Everything Inheritors Need To Know About Trusts

Understand what to do if you have, or think you will, inherit through a trust.

Connect with Katherine and Sunnybranch Wealth:

Understanding an inheritance from a trust:
www.sunnybranchwealth.com/our-work-together
https://www.sunnybranchwealth.com/blog/inheriting-money-from-trust

Instagram: www.instagram.com/sunnybranchwealth

Website: www.sunnybranchwealth.com

Book a FREE consultation: https://calendly.com/sunnybranchwealth/intro-call

Sunnybranch Wealth LLC (“Sunnybranch Wealth”) is a registered investment advisor offering advisory services in the State of Oregon and in other jurisdictions where exempt. Registration does not imply a certain level of skill or training.

The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.

Transcript

And so you could have a trust that was revocable during someone's lifetime and then after they died, it became irrevocable. 

And so as an inheritor, when we talk about inheriting from a trust, generally you are going to be inheriting either from a revocable trust that's just distributing its assets out and has ceased to exist, or you're going to be inheriting through an irrevocable trust.

Inheriting from an irrevocable trust can have a lot of strings attached, which is what I'm going to dive into now.

I'm Katherine. I'm a certified financial planner and I'm the founder of Sunnybranch Wealth, a fee only investment advisory firm that works with millennial and Gen Z inheritors who want to create positive impact with their wealth.

On today's episode of Planning for Inheritance, we are going to be talking about all things trusts, everything you need to know if you have or will inherit money from a trust.

WHAT IS THE DIFFERENCE BETWEEN REVOCABLE AND IRREVOCABLE TRUSTS?

The first thing we're going to talk about are the two main different kinds of trusts, revocable and irrevocable trusts. 

We're going to start with revocable trusts. 

A revocable trust is a trust that can be amended or changed. 

A revocable trust is sometimes also called a living trust and it's set up during someone's lifetime. 

The person who sets up a trust is called the grantor. 

So if you have a revocable trust, you have the grantor, the person who set up the trust and during their lifetime, they can change that trust as they see fit. 

They can move assets into and out of the trust without any tax consequences. They can take money out of the trust. They can give money away from the trust. 

They maintain full control over the assets in that revocable trust. And generally, the grand tour of a revocable trust during the grand tour's lifetime is also the trustee of that trust. 

An irrevocable trust is a trust that can't be amended or changed except under certain limited circumstances.

So a person may still set up an irrevocable trust to hold their assets while they're alive.

They're still called a grantor, but the primary difference is that they can't move assets into and out of the trust.

Once an irrevocable trust is set up and funded, even if you are the grantor, you can't change what's in that trust while still maintaining the tax and estate planning benefits of an irrevocable trust. 

And if you're the grantor of an irrevocable trust, you would have set up a third-party trustee to manage and steward trust assets.

So, why would someone set up an irrevocable trust when they could set up a revocable trust and maintain control over their assets while they're alive?

WHY WOULD YOU CHOOSE AN IRREVOCABLE TRUST OVER A REVOCABLE TRUST?

The primary reason that someone would set up an irrevocable trust while they're living is for estate planning purposes.

When you set up an irrevocable trust, the assets in that trust are no longer yours. So if you have a large estate that's going to be subject to estate tax at the state or at the federal level, then you might want to take some assets out of your estate and then they won't be part of your taxable estate you can save some money on estate taxes.

There are a lot of different types of irrevocable trust that can let you accomplish that purpose. I'm not gonna dive into all of them here but just to give you some names you could be looking at charitable remainder trust, a qualified personal residence trust, a grantor retained trust, or any number of other types of irrevocable trusts.

WHAT HAPPENS IF YOU INHERIT MONEY FROM A TRUST?

Something that trips up people a lot is understanding how an inheritance from a trust works.

So let's go back to our previous example. Let's keep talking about that grantor who set up a revocable trust.

That grantor set up that trust and then they died. What happens next?

When the grantor of a trust dies, that trust is either going to dissolve or it's going to become irrevocable. 

And so you could have a trust that was revocable during someone's lifetime and then after they died, it became irrevocable. And so as an inheritor, when we talk about inheriting from a trust, generally you are going to be inheriting either from a revocable trust that's just distributing its assets out and has ceasde to exist, or you're going to be inheriting through an irrevocable trust.

HOW DO IRREVOCABLE TRUSTS RESTRICT BENEFICIARIES RIGHTS TO ASSETS?

Inheriting from an irrevocable trust can have a lot of strings attached, which is what I'm going to dive into now.

Remember that an irrevocable trust can't be amended or changed.

We talked about two of the three important parties to an irrevocable trust: 

You have the grantor who set up and funded the trust. 

You have the trustee who manages and oversees trust assets and also ensures that the trust is providing funds out to beneficiaries the way the trust document specifies. 

And then the third party you have is the beneficiaries or the actual heirs from that trust.

WHEN WILL YOU HAVE ACCESS TO MONEY INHERITED FROM AN IRREVOCABLE TRUST?

So if you inherit from an irrevocable trust, when are you actually going to see money from that trust?

That could be so dependent depending on the terms of the trust document. 

It may be that your loved one who died set up an irrevocable trust with really simple distribution provisions. 

Maybe the irrevocable trust is just going to distribute all of its assets out to you very quickly over a period of months or years. 

But in most cases, an irrevocable trust is set up to put limits around how beneficiaries can access trust funds. 

The intention to restrict funds can be done for a wide number of reasons on the part of the grantor, your loved one who set up the trust. 

They may not trust you with money and they want to put guardrails up in terms of how you can access money. 

They might not think that you're old enough and so they want to restrict your access to funds until you're older.

They might want to impose certain conditions on you in terms of what you have to have accomplished in terms of life goals before you can actually access money in the trust. 

Irrevocable trusts are also commonly set up for people with special needs so that someone can ensure that their loved one who has special needs is going to be financially taken care of for the rest of their lives. 

I'm going to talk through some different scenarios that you could encounter if you were the beneficiary of an irrevocable trust.

HOW DO IRREVOCABLE TRUSTS DISTRIBUTE ASSETS?

One of the most common ways that irrevocable trusts distribute assets is outright at specific ages. 

So if you are a beneficiary of an irrevocable trust and you're 29 years old, it may be that you get a large chunk of trust assets, maybe a third or half of trust assets when you're 30 years old, and then you get another chunk of trust assets when you're 35 or 40. 

This is a really common way grantors set up trust, the thinking being that, if they die and their children are 21 years old, they don't want them getting full access to all of that wealth. They want to wait until they're older and also more mature. 

Even if you're getting those large trust distributions in the future, you may still be entitled to some distributions from the trust.

WHAT IS THE "HEMS" STANDARD IN  TRUSTS?

Generally, these distributions fall under what's called the HEMS standard, which is health, education, maintenance, and support.

The HEMS standard give the trustee of the trust really broad latitude to make trust distributions to support your current standard of living. 

Depending on your relationship with the trustee, it may be easy or difficult to actually get them to make these distributions. And you might have to provide a lot of supporting evidence to get them to do it. 

You might have to give them bank statements, a budget, pay stubs, all sorts of financial information for them to do their fiduciary duty and say, yes, I can give you money for this distribution, which is for this specific purpose only.

WHAT DOES IT MEAN TO BE A TRUST INCOME BENEFICIARY

Another common way that people inherit from a trust is as an income beneficiary. If you're an income beneficiary of a trust, it means that you have the right to all of the income that comes off of the trust assets. 

Trust assets are divided up into two types. You have the principal, or the main body of the investments in the trust. And then you have the income that comes off from those investments. 

So say the trust owned an investment property, the principal would be the actual value of that investment property and the income would be any money or rent that is paid to the trust who owns that property. 

That income, if you're an income beneficiary, would be distributed to you monthly or quarterly or however you set it up with your trustee.

WHAT CAN YOU DO IF YOUR TRUSTEE WON'T GIVE YOU MONEY FROM A TRUST?

One of the most common issues I see when people inherit money from trusts is they have a really hard time dealing with their trustee, establishing a positive relationship with their trustee, and getting the information that they are legally entitled to from their trustee. 

Unfortunately, this is really, really common because oftentimes people set trustees as a family member or a family friend that they trust, but they might not have any knowledge about how to actually be a trustee and what the legal requirements of being a trustee are. 

If you're a beneficiary of an irrevocable trust and you have a difficult relationship with your trustee, the most important thing to do is educate yourself about your rights as a beneficiary.

WHAT ARE THE RIGHTS OF TRUST BENEFICIARIES? 

As a beneficiary of the trust, you're due a copy of the trust document. You're due information about trust assets. And you have a right to understand from the trustee what distributions you can take, how to request them, and when you may be entitled to future distributions. 

If you aren't getting this information from your trustee, the best thing you can do is hire your own professional, maybe a financial advisor or an attorney who can help you talk to your trustee and establish a more productive relationship with them.

If you've tried all of this and you still are not getting what you need from your trustee, then you might be getting into one of the very few areas where beneficiaries of an irrevocable trust can actually change or modify the trust.

HOW CAN BENEFICIARIES MODIFY, CHANGE, OR DISSOLVE AN IRREVOCABLE TRUST?

Depending on the terms of the trust document, beneficiaries may have a right to select an investment advisor for their trust and they may have a right to change the trustee for their trust. 

Generally, these things are gonna involve full agreement of all trust beneficiaries, so it can be easier or simpler depending on how many trust beneficiaries there are and how close all of you are and if they would all agree to do this but if you are all having issues with your trustee, then it might be that you're able to convince everyone to go through the process of instating a new trustee.

This might be another individual who's named in the trust document, or you might choose to go with an independent trust company who's gonna step into that professional trustee role.

CAN YOU HIRE YOUR OWN INVESTMENT ADVISOR FOR A TRUST?

I mentioned getting an investment advisor for your trust.

This can be something that is often overlooked, but can be a really, really easy way for trust beneficiaries to feel like they have some control over trust assets. If you feel like you understand how your trust is invested and you understand, how it's invested to meet your needs now and in the future. It can provide a huge amount of relief and ameliorate a lot of stress that comes from having a negative relationship with your trustee. 

If you're interested in knowing how you can get your own investment advisor to start managing assets of an irrevocable trust that you're a beneficiary of, send me an email at katherine@sunnybranchwealth.com or check out the other posts I have on this topic linked in the show notes

Thanks for hanging out with me and talking about trusts. I'll catch you on next week's episode of Planning for Inheritance.