Trust Fund Kid 101: 5 Questions Nobody Tells You to Ask

Transcript and show notes at: www.sunnybranchwealth.com/blog/trust-fund-5-questions

You just found out you're a trust fund kid—congrats!

But now what? 

In this episode of Heir Necessities, I'm cutting through financial jargon to give you the 5 questions you need to ask right away. 

The truth is, most new trust beneficiaries feel confused and powerless, even with a trust fund with multi-million dollars. 

Listen to the epsidoe to learn how to decode your trust document, build a team that's on your side, and avoid common tax surprises.  When you're done, you'll be one step closer to taking control over your financial future as a trust fund beneficiary. 

This is real talk for real inheritors—no judgment, just practical advice from someone who helps people like you navigate this weird new world. 

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

Trust Fund 101: Essential Questions for New Beneficiaries | Heir Necessities Podcast

Navigating Your Trust Fund Inheritance as a Gen X, Millennial, or Gen Z Inheritor

Hey, I'm Katherine and thanks for joining me today at Heir Necessities, the podcast that turns complex financial topics into real talk for Gen X, Millennial, and Gen Z inheritors. Each episode of this podcast, I'm breaking down a different topic related to generational wealth and inheritance. On today's episode of the podcast, I'm gonna be talking about something I get asked about all the time:

What are the first questions you need to ask when you find out that you're now a trust fund kid? Before I get started giving you the questions you need to ask, I just want to recognize that this is a really hard thing. I know there's a lot of talk in the popular imagination about what a trust fund kid is. Trust fund kids are spoiled this, that, and the other thing, right? But...

The Reality of Being a Trust Fund Beneficiary: Common Challenges and Misconceptions

I want to tell you about the reality of having a trust fund from what I see in my work. And most often what I see is that new trust beneficiaries are confused and overwhelmed. And they live in this weird space where they're being told you have this trust fund, have all this money available to you, but how you access it, how much of it is actually available to you, and what all the rules are surrounding this thing are

totally opaque. So on one hand, you're being told, yeah, you have this huge, amazing, you know, millions of dollars of resources. And on the other hand, you feel poor. And so it's just this really confusing thing to live with and layered on top of all of that is that you don't understand how things work. And that's what I'm trying to demystify and break down for you today.

Question #1: Can I see my trust document?

So if you find out that you now have access to a trust fund, the first question that I want you to ask is can I see a copy of the trust document? Because by and large, the vast majority of the information that you are going to need to understand your trust fund is contained within that trust document. So that document is gonna tell you who your trustee is. It's gonna tell you what the rules are for how you can take distributions out of the trust, when you can take distributions, what kind of distributions you can take. It's gonna tell you what

powers you have, like do you have the power to appoint your own investment advisor? Do you have the power to change the trustee? It's going to tell you who the other beneficiaries of the trust are, which in some cases you might not know. You might be sharing it with other family members that you weren't aware of. So the first question you want to ask is can I see a copy of the trust document? But I also want to preface this by saying you might not be able to understand everything that you read in the trust document and actually

you may not be able to understand any of it. And that's where having an advisor who is on your side really comes in handy. And this is where a lot of my work at Sunny Branch actually starts with new clients who come in and want to understand their trust funds, is actually looking at a copy of the trust document and helping them understand what it says to then be able to ask informed questions. And...

I'm not an attorney, so if there are parts where I don't understand it, we need additional clarification, whatever, then bringing in an attorney who's an attorney that's on your side instead of an attorney who's on the trust side, because often that attorney who's on the trust side isn't gonna be super helpful for you.

Question #2: Who is my trustee?

So let's say you've gotten a copy of the trust document, you don't understand it at all, all right? But you've done it, you've asked the first question. The second question that I want you to ask is who is my trustee?

And in a lot of cases, this might be pretty obvious because your trustee may have been the person who reached out to you to say, hey, this is your trust. I'm your trustee, blah, blah, blah, blah, right? So if you already know who your trustee is, then you're going to want to ask a slightly different question. These two questions are linked, right? Part A, who is my trustee? And then part B, what is your role as trustee? Because

every trustee is going to have a little bit different sense of what their role is. And in part, this is going to depend on the terms of the trust and what the terms of the trust dictate. But then on the other side of things, trustees are just different. Like a corporate trustee is gonna be different than a trustee who's a family member. And a corporate trustee who works at like a very conservative trust company or very conservative bank is different from...

a corporate trustee who works at like an independent trust company or even a smaller trust company. And so you really wanna try and get the lay of the land and the feel for who this person is and what they think their job is. Because ultimately having a trustee is like having a financial parent. They are the person that you are going to be interacting with on a regular basis.

And so getting a feel for them, really understanding where they're coming from is an important part of adapting to life as a trust fund beneficiary.

Question #3: Who is the trust investment advisor?

The next question I want you to ask is who is the investment advisor for the trust? And oftentimes the trustee and the investment advisor are going to be part of the same institution. So for example, if you have a trust at like Bank of America, say your trustee is going to be a trust officer at Bank of America and then your investment advisor, your relationship manager is going to be that person who also works at Bank of America but in a different branch.

But if you have a family member who's a trustee or a non-professional trustee, then likely there's going to be a separate investment advisor, or if you work with an independent trust company, then there may also be a separate investment advisor on that trust. So I want you to figure out who the investment advisor is so that you can talk to them as you need to about how the trust is invested.

And as a beneficiary, depending on what powers you have under the trust document, you may not be able to affect a lot of change in these investments, but at least you can establish an open line of communication with the trust investment manager to understand what they're thinking about how the trust is invested and how that's going to affect the growth of trust assets over time.

Accessing and Analyzing Your Trust Statement: A Critical Financial Document

Once you've figured out who the investment advisor is, another question you're going to want to ask, which again is linked, is can I see a copy of the trust statement?

Because even if you can't get the investment advisor on the phone or you get them on the phone and they're super unhelpful, which is often the case, especially if you're working with a big bank or a big trust company, then if you have a statement, it's like having a copy of the trust document where you can work with your own advisor. So you could work with an advisor like me or another financial planner to help you understand how that trust is invested. And then if it's not invested, how you might want it to be.

Advocate a little bit and advocate with your investment advisor for the investments to be moved a little bit more in line with your vision for the future and your hope for trust assets themselves.

Question #4: What distributions will I get from this trust?

The fourth question I'm going to want you to ask is the one that maybe people care the most about. I want you to ask what distributions the trust will make, what the timing is of those distributions, and what rights you have under the trust to request additional distributions. And this is maybe the meatiest part because this is what you actually care about, right? When you are the beneficiary of the trust fund, you care about how do I get money out of this trust?

And there are different common ways that trusts pay out. So you might be what's called an income beneficiary of a trust. And what that means is that if you're an income beneficiary and say you're the only beneficiary on that trust, any income that trust assets generate will be paid out to you. And usually that payment happens on a quarterly basis. It might be monthly, it might be annually, depending on what you set up with your trustee. But.

Assuming you're an income beneficiary of a $10 million trust that generates $200,000 in income a year, that income is all going to be paid out to you under the terms of the trust. If you're a younger trust beneficiary, it may be that when you hit a certain age milestone, so like when you hit 25 or 30 or 35, you might become an income beneficiary.

So it may be that you're not entitled to any income distributions now, but when you hit a certain age, that income spigot sort of turns on and then it will be distributed out to you on a regular basis.

Understanding HEMS Standards and How to Request Additional Trust Distributions

But the second piece you wanna know is if and how you can request additional distributions from the trust. Generally, trusts have what's called in them a HEMS standard. HEMS stands for Health, Education, Maintenance and Support. This is a very broad ascertainable standard that

basically lets trustees distribute money out to you to maintain your current standard of living, but it also gives them really, really broad discretion as to like what does or doesn't fall under that standard of living.

And that has to do with the size of the trust, your current standard of living, and whether the person who created the trust left any kind of additional clarification. Oftentimes you'll see it spelled out in trust documents, you know, this HEMS standard exists, so distributions to maintain your current standard of living, and larger distributions are specifically allowed for education, buying a home,

starting a business. Those are three of the most common call-outs you'll see for larger distributions. For example, if you want to buy a new car, you're going to want to know, is that a distribution that would be allowed? What's the process for requesting that distribution? And what information do you need to provide?

Because oftentimes a trustee may ask some pretty invasive personal financial questions before making a distribution. They might ask to see your other bank statements, your other accounts. They might wanna see a budget and understand where you're spending your money every month before they make any additional distributions. And again, this is gonna depend on the size of the trust, the terms of the trust, and also honestly, just like how willing or not your trustee is to work with you as a beneficiary.

Question #5: Who pays the taxes for this trust?

The last question I want you to ask if you're a new trust fund beneficiary is who is going to pay the taxes on your trust? And this is really, really important because taxes are a piece that really trip up most trust beneficiaries. I'm not gonna go into the specifics of how taxes work on trusts, but just to kind of lay it out, generally,

it's preferable for beneficiaries to pay taxes on trust income instead of for the trust to pay those taxes because trusts pay taxes at a much higher rate than individuals do. So going back to what I talked about at distributions, if you're that income beneficiary of the trust who gets $200,000 a year in trust income, it's likely that you will be paying all of the income taxes on that trust income. And depending on the sort of

character of that income, it will likely be taxable to you as ordinary income. But this isn't something that most trust beneficiaries plan for. A lot of the time it's like, okay, I get $200,000, I'm gonna spend $200,000, and then come April, it's like, oh, now I owe, you know, 50, 60, $70,000 in taxes, which is never a fun feeling.

If you are a new trust fund beneficiary and you're receiving either income distributions or more ad hoc distributions from the trust, I want you to talk to your trustees specifically about who is going to be responsible for paying taxes on the money that you receive. And if the answer is you, then you need to run, not walk, and find a CPA who is familiar with working with trust beneficiaries.

If this isn't something you know where to start, I'm happy to make referrals. I have sort of a stable of CPAs that I work with who are really familiar with this. Again, this is really, really common to trip up trust beneficiaries because for whatever reason, trustees don't note this, even though it's like such an important thing and you would think it would be part of their fiduciary duty. Oftentimes they just kind of let beneficiaries flounder here and then figure it out on their own when tax time comes. And I don't want this to happen to you.

So again, if you are a new trust fund beneficiary, you wanna ask your trustee who's gonna be responsible for paying taxes on the income that you get from the trust. And if the answer is you, you are gonna wanna hook up with a CPA sooner rather than later, because it's likely you're gonna wanna start making estimated payments from your trust income so that you can avoid a major penalty next tax day with the IRS.

Summary: The Five Essential Questions Every New Trust Fund Beneficiary Should Ask

To recap for you here, I covered the five questions that you need to ask when you find out that you are a new trust fund beneficiary. Specifically, can I see a copy of my trust document? Who is my trustee? And what is the role of my trustee? Who is the trust investment advisor? And can I see a statement for my trust?

What are the timing and rules for trust distributions and who is gonna pay the taxes on my trust? If you're a new trust beneficiary and you are confused about how to navigate this, I am here for you. I work with trust beneficiaries on an hourly basis with no long-term commitment to help you figure out answers to all of the questions that I just covered.

Because especially if you're the beneficiary of a larger trust, like a 10, 20, 30, 40 plus million dollar trust, it's really confusing and overwhelming and your advisors aren't always on your side. And so it can be really helpful to have someone who's in your court, who's speaking your language, and who can give you the skills and the education you need to actually talk to the people who are your advisors and the advisors to the trust on a level that brings you up to their equal and not just this annoying trust fund beneficiary thing

to deal with.

Connect with Katherine Fox for Personalized Trust Fund Guidance

If you're interested in learning more, I've got a link to the full episode in the show notes. You can reach out to me, Katherine at SunnyBranchWealth.com. Send me a DM on Instagram. Check out my website, SunnyBranchWealth.com, and I'll look forward to chatting with you on the next episode of Heir Necessities.