When you find out that you are a trust beneficiary, that can elicit a lot of emotions and questions. What are some of the key insights trust beneficiaries should know about?
In this episode of Life & Legacy, Karen Tan from the Wealth Advisory Practice at J.P. Morgan Private Bank and Julie Golden a senior trust officer from our Trusts & Estates Group, discuss the role of beneficiaries in trust arrangements, sharing insights from their experience in working with families and trusts.
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Welcome to our Wealth Advisory Series, where we discuss issues relating to life and legacy. I'm Karen Tan, and I head the Wealth Advisory Practice in Singapore, covering families on their planning and succession needs in the region. I'm delighted to have Julie Golden, a senior trust officer with our US Trust business, based in Denver, Colorado, join me today to share her insights in working with families and their trusts.
In this episode, we will discuss the role of beneficiaries in trust arrangements and specifically what you need to know as a trust beneficiary. So, Julie, let's get started. How do beneficiaries react when they find out that they are beneficiaries of a trust?
Hi, Karen. Well, let's start with how you should feel about the trust. Finding out that you're a beneficiary can elicit a lot of emotions and questions, which is completely normal. If you can reach out to the settlor, and by settlor I'm referring to the person who created the trust, that's the best starting point so that they can help you to understand why they created the trust and the purpose of the trust.
Oftentimes, people mistakenly think that a trust was created because their loved ones don't trust them. And usually, that is the furthest thing from the settlor's mind. If connecting with the settlor is not an option, then your next best bet's the trustee. That might be an individual like a lawyer, a family member, or it could be a corporate trustee, which is a role that JPMorgan can play.
Besides the settlor, Julie, who are the other people in a trust that will decide on matters concerning the trust? Could you perhaps briefly explain their roles? We have talked about the settlor, but how about the other instrumental roles in a trust arrangement?
The trustee is probably the most important because they're going to be the party that you'll work with to learn about your trust, understand how to access it, and hopefully establish an ongoing and trusted relationship with. You also need to understand who the beneficiaries are. You may be the only beneficiary, or you could be one of many. Maybe the trust is for the benefit of you as the primary beneficiary, and your children are the secondary beneficiaries. All of these are important questions that will help you understand the inner workings of your trust.
There can also be a lot of other roles in a trust arrangement where decision-making ability can be bifurcated. For instance, there might be an investment committee, a distribution committee, or a protector committee. Each trust can be designed with one or more of these features. And the document will specify the powers and scope of each of these.
That was super helpful to have an overview of the various roles in a trust arrangement. With that background, assuming I'm a beneficiary, I would want to now understand what my rights are. And more importantly, how do I access the funds in a trust?
You are right. That is probably the most important question. Each trust is unique. So it's really important for you and your trustee to sit down and go over what are called the dispositive provisions in your trust documents.
For instance, your trust may contain what are called mandatory distributions. And these can take a variety of forms. Your trust may require that the trustee distributes all of the income in the trust on an annual basis.
Others are designed where the beneficiary receives a specific percentage of the trust each year automatically. Or they can request up to a certain percentage. Others require that the trustee distribute certain dollar amounts or percentages when you turn a specific age or upon the occurrence of certain events like graduation from college, marriage. There are pros and cons to mandatory distributions. And it's important that you not only understand when and if they occur but what the tax consequences to you might be.
But what happens when a trust doesn't have mandatory distributions? How else can a beneficiary access the trust fund then?
The other types of distributions are what we call discretionary distributions. And what this means is that the trust document sets out rules for when the trustee may contemplate distributions to you or one of the other beneficiaries. Some trusts allow for the trustee to distribute funds for health, education, maintenance, and support.
Other trusts are very broad, and they allow the trustee to make distributions at the trustee's unlimited discretion, while other trusts range from pretty much anywhere in between. Your trustee is the one who's going to work with you to educate you about the provisions of your trust. And they'll help you to understand what the discretionary request process looks like.
Let's take a closer look at the discretionary distributions you talked about. What will a trustee typically ask, Julie, and require from a beneficiary before they can make such distributions?
The trust document is always going to be the starting point. The trustee has to take in both the provisions of the trust and the settlor's intent into consideration when they're contemplating distributions. This includes the discretionary standards, who the current and future beneficiaries are, and the resources of the trust.
For example, if a trust is only intended to cover medical and education expenses, then a distribution can't be made towards the purchase of a vehicle or a home. Also, if the trust is for multiple beneficiaries instead of one, the trustee will have to consider and balance the interest of all of the beneficiaries. Generally, a trustee is going to require supporting documentation to substantiate any request. So for example, if a request is made for $10,000 for living expenses, the trustee may request a budget or a copy of the beneficiary's tax return.
This isn't because we don't trust you. It's to ensure that the trustee is keeping proper records on how decisions were made. It is essential because it protects the trust from claims. And more importantly, it protects the beneficiaries. It demonstrates that they didn't try to influence or control the trust when receiving a distribution.
Last but not least, the details of a given situation or a beneficiary's circumstance will provide excellent background to the trustee. For example, if a beneficiary is transitioning jobs, expanding their family, moving, all of this is really important for the trustee to take into consideration so that they can figure out how the distributions will fit with your personal situation and financial objectives.
With what you've shared, and with an understanding on the various roles and the distribution mechanics, that's a fair amount of information a beneficiary needs to appreciate. Moving along, how about the investments in the trust, Julie? Do they also need to know about investments? And what happens if a beneficiary has little or no investment knowledge?
This is a question that's going to be unique to each beneficiary. You're not required to learn about the investments. But the trust will usually be serviced by a team that includes an investment specialist. So I would highly encourage you to take advantage of that resource within JPMorgan.
Your trustee can help you to understand the trust investments. And it's perfectly all right if you have little or no investment knowledge. But don't be afraid to ask questions. Understanding the investment aspect of your trust is your right. And it really is helpful, but it's not a requirement.
In certain cases, if the trust document allows, a settlor or a beneficiary can actually be what's called an investment advisor. And then they make the investment decisions for the trust. You do, however, need to appreciate the investment hat you wear and be mindful of your other capacity, as in the beneficiary hat.
As you may have experienced, Julie, the beneficiary's relationship with the trustee or with other beneficiaries may not always be so perfect. And in those circumstances, what would you recommend that a beneficiary bears in mind to always keep things in good working order?
Let's say that the key to a successful relationship is communication. Be open and honest with your trustee. And you have-- if you have questions or concerns, reach out to them.
I often describe the role of trustee as that of an advocate. And if I can't be a successful advocate for my beneficiaries unless we have an open and trusting relationship. And as a trust officer, the more we understand your individual situation, the more we can help provide advice and recommendations, which might not be limited to your trust.
JPMorgan has extensive resources that can be helpful to our clients. And speaking to a wealth advisor like Karen for ideas and additional help to work through some relevant considerations in your trust might be a really good starting point. And if things really aren't working, then you want to look to the trust document to understand if you have additional recourse, like removing and replacing the trustee.
Last but not least-- and you probably get asked this very often, Julie. And I would love to hear your view here. If I'm a newly minted beneficiary, how much should I share about the trust, the details with family, with friends, with spouse, or even with a partner?
It's going to be up to you to use your discretion as to who you tell about your trust. Most trustees would recommend that you keep this information pretty close to the breast and be selective about who you tell. Oftentimes, the knowledge that someone's a trust beneficiary can create misunderstandings, hurt feelings, or third parties asking for money. Generally, the fewer people that know about the trust, the more peace of mind you'll have. But you need to use your judgment on that.
Thank you for your insights here, Julie. Beneficiaries as well as settlors listening to this will no doubt find your advice and guidance practical and helpful, giving them a better grasp on the role of a trust beneficiary as well as the responsibility and obligations that come along with it. Ultimately, it is a privilege to be a trust beneficiary, a blessing, as some may say, to be able to enjoy the assets and the protection that the trust supports in a properly structured arrangement.
With sound advice and good governance underlying the trust, coupled of course with the importance of regular and transparent communication with the trustee, as Julie highlighted, trust beneficiaries can be encouraged to develop and grow and continue the family legacy for the generations to come. Thank you for tuning in to our Life & Legacy series. If you have any questions on this subject or would like to explore your own circumstances in greater detail, please reach out to your private bank wealth advisor.