Being named as the trustee of an estate is a significant responsibility. Whether you’re a family member or trusted friend of the grantor, a trustee’s legal obligation is to act in the best interest of the trust and its beneficiaries.
While it may seem straightforward, many trustees inevitably run into complications regarding trust distributions or when handling beneficiary conflicts, particularly when it’s their first time acting as a trustee.
If you’ve been named as a trustee but aren’t 100% sure how to distribute trust assets, the Law Office of Vidhya Babu is here to help. Over the years, we’ve guided dozens of Bay Area families clients through the process of trust administration and distributing trust assets.
In this blog, we’ll discuss basic guidance for trustees including methods of trust distribution and how to handle beneficiary conflicts.
And if you still need help, we offer professional trust administration guidance from our experienced legal team.
What Are Trust Distributions?
When a person creates a trust, they create a way to pass their assets down to their heirs and chosen beneficiaries that bypasses the otherwise lengthy and costly process known as probate.
Trust distributions are how those assets are transferred from possession of the trust to beneficiaries.
As a named trustee, your primary responsibility is to see that the assets placed in the trust are distributed to beneficiaries in accordance with the trust grantor’s wishes.
In fact, that responsibility is baked into the California probate code, ensuring that the trustee is legally obligated to make decisions that are in the best interest of the trust’s beneficiaries.
However, to whom and when trust distributions should be made isn’t always crystal clear.
How to Distribute Trust Assets: Common Methods Of Trust Distribution
Trust distributions can be handled in several different ways. Among the most common methods of trust distribution are:
Discretionary Trusts
A discretionary trust does not place any specific rules on how to distribute trust assets. Instead, trust distributions are left to the discretion of the trustee.
A trust without specific distribution instructions may seem counterintuitive, however the primary motivation behind a discretionary trust is to protect beneficiaries from potential creditors. After all, if they are not formally left with a specific inheritance, it would be extremely unlikely for a creditor or even a former spouse to successfully claim a share of the assets.
While there are no specific instructions, such as X person receiving Y amount of money, the trust grantor often leaves general guidelines, such as to favor children or grandchildren in distribution.
In either case, as trustee of a discretionary trust, you’ll need to make some significant decisions. Your goal is to try to align them as closely to the grantors wishes as possible.
Trusts With Ascertainable Standards
Ascertainable standards are more formal guidelines given to a trustee over how to distribute trust assets. In this form of trust, trust distributions to beneficiaries are limited to one of three areas, known as HEMS:
- Health: Payments can be made to cover insurance, medical bills, therapies, medical devices, and other healthcare related expenses.
- Education: Trust assets can be distributed for educational expenses such as tuition, books, room and board, and other living expenses for any level of education.
- Maintenance and Support: This designation offers a little more flexibility, but typically means trust distributions can be made to cover things like rent or mortgage payments, utilities, insurance, property taxes, and even food and clothing.
Why do some trusts use ascertainable standards? One of the biggest reasons is asset protection. Ascertainable standards allow the trust to keep possession of the assets, and make payments to the beneficiary for HEMS purposes, keeping those assets away from creditors.
Ascertainable standards are also a popular method of trust distribution because they can help minimize tax liability, as using HEMS standards for trust distribution does not typically trigger gift taxes.
Revocable Trust Distributions
In a revocable trust, the grantor maintains control of assets during their lifetime as the initial trustee, and can make changes to trust distributions up until their passing. They may even distribute assets while still living.
Once the grantor has passed, a successor trustee takes over, and any trust asset distributions become locked. The successor trustee can then distribute trust assets according to the grantor’s wishes.
Common revocable trust distributions methods include lump sums paid to beneficiaries, staggered distributions given out over time or when specific milestones are reached (age, college graduation, etc), as well as discretionary or ascertainable standards.
Mandatory Trust Distributions
Mandatory trust distributions do not rely on the trustee’s discretion, instead requiring the trustee to distribute assets according to specific instructions left by the grantor, such as on a fixed schedule, or when a beneficiary reaches a certain age or other milestone.
Here, the trustee is legally obligated to follow the trust terms exactly as written by the grantor, and cannot involve any personal judgement in how or when distributions are made.
Mandatory distributions are commonly used in both revocable and irrevocable trusts, however they are rigid and do not allow for any flexibility in distributions if the beneficiary’s needs change. does not exercise any discretion in how trust assets are distributed.
Trustees must see that distributions are made exactly as the grantor intended. Making distributions outside those requirements can lead to personal liability for the trustee.
Handling Beneficiary Conflicts
As a trustee, one of your responsibilities is handling beneficiary conflicts, particularly when left in charge of a discretionary trust or one with ascertainable standards.
Beneficiaries may attempt to demand additional payments that go beyond what they’ve already received, or what HEMS payments allow. They may feel like they have not received enough compared to other beneficiaries, or may have any number of other complaints or conflicts with how trust distributions are handled.
However, your duties as a trustee are to act in the best interest of all beneficiaries and the wishes of the trust grantor, as well as any applicable laws. Below you’ll find some guidelines for handling beneficiary conflicts:
1. Remain Neutral
Your duty is to the trust and all beneficiaries, not to choose one side over another, or show one beneficiary favor.
2. Keep Accurate Records
Part of your fiduciary duty is keeping proper accounting of all payments and transactions involving trust funds, which are essential when handling trust disputes.
3. Follow Trust Terms Closely
Whichever form trust distributions take, it’s vital that you follow the prescribed method of trust distribution. Handing out distributions beyond your discretionary power is illegal and can lead to legal action against you as well as your personal liability for the funds.
4. Communicate Honestly With Beneficiaries
Your responsibility is to act in the best interest of the estate and its beneficiaries, but that doesn’t mean giving into demands. If you are asked to do something that you aren’t authorized to do, be honest with that person about the limits of your authority.
5. Seek Professional Legal Guidance If Necessary
As a trustee, it may feel overwhelming when multiple parties are demanding payments beyond what you’re permitted to distribute. A legal professional like those at the Law Office of Vidhya Babu can help with trust administration. We have a proven track record of helping clients successfully fulfill their duties in estate administration, and we can help you next.
Need Help Handling Beneficiary Conflicts or Trust Distributions? The Law Office of Vidhya Babu Is Here to Help
There are a number of different ways to distribute trust assets, but no matter which type is used, it is your duty as a trustee to act in the best interests of the estate and all its beneficiaries. That may include making decisions about significant trust distributions as well as handling beneficiary conflicts.
If you’re feeling overwhelmed or unsure about how to handle your fiduciary responsibilities when it comes to how to distribute trust assets, the Law Office of Vidhya Babu can help you navigate the process of trust administration.
We’ve helped clients throughout the Bay Area fulfill their trustee legal obligations while protecting trust beneficiary rights.
Instead of struggling to fulfill your duties, get professional legal guidance from an experienced Bay Area trust administration attorney.
Contact the Law Office of Vidhya Babu today for an initial consultation, and let us help you distribute trust assets with confidence.
**DISCLAIMER**
This blog post is for informational purposes only and does not constitute legal advice. Please consult with an attorney to discuss your specific circumstances