David “Chico” Esparza, senior fiduciary strategist with Wells Fargo Wealth & Investment Management, remembers meeting two clients, a brother and sister whose parents had passed away. “Unfortunately, their parents had not discussed their estate plans with the adult children. When the siblings learned they were the beneficiaries of a sizable trust,” Esparza recalls, “they had no idea what to do next.”
The brother and sister had many questions. Who handles the estate? What are the terms of the trust? And what should their next steps be? “The bank was appointed as successor trustee, so we explained the timeline and process for settling the trust estate,” Esparza says. “It helped to ease their minds to know that professionals would be handling the numerous tasks required for an orderly estate settlement.”
As Esparza’s clients found, stepping into the role of beneficiary can feel a bit like stepping into the unknown. Here, Esparza offers three suggestions for those in similar situations.
1. Build an advisory team.
A good first step for the beneficiary is to meet with the trustee who is tasked with executing the terms of the trust. It may be an individual, such as a CPA or lawyer, family member, or potentially a corporate trustee such as Wells Fargo Bank.
“There will be a lot of questions, so it’s important to establish a communication plan and outline tasks that need to be accomplished along with a general timeline for how long it will take to settle the estate,” Esparza says.
In some instances, once the estate is settled, a new trust is funded with the beneficiary’s share of the estate; in other cases, assets will be distributed outright to the beneficiary. If the assets will be retained in trust, the trustee collaborates with an investment advisor to help manage the assets according to the terms of the trust.
“The trustee and investment advisor will create a plan that is based on the terms of the trust and considers the needs of the beneficiary,” Esparza says. “A best practice is for beneficiaries to seek the guidance of a tax advisor regarding tax implications related to trust distribution.”
2. Understand the terms of the trust.
One of the first questions a beneficiary might have is, “What benefits do I have under the trust?” Beneficiaries are well served to seek independent counsel for questions regarding interpretation of their interest under the trust.
Esparza explains that a trust can be a useful tool for holding, managing, and distributing property as outlined by the trustor(s) — the creator(s) of the trust — in the trust agreement, but each trust is unique in how assets can be distributed to beneficiaries. Some common areas of discussion include:
- Beneficiary or beneficiaries: Is there a sole beneficiary or several beneficiaries of the trust? How do the terms address the rights different beneficiaries have to distributions from the trust?
- Age restrictions: Does the beneficiary have to reach a certain age before accessing some or all of the trust?
- Distribution restrictions: Can beneficiaries access the principal or just the income from the trust? Does the beneficiary need to provide the trustee with proof of the beneficiary’s own income and expenses to receive distributions? What categories of expenses can the trust cover for the beneficiary? (Typically, trusts with discretionary provisions have ascertainable standards that can cover health, education, maintenance, and support.) Can distributions be adjusted for inflation?
- Lifetime of the trust: Does the trust terminate once the beneficiary reaches a certain age, or is it meant to last the beneficiary’s lifetime? Is any portion of the trust designated for future generations?
“Trusts present an opportunity to preserve, accumulate, and transition generational wealth,” Esparza says. “For that reason, the trustee should be prudent and equitable in administrating the trust, giving consideration to the current needs of the beneficiary as well as the long-term goals and objectives of the trust.”
3. Ask questions before taking distributions.
“Before taking a trust distribution, some beneficiaries find it useful to inquire about the potential tax consequences. That’s where a tax advisor should provide guidance,” Esparza says. “Beneficiaries also may consider consulting with the trustee and the rest of their advisory team about additional considerations or impacts a trust distribution may have on the investment plan.” In addition, beneficiaries should consult with their own legal counsel if they have specific questions regarding their rights with respect to a trust.
Esparza shares the story of a young beneficiary who wanted to use her trust fund to purchase a luxury car when she turned 16. “I posed this question: ‘Would a less-expensive car meet your transportation goals and help preserve trust assets for the long term?’” he says. “It is important for beneficiaries to stay connected with the trustee and to ask clarifying questions so they understand the goals and objectives established by the grantor.”
Wells Fargo Wealth & Investment Management (WIM) provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Trust Services are available through Wells Fargo Bank, N.A. and Wells Fargo Delaware Trust Company, N.A.
Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.