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TEN FACTS EVERY TRUST BENEFICIARY SHOULD KNOW by Helping a Beneficiary Fter Years of Working with Fami- About Its Terms

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TEN FACTS EVERY TRUST BENEFICIARY SHOULD KNOW by Helping a Beneficiary Fter Years of Working with Fami- About Its Terms Estate Planning: Trusts TEN FACTS EVERY TRUST BENEFICIARY SHOULD KNOW By helping a beneficiary fter years of working with fami- about its terms. It is only by reference to lies to establish trusts, and with the specific provisions of the benefi- understand the essential Aindividual trust beneficiaries, it ci a r y ’s own trust that the beneficiary will vocabulary and concepts of has become clear to me that there is a fully understand how they apply to him need for better understanding by the or her. the trust relationship, an persons creating trusts and, more impor- advisor can increase the t a n t l y, by beneficiaries, about what a Key parties trust is, and how trusts work. The trust agreement defines the key chances that the beneficiary I r o n i c a l l y, the beneficiary, who is the parties to the trust relationship: will be able to truly benefit very person for whom a trust is estab- • the “grantor” or “settlor” lished, is often quite confused about contributes funds to the trust and from the trust fundamental trust concepts. generally sets its terms; By Patricia M Angus In my view, the education of family • the “trustee” is the individual, members, especially beneficiaries, is as bank or trust company who is important as the creation of legal struc- responsible for holding the trust tures and the proper investment of assets funds and implementing its to ensure the preservation and growth of terms; family wealth and enhance the benefi- • the “beneficiary” is a person ciary’s life. who is to receive current benefits F u r t h e r, legal and financial advisors, (income and/or principal) from the as well as trustees, should assist benefi- trust; ciaries in the educational process. • the “remainderperson” is anyone This article summarises some funda- who is entitled to receive trust mental issues that advisors can and property when it terminates. should strive to teach their clients. The beneficiary should seek clarifica- The process should begin when a trust tion on what the trustee can or must do is created and continue for its duration. with trust income and principal. This will help the beneficiary better Often, the agreement states that the understand the trust and how the bene- trustee is to pay income to a particular ficiary can play an active role in its be ne f i c i a r y . This is generally annually or administration. more frequently. It may also provide O b v i o u s l y, this list hardly begins to that principal is to be paid at certain address the complex set of issues that ages or from time to time in the trustee’s each trust entails. Hopefully though it discretion. can guide advisors as they raise their A trustee who has discretion over awareness and assist beneficiaries in the payment of trust income and/or princi- process. pal is subject to certain standards that determine when payments can be made: 1.Terms of the trust agreement • under a broad standard, the trustee A beneficiary should receive a copy of the may pay principal for any reason, or trust agreement, or at least relevant parts not at all; of it, from the trustee. • a more restrictive standard might The trust agreement provides a set of state that principal may be paid for instructions for the trustee and guidelines the emergency needs of the for the beneficiary. beneficiary. The trustee should also provide a The beneficiary and trustee should summary (oral or written) of the trust discuss openly the types of payments that and be available to answer questions can be made. Private Wealth Management 2003 48 Estate Planning: Trusts Trustee’s powers If the trust agreement is not clear, the The trust agreement provides specific beneficiary should ask the trustee, lawyer guidance on the trustee’s powers. This or other advisors for some background part contains important information that information. The beneficiary will not will give the beneficiary key ideas on necessarily be happy with the grantor’s what the trustee can and can’t do for him purpose. However, knowing the reasons or her. For example, before the benefi- may help keep potential frustration and ciary calls the trustee to request a distri- anger in the right direction, rather than bution, it would be useful to find out at the trustee, who is merely carrying out whether a loan would be possible. For the grantor’s wishes. tax or other reasons, it might be better for the beneficiary to take a loan rather 4. Trustee’s duties than a distribution. A trustee is a fiduciary and, as such, must act in the best interests of the bene- Beneficiary’s powers ficiaries and remainderpersons. The beneficiary should also find out If a trustee takes advantage of its legal what specific powers are reserved to the ownership of the property it faces not b e n e f i c i a r y. He or she may have a only the ire and wrath of disgruntled “power of appointment”, which gives beneficiaries, but can also face legal the ability to determine where trust prop- action by them. erty goes upon the beneficiary’s death. In addition, a trustee has a number of specific duties, including duties to: 2. Identity of the trustee, other • exercise reasonable care, skill and beneficiaries, investment advisors, caution; accountants and other advisors to • keep and render accounts of the trust administration; The beneficiary should know who the • take and keep control of trust other parties to the trust relationship are, property; currently and in the future. • keep the trust property separate; The trustee can be one or more indi- • make the trust property productive. viduals or institutions. There may be an investment advisor 5. Beneficiary’s rights and who is responsible for managing trust responsibilities assets. One unique aspect of the trust structure The beneficiary may be one of several is that the beneficiary is an integral, and people (family members or others) to indeed the most important, person in the whom income and principal may be overall structure. Yet often the benefi- paid. The beneficiary should understand ciary is not involved in the process of w h e t h e r, and to what extent, he or she establishing the trust or in its adminis- has the ability to request or demand tration. This can lead to an unhealthy removal of the trustee. It is also helpful feeling of dependence. to find out whether there is a trust To maximise the benefits the benefi- “protector” or other trust advisor. ciary may receive from the trust and to ensure the wellbeing of the overall trust 3. Purpose of the trust arrangement, the beneficiary should be Ideally (but infrequently), the trust comfortable with his or her rights and agreement contains a statement of the responsibilities (Tables 1 and 2). g r a n t o r ’s reasons for establishing the trust. If the trust agreement is not clear, 6. Duration of the trust the beneficiary should seek clarification Most trusts are governed by a local of the purpose. Understanding the “perpetuities period”, which usually mission will help the beneficiary keep the states that no trust (other than a chari- entire arrangement in perspective. table trust) may last more than one life- Private Wealth Management 2003 49 Estate Planning: Trusts To review the trust agreement and related documents To expect the trustee to be accountable to each beneficiary and remainderperson of the trust To have a trustee who is willing to maintain open communication To attend regular (at least annual) meetings with the trustee to discuss trust matters and the be n e f i c i a r y ’ s personal financial circumstances and goals, and to provide input on the trustee’s performance in light of the trustee’s duties and responsibilities To seek removal of a trustee in appropriate cases Table 1: The beneficiary’s rights. To participate actively in trust affairs To understand the trust’s mission or overriding purpose To understand the general nature and composition of the trust assets To understand his or her rights and responsibilities under the trust agreement and how these relate to the rights and responsibilities of other beneficiaries and remainderpersons To gain a basic understanding of trust law To obtain a general understanding of investment fundamentals, including modern portfolio theory and how it fits with the “Prudent Investor Rule” To understand the trustee’s roles and responsibilities To develop a general capacity to understand trust accounting To know how and in what amount trustees and other professionals are compensated, and obtain a general understanding of the budgets for the trust and investment entities in which the trust will be invested Table 2: The beneficiary’s responsibilities. time (starting at the time the trust is More specific definitions of income created) plus an additional 21 years. This and principal are provided by the law centuries-old restriction is now being governing the trust. Indeed, the defini- loosened in many jurisdictions. All new tion of “income” can be quite compli- trusts in Delaware, South Dakota, cated. Alaska and many other states (and coun- The beneficiary should be aware that tries) may now last in perpetuity. tr ust accounting principles are not always the same as tax rules. In this way, a bene- 7. General overview of trust ficiary may be subject to tax on income accounting that he or she did not actually receive but A beneficiary does not need to become is attributed to the beneficiary.
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