless there are legal justifications for liquidating the asset (e.g., if the property must be sold to pay the debts of the settlor).

In regard to assets not specifically devised, the trustee generally has the discretion to distribute assets to beneficiaries in cash or in kind. A distribution in cash calls for the trustee to liquidate the assets in the trust and distribute the resulting cash to beneficiaries. A distribution in kind calls for the trustee to distribute assets to beneficiaries without selling the assets.

For example, if the trust owns real estate, the trustee could make a distribution in cash by selling the property and dividing the proceeds among the settlor’s two children, or the trustee could make a distribution in kind by simply deeding the property equally to both children so that each owns an undivided 50% interest in the property. A trustee may even have the ability to distribute the assets partially in kind and partially in cash by delivering title to one child and distributing an offsetting amount of cash to the other child.

Whether distributions should be made in cash or in kind depend on the terms of the trust. Distributions also can have serious tax implications for the trust and its beneficiaries, so it’s critical to speak with a qualified probate attorney and tax adviser before making such decisions.

If trustees were to only pay attention to one trust distribution rule, it would be to precisely follow the terms of the trust. Straying from the terms of the trust can result in the trustee not only being removed but being surcharged as well.

Trustees will also need to provide beneficiaries with an accounting for every year the trust remains active. This process can be streamlined if trustees keep thorough records of trust-related transactions and an up-to-date inventory of trust assets at all times. They also will need to track every time they make trust distributions to beneficiaries to include in their accountings, and fill out the necessary trust distribution tax forms.

As to whether family trust distribution rules are different from general trust distribution rules, the answer is no. A family trust refers to a trust that benefits the family members of the settlor. It can be revocable, irrevocable or even discretionary. The category it falls under will determine the family trust distribution rules the trustee must follow.

If you’re wondering how to transfer property out of a trust after death, chances are you are a successor trustee who is attempting to confer ownership of non-liquid assets to a beneficiary as part of their trust fund distribution.

For liquid assets, like cash, distributions to beneficiaries can be effectuated by either wiring funds to a bank account in the beneficiary’s name or issuing a check to the beneficiary.

Distribution of non-liquid assets can be a bit more complicated. The way they should be transferred will depend on the type of asset being distributed and on whether the asset is being distributed in cash or in kind, as discussed above.

To transfer real property to beneficiaries in kind, the trustee will need to fill out either a quitclaim deed or grant deed (which they will need to get notarized) that formally transfers title to the property from the trust to the beneficiary. They will then need to record the deed with the Office of the County Clerk. The trustee may also need to file additional documents with the County Clerk’s Office and the County Assessor’s Office to formalize the transfer, but these forms can vary from county to county, so trustees should familiarize themselves with the procedures in their area.

To transfer other non-liquid assets in kind, such as stocks or bonds, the trustee can instruct the brokerage to distribute the stocks and bonds in kind to new accounts established by each beneficiary.

Business interests, such as membership stakes in an LLC owned by a trust, may also be able to be transferred in kind to beneficiaries by executing certain legal documents (known as assignments).

Transferring property from a trust to a beneficiary can be complicated, so it is best to involve a lawyer in the process.

It is vital beneficiaries take action if the trustee is refusing to provide them with accountings.

Accountings are one of the only ways beneficiaries can keep tabs on the trustee’s activities. If beneficiaries don’t have any accountings to review, they will not be able to accurately gauge whether the trustee is abiding by trust distribution rules. Likewise, they will have trouble gauging whether the trustee is causing financial harm to the trust.

Beneficiaries are entitled to at least one formal accounting from the trustee for every year the trust remains active. They are also entitled to request informal accountings from the trustee at any time.

When trustees are hiding accountings from beneficiaries, beneficiaries should immediately reach out to a probate lawyer, who can file a petition with the court to try to compel the trustee to provide an accounting.

Unless the terms of a trust forbid the trustee from doing so, trustees generally are allowed to sell property without beneficiaries approving. There are a few caveats to be mindful of, however.

For example, trustees should not sell trust property for below fair market value without first obtaining consent from all the beneficiaries of the trust. If they fail to obtain consent, the trustee could be held liable for the shortfall.

They also should discuss their plans to sell trust property with beneficiaries in the event beneficiaries wish to keep the property in question. While the trustee doesn’t necessarily have to take the beneficiaries’ wishes into account, consulting with them can go a long way in preventing conflicts from arising between the trustee and beneficiaries.

When making trust fund distributions to beneficiaries, it would be wise for trustees to have the beneficiary sign a receipt of distribution. This will essentially release them of any liability should the beneficiary decide to sue them later on for not providing them with a trust distribution.

While this step is not required, trustes can never be too cautious. The last thing a trustee should want is to be held liable for misconduct they did not commit.