How Do Trust Funds Pay Out to the Trustees?

Aug 23, 2022 | Financial Trust Legal Blogs | Elder Law P.A

Trust funds offer an excellent way to protect your assets after you’re gone, but they can be a bit confusing if you’ve never created a trust before. You may be a bit confused as to the benefits of using a trust, who might benefit from one, and even have simple questions like “How do trust funds pay out?” Understanding this key estate planning tool can help you better understand whether it’s right to meet your needs.

Trust Funds – The Basics

A trust is one way to distribute your assets to beneficiaries after your death. In this scenario, because you’re creating the trust, you’re called the trustor or the grantor. You, in turn, designate a trustee to manage the trust, and one key responsibility for that person is to actually make sure the beneficiaries get the assets according to your wishes.

The person who gets the assets you put in the trust for them is called the beneficiary. In most cases, when you create the trust, you specifically state how and when the assets are to be released to your beneficiary. For example, you might create a trust for your young child. You would probably create a revocable trust that will distribute the assets to the child after he reaches age 18, then he can use them as he likes. While you’re alive, you can change and alter those terms as you like, even changing beneficiaries.

You can also create an irrevocable trust. In this situation, you can’t change the trust without prior approval from the beneficiary, but you still get to decide how things will be distributed. For example, you may want your daughter to go to college, so you create an irrevocable trust to set aside funds only for college. You can’t change that once you’ve set it up.

The Benefits of a Trust

Why do so many people decide to place their assets in trust? And how do trust funds pay out once you want to retrieve those assets? There are actually a number of reasons people create trust funds. First, it helps to eliminate any feuds and reduces the overall risk of contested assets. It also helps to avoid probate and may help to lower estate taxes. It may also create more versatile management of your overall estate because the assets can be flexibly distributed.

The great thing about trusts is that you are allowed to establish any condition before the assets can be distributed. For example, you can state that your son will only be eligible to receive the funds after age 30 if he remains married or he can receive $3,000 a month for the next 20 years if his medical condition has not improved. The trustee will make sure that the beneficiary meets these eligibility criteria before disbursing the funds.

When you create the trust, you state how and when the assets should be distributed to the beneficiaries. You can also stipulate or set some rules that the beneficiaries must meet before they can receive the funds, which may give you some peace of mind. For example, you may have written in the trust that your daughter is to get $2,000 a month after the age of 18 but only if she enrolls in college and stays with a degree program. If your daughter decides not to enroll in college, she wouldn’t be able to access that money.

Depending on how the trust is created, you may even find some tax relief, particularly if you’re creating an irrevocable trust. Beneficiaries, however, will not face the same tax relief. Depending on the trust and assets, estate and income tax payments may be required.

How do Trust Funds Pay Out?

In general, the answer to this question depends on the type of trust. With a revocable trust, the beneficiary gains access to the assets after the grantor has passed away. However, with an irrevocable trust, the process of ensuring your beneficiaries gain access to the assets can take years. The conditions of the trust must be met.

There are three key methods of transferring assets from a trust.

  1. Total Distribution of the Assets at Once. The grantor can create a trust so that the funds will be distributed to the beneficiary immediately after he or she has passed. To make this work, you have to avoid limitations or restrictions on the transfer of the assets. This can be used for any asset type. Money can be given as cash or a check. Real estate transfers can be made by changing the deed or selling the property and giving the money to the beneficiaries. Even though this method of fund transfer is easy and straightforward, it lacks the protection of the funds. If the beneficiary doesn’t know how to manage things well, this could be a serious problem.
  2. Assets Distributed Over Time. You can also create a trust where the funds are distributed over time. For example, you can state that the beneficiary can be paid $50K a year for the next 10 years or be paid $4,000 a month after he reaches age 18 and until he gets married. You can set any time condition on the distribution of the assets.
  3. Trustee Managed Distribution. Finally, the last method of asset transfer relies on the judgment of the trustee. The grantor may allow the trustee to decide how much of the assets are distributed and when they are distributed. This is called a discretionary trust. For example, if the beneficiary is a child with no money management skills, this works well, as the trustee can help decide what’s the perfect purchase and what may be a waste of money.

Asset Distribution Time Limits

No matter what method of asset distribution you choose, it’s important to note that there is no law stating that the funds have to be transferred to the beneficiaries in a specific amount of time. In general, however, the process should take a reasonable amount of time. The longer it takes to transfer the assets, the more expensive it becomes to maintain the trust. This is because the trustee has to be paid, and there are maintenance fees. Hence, you should always find out about the cost of the trust, its maintenance, and the fees of the trustee before you create the trust. You may want to have the assets transferred within a relatively short period of time to avoid these long-term fees.

Withholding Funds

A trustee cannot withhold funds. They are legally responsible to carry out the terms of the trust you set forth. In short, they will do whatever the trust asks them to do.

A beneficiary, though, can actually contest the trust. If they want complete access to it, if they want the funds better distributed, or if they believe a trustee is not doing his or her job, they can sue the trust.

An Estate Lawyer Can Help

If you’re working to learn more about how to create a trust, or you’re a beneficiary and you want to better understand how to withdraw money from a trust fund, your best option is to speak with a qualified estate attorney. But if you still have questions, please feel free to contact us today! We have years of experience helping Floridians, and we’d be happy to help you too.

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