Wealthy parents often rely on trusts, not as a way to micromanage their children’s inheritances, but as a way to ensure that those assets are protected from creditors and/or a possible future divorce. With trust assets, your inheritance is managed by a trustee (usually an investment advisor, trust company, attorney, or trusted friend or family member) who is responsible for overseeing the investment and distribution of assets according to the provisions of the trust. 

Note: Even though you may legally be an adult, your trustee and all beneficiaries are still bound by the terms of the trust document. If it is structured to last for a specific period of time (perhaps even your lifetime), it’s likely that neither you nor the trustee will be able to force the trust to terminate early.

Every trust is controlled by a trust document that describes the purpose of the trust and exactly how it will be administered. Typically, it:

• Names the grantor, trustee and beneficiaries
• Identifies the assets included in the trust
• Outlines the trustee’s powers and responsibilities
• Explains how and when the trust assets will be distributed to beneficiaries
• Specifies the circumstances around when and how the trust will terminate

The trustee is the individual (or institution) who holds legal title to the trust property and agrees to perform certain duties on behalf of the trust beneficiaries. The trustee should therefore have a clear understanding of the specific terms of the trust, but also must be mindful of the duties that govern how they carry out their obligations.  

Additionally, in order to administer a trust effectively, trustees need to be able to balance the wishes of the grantor and gain the expertise required to administer the trust effectively.

• Must be independent and objective in its actions with respect to both current and future beneficiaries. They cannot make decisions favoring you at the expense of future beneficiaries.
• Has many responsibilities, including handling beneficiary distribution requests, making investment and tax decisions, maintaining all of the trusts records and filing all required tax returns.
• Should sit down with beneficiaries periodically to answer any questions you have about your trust and should help coordinate your overall financial planning with your expected trust distributions.

The fiduciary duties of a trustee fall into three broad categories. Each should guide the trustee’s day-to-day trust administrative actions.

Trustees are also required to invest the trust assets in a diversified manner — analyzing and making investment decisions in consideration of the risk tolerances of beneficiaries and incurring only reasonable expenses. Other duties include: 

• Distributing trust notices
• Regularly communicating with beneficiaries
• Handling the accounting and reporting for all trust investment and activity
• Keeping the trust property segregated from other property
• Enforcing and defending any claims of the trust 
• Maintaining confidentiality relating to the trust  

Keep in mind that balancing these obligations and determining which actions are and aren’t permissible can involve a lot of complexity and requires a clear understanding of trust administration rules.

Distributions fall into two broad categories: mandatory and discretionary. With mandatory distributions, the trust directs that net income or principal must be distributed at certain points in time:

• In some cases, net income distributions begin automatically when you reach a certain age and continue annually (or more frequently) until the trust terminates or you no longer have an interest in the trust.
• Trust principal may be automatically distributed to you (or become available for withdrawal) when you reach specific ages. For example, half the principal may become available upon request once you reach age 35, with the balance becoming available at age 50.

If distributions are not mandatory, you will need to request distributions from the trustee who may have discretion to make income and principal distributions to you based on the standard provided by the trust agreement:

• A trustee who is also a beneficiary or related to the beneficiary will be limited to distributions based on an “ascertainable standard” that includes health, education, maintenance and support.
• An “independent” trustee, who cannot be related to the beneficiary, may be granted a more liberal distribution standard.
• Sometimes the trust will allow for certain principal distributions based on life events (e.g., paying for a wedding, making a down payment on a home or starting a business).
• Some trusts also include a withdrawal power, which permits a beneficiary to request the distribution of a certain percentage of the trust assets each year.

Trustees may be required to consider your other available financial resources before approving a distribution. You may need to provide a budget, personal financial statement, income tax returns or other documentation to support your distribution request.

If you’re the beneficiary of an irrevocable trust that was created by a family member to provide you with financial resources and security, the following are a few questions you may want to ask your trustee to better understand the terms, benefits and options relating to your trust:

• Does the trust require periodic income distributions? If so, how frequently?
• Does the trust include distributions of principal at certain ages or upon other milestones?
• Can I request additional discretionary distributions?
• Can trust assets be used for specific purposes (e.g., buy a home, start a business, fund an education)?
• Does the trust terminate at a particular time? If so, who receives the remaining trust assets?

You should also take time to learn how the trust assets will be invested. Distributions of trust income are made up of interest, dividends, rents, royalties, etc. that may be taxable, so ask: 

• Which of the payments I receive will be taxable to me?
• What’s the investment objective for the trust portfolio?
• What investments are being held in the trust and how/why were they chosen?
• How much income is expected to be produced by the portfolio?

Find out whether you have some control over the ultimate distribution of the trust (either during your lifetime or through your estate). A few good questions to ask:

• Do I have any control over the ultimate distribution of this trust?
• What happens to any remaining trust assets when I pass?
• What does it mean to have power of appointment?
• Is that power in any way limited in its scope?

Finally, inquire as to whether you’ll have the opportunity to become a co-trustee or the sole trustee of your trust, and if so, ask:

• When I become a trustee, what duties will I have and how can I best prepare myself for that future role?

When’s the best time to sit down and discuss your trust? Ideally, as soon as you find out about its existence.

• Make sure you meet regularly with your trustee.
• Obtain a copy of the trust document for your files.
• Carefully review the trust account and investment statements you regularly receive.
• Talk to both your tax advisor and attorney about the specifics of the trust, and sit down with your financial advisor to discuss how the trust affects your plan.

Knowing that you’ll have access to a sizeable inheritance at some point in the future can open up a world of new planning opportunities and impact how best to direct your existing portfolio assets.