What is a beneficiary of a trust? Describes basic categories of the exercises of the beneficiaries’ rights, two main categories of sequential interests of a beneficiary, the two beneficiaries from the trustees perspective.
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The Beneficiary is the reason for your Trust (contract). Your Beneficiary is the person who will enjoy the benefits of your Trust assets. They include wives, children, grandchildren, and charitable organizations of every color and variety.
The length of your Beneficiary is unlimited. The Beneficiary could include the original Grantor, but that would be self-defeating. Trusts should be irrevocable. The Grantor gives up his assets to gain asset protection, elimination of probate, elimination of estate taxes, and certain uncommon tax advantages. Any degree of control by the Grantor will render the Trust revocable and subject to court discretion.
The period of time of the trust depends on the selection of your Trust’s legal jurisdiction. Most states and countries have rules against “perpetuities.” That means your trust must have an end. Selection of your trust’s jurisdiction in the United States or outside the United States depends on the degree of risk you assume. Foreign Asset Protection Trusts (FAPT) are significantly stronger than domestic Trusts. Judgments are generally not enforceable outside the United States.
Categories of the Beneficiary of a Trust
There are two basic Trusts with regard to the exercise of the Beneficiaries’ rights:
- Beneficiaries of a Bare Trust (also known as a Simple Trust) are entitled to take actual ownership and control of the Trust. They have the right to the income and capital, and the Trustees act in accordance with the Beneficiaries’ wishes.
- Beneficiaries of an Express Trust have Trustees with additional duties and powers assigned in the Trust Deed. An Express Trust can either be an Inter Vivos Trust, which is created during the life of the Grantor, or a Testamentary Trust, which is enacted after the death of the Grantor (also known as the Will Trust).
When there are issues of sequential interests involved, such as tax implications, it’s important to note the two main sequential Beneficiary categories:
- Beneficiaries with a vested interest, such as Tenants For Life. A Tenant For Life owns the property or asset for the duration of their life, but upon their death, ownership ends. Because the property ceases upon the Beneficiary’s death, it cannot be inherited or left to heirs.
- Beneficiaries with a contingent interest, such as Remaindermen. A Remainderman is entitled to inherit property upon the death of the previous owner (Tenant For Life). For example, if the Grantor states in the Trust Deed that “Joe gets the property for life, then it goes to Susan,” Susan is the Remainderman.
Where the Trustee is concerned, there are two main types of Beneficiaries:
- Fixed Beneficiaries who have a fixed entitlement to the income and capital from the Grantor.
- Discretionary Beneficiaries, for whom the Trustees have discretionary powers regarding their entitlements.
The Trust Contract
The Trust document (contract) can be as short as three pages or as long as fifty pounds of paper. The more complicated the Trust, the more complicated its administration. Simplicity is key.
Trust assets may include your personal residence, investment accounts, other real estate, or your business—limited only by the valuable assets you wish to contribute to your Trust.
The Trust generally obtains a federal identification number and files its own tax return. Distributions to Beneficiaries may or may not be taxable, depending on the nature of the underlying assets.
A Trust may operate as a business, but it’s difficult for others to conduct business with a Trust because it is essentially a “private contract” between the Grantor, the Trustee, and the Beneficiaries. Business partners typically prefer to deal with recognized legal entities such as a Limited Liability Company (LLC), Corporation, or Partnership, which the Trust may own.
Understand these Important Facts on Trusts:
A Trust is a form of ownership controlled and managed by your designated “independent” Trustee. This completely separates responsibility and control of Trust assets from your benefits of ownership, meaning you no longer own or control your assets. The IRS recognizes numerous types of Trusts and other legal arrangements commonly used for wealth preservation and legal protection against lawsuits, elimination of probate, and elimination of estate taxes.
Grammar Note: Words such as Grantor, Revocable Living Trust, Trust, Beneficiary, and Trustee have been capitalized for readability and emphasis. Grammatically, they should be in lowercase.