What to Know About Receiving an Inheritance
The passing of a loved one is a difficult experience. That can make the complexity and emotions around receiving an inheritance even more stressful. To ease the process, you need to familiarize yourself with the terms and details of your inheritance. That way, you can maximize its impact now and into the future.
Outright Inheritance Vs. Assets Held in Trust
An inheritance can take many forms. Stocks and bonds, cash and real estate are commonly passed on to beneficiaries. Valuables like jewelry, works of art and silver or gold items are also frequently passed on. There are also more complicated assets that can be included in an inheritance, like patent or trademark rights or an ownership interest in a company.
Whatever the nature of the assets, they can be passed directly to a beneficiary or used to fund a trust. When wealth is put into a trust, assets are managed by trustees. You can receive distributions over the course of the trust based on the instructions set forth when the trust was made.
What to Expect as a Trust Beneficiary
Becoming a trust beneficiary comes with rights. You’re entitled to examine the trust document, which dictates the rules of how the trust assets will be maintained and under what circumstances they’ll be distributed.
As a trust beneficiary, it’s natural for you to want answers about how you can get the maximum benefit from the assets. You’ll also want to understand how you can gain access to them per the terms of the trust.
Question: What are my rights as the beneficiary of a trust?
It’s vital to know about the management of the trust. The trustee should provide you with an accounting of trust details, including distributions, income earned and expenses associated with the trust. Beneficiaries typically receive an annual financial report from the trustee. Specific terms of the trust may require more or less reporting.
Question: Will I be paid from the trust regularly?
Distributions from a trust are not all handled the same way. The terms of your trust dictate the circumstances under which you will receive a distribution. In many cases, the trustee has the authority to decide whether trust income will be paid annually or according to another timetable.
Some trusts allow beneficiaries to ask the trustee for a special distribution to cover substantial expenses. The trustee typically has the authority to make these decisions.
Trusts can also grant the trustee authority to make special distributions tied to specific purposes, such as to cover medical problems or educational expenses. You should discuss with the trustee the various scenarios that may allow you to gain access to the income of the trust or the assets that fund the trust. Trust assets and trust income are often treated differently.
Question: When will the trust terminate?
Trusts can last for generations. How long your trust will last depends on the rules put in place when it was created. Some trusts are created to last exactly as long as the life of the beneficiary or beneficiaries. Others are created to last for a limited period of time.
A trust can be built to distribute its assets in chunks. For example, you could receive one-third in five years, another third in 10 years, and the rest in 15 years. When the assets are all distributed, the trust dissolves.
For trusts that have no set endpoint, the lifespan of the trust may depend on your spending habits. Once the trust’s assets are expended, the trust is done. If you use the trust sparingly, requesting fewer distributions and avoiding requests for larger sums, your trust may last you the rest of your life.
Question: Who is tasked with overseeing the assets of the trust?
The responsibility for handling the trust’s affairs legally falls on the trustee. They must keep records, invest the assets properly and administer the trust on an ongoing basis. For this reason, beneficiaries need to keep in touch with the trustee to ensure that things are being handled correctly.
Good communication between the trustee and beneficiaries can lead to more efficient financial management and timely investments. For example, if the trust allows for flexibility in distributions, communicating with your trustee about how much money you will be requesting from the trust and when it will be distributed gives the trustee time to make the best decisions about what to sell and when to sell it if the trust needs to raise cash.
Question: Am I responsible for paying estate taxes on what I inherit?
In most cases, the estate pays estate taxes before assets are distributed.
Only certain estates trigger estate tax liability. Assets that exceed the federal estate tax exemption are taxed at a 40% rate. The estate tax exemption amount for a U.S. citizen in 2024 is $13.61 million per person.
Although it is unlikely that you would be responsible for estate taxes, you probably would be subject to income taxes on the distributions. Therefore, you need to work with your tax advisor to determine what your income tax liability might be.
Question: What happens when different beneficiaries have different ideas about how trust assets should be used?
It’s important to understand that trusts are often set up to serve the needs of multiple beneficiaries. A trust designed to benefit both current and future generations will typically involve interests that don’t line up. The current generation wants to be paid now. Future generations will want to limit current distributions to maximize the trust’s assets later.
By the time you inherit, the terms of the trust have been set and you’re subject to whatever distribution terms the trust dictates. You have little, if any, control over trying to change how distributions are made.
Balancing competing interests is something that should be considered when the trust is created. If the trust document is comprehensive and adaptable, the balance between investing and distributing can be set by the trust’s creator. If you are anticipating receiving an inheritance, it’s important to talk to the trust creator about how they plan to distribute your share to you. That may be a difficult conversation to have, but it sets clear expectations for everyone.
Get Expert Help: Contact Our Los Altos Estate Planning Attorney Today
At the Law Office of Janet L. Brewer, we offer extensive experience handling a wide variety of estate planning concerns. By speaking to an experienced estate lawyer, you can ensure that all of your goals and aspirations are built into your estate plan. Call us today at 650-325-8276 to schedule a consultation.
