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FACTS EVERY TRUST BENEFICIARY SHOULD KNOW
By Patricia M Angus
After years of working with families to establish trusts, and with individual trust beneficiaries, it has become clear to me that there is a need for better understanding by the
persons creating trusts and, more import a n t l y, by beneficiaries, about what a trust is, and how trusts work.
I r o n i c a l l y, the beneficiary, who is the very person for whom a trust is established, is often quite confused about fundamental trust concepts. In my view, the education of family members, especially beneficiaries, is as important as the creation of legal structures and the proper investment of assets to ensure the preservation and growth of family wealth and enhance the beneficiary’s life.
F u r t h e r, legal and financial advisors, as well as trustees, should assist beneficiaries in the educational process. This article summarises some fundamental issues that advisors can and
should strive to teach their clients. The process should begin when a trust is created and continue for its duration. This will help the beneficiary better understand the trust and how the beneficiary can play an active role in its administration.
O b v i o u s l y, this list hardly begins to address the complex set of issues that each trust entails. Hopefully though it can guide advisors as they raise their awareness and assist beneficiaries in the
1.Terms of the trust agreement. A beneficiary should receive a copy of the trust agreement, or at least relevant parts of it, from the trustee.
The trust agreement provides a set of instructions for the trustee and guidelines for the beneficiary.
The trustee should also provide a summary (oral or written) of the trust and be available to answer questions about its terms. It is only by reference to
the specific provisions of the benefic i a r y’s own trust that the beneficiary will fully understand how they apply to him or her.
The trust agreement defines the key parties to the trust relationship:
• the “grantor” or “settlor” contributes funds to the trust and generally sets its terms;
• the “trustee” is the individual, bank or trust company who is responsible for holding the trust funds and implementing its terms;
• the “beneficiary” is a person who is to receive current benefits (income and/or principal) from the trust;
• the “remainderperson” is anyone who is entitled to receive trust property when it terminates. The beneficiary should seek clarification on what the trustee can or must do with trust income and principal. Often, the agreement states that the trustee is to pay income to a particular b en e f i c i a r y. This is generally annually or more frequently. It may also provide that principal is to be paid at certain ages or from time to time in the trustee’s discretion. A trustee who has discretion over payment of trust income and/or principal is subject to certain standards that determine when payments can be made:
• under a broad standard, the trustee may pay principal for any reason, or not at all;
• a more restrictive standard might state that principal may be paid for the emergency needs of the beneficiary.
The beneficiary and trustee should discuss openly the types of payments that can be made. By helping a beneficiary understand the essential vocabulary and concepts of the trust relationship, an
advisor can increase the chances that the beneficiary will be able to truly benefit from the trust.
Read more related articles at:
Naming a beneficiary: What you need to know
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