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Knowledge Is Power

10 Tips for Protecting Yourself as a Trust Beneficiary

There’s so much you have to know as a California trust beneficiary if you are going to protect your interests. It can feel completely overwhelming at times. And when the trustee is abusing you, threatening to cut off your money, or keeping you in the dark, the stress increases substantially. If you are going to protect your interests as a California trust beneficiary, there are some basics you need to know:

1. Know your trust.
   Read it and then read it again. If you don’t undestand it (and who really does?), consult with a lawyer to go over the trust terms. If you don’t know what your right are, you won’t be well-armed to protect those rights.
2. Know your rights as a beneficiary.
   Not all beneficial interests are the same. Some beneficiaries have superior rights than others. Sometimes you are entitled to distribution now, sometimes you have to wait. You must know what your beneficial rights are as soon as possible.
3. Ask for information in writing, and follow up often.
   All beneficiaries are entitled to information. Ask for as much as you want, such as copies of bank statements, checks, trustee’s fees, costs, etc. Better yet, ask for the information in writing. It does not take much to send an email or a letter listing what you want to see. It doest NOT need to be sent by certified mail. Just get it to the trustee in writing as soon as you can.
4. Ask for an accounting in writing, after six months or one year.
   Unlike information described in number three above, not every beneficiary is entitled to an accounting. In fact, only current income and principal beneficiaries can demand an accounting, unless the trust specifies otherwise (and they usually don’t). If you are a current income or principal beneficiary, then you will have to wait at least six months to get an accounting. But once the time comes, request an accounting in writing. Again, you need not send anything by certified mail, just get it out in writing as soon as you can.
5. Know you income tax consequences.
   The good news: Most of the assets you receive by way of an inheritance are NOT subject to income tax (except for things like 410(k)s and IRAs which have a built-in income tax when you receive them because the decendent put the money away tax-free during life). The bad nes: If the trust generates income, such as from rental property or investment accounts, you may be on the hook for a portion of the income tax generated by the trust assets, regardless of whether you receive any money from the trust.
6. You have the right to question and challenge your trustee without fear of the no-contest clause.
   If you start questioning the actions of your trustee, or you need to go to court to enforce your rights a a beneficiary, you have nothing to fear from a trust no-contest clause. Trustees (especially private individual trustees) may continually threaten disinheritance under a no-contest clause if their actions are challenged. Well, trustees can say what they want, it simply is not true.
7. Discretion is not absolute.
   Many times, a trust will give the trustee “discretion” to make distributions to a trust beneficiary. While trustees have wide latitude in exercising discretion, it is not absolute. That means a trustee must act reasonably under the circumstances and make distributions when they are needed. A trustee cannot refuse to make a distribution just for the sake of saying no.
8. Communicate often.
   Wonder what’s going on with your Trust? Ask about it. Don’t get a satisfying answer? Ask again, and then follow up with the trustee, and then keep asking. A lack of communication is a bad thing for beneficiary. And your trustee has a duty under California law to communicate with you. So asl away, the earlier the better.
9. Investments matter.
   Every California trustee has a heavy burden to invest trust assets under the guidelines of the Prudent Investor Rule. The rule requires trustees to act reasonably and responsibly in investing. Trustees are not allowed to make risky investments. However, not every trustee knows or implements their duties to invest properly, so know the investment rules and ask your trustee if he or she is following the rules.
10. Trustees are not all powerful, they have duties, obligations, and responsiblities.
    The number one problem with private people acting as trustees is that they think they can do whatever they like. The common misconception is that the trustee is “in charge now” and can as though he or she is the trust creator. Not true. In fact, trustee have far more duties and obligations than they can even imagine. But if no once informs them of their duties, then they may continue to act under this miscomnception, which can do a lot of damage to you as a beneficiary. Trustees are not all-powerful, and sometimes they need to be told as much.