How a trust is distributed depends on two things: the relevant trust law and the document that created the trust. Trust law varies based on the state where the property is located. The specific rules regarding distribution is defined by the declaration of trust, which is drafted according to the trust creator’s wishes. The three main questions to ask when determining the effect of a deceased beneficiary on a trust are: do the beneficiary’s heirs have a right to the trust; are there any other surviving beneficiaries; and does the creator of the trust want to change the terms.
Trusts are a type of device used to transfer property. The creator of a trust conveys some of her property into a distinct legal entity, relinquishing ownership. The creator names several people to benefit from the assets in the trust, otherwise known as beneficiaries. The beneficiaries do not control the property in the trust. Instead, an individual, or trustee, manages the assets for the beneficiaries' benefit based on guidelines established by the trust's creator. Trusts are often used when the creator does not believe the beneficiaries are prepared to manage the trust's assets, such as when the beneficiaries are children.
While each state drafts its own set of trust laws, there has been a movement to create a standard trust code. As of publication date, the Uniform Trust Code has been enacted in 23 states. The UTC has been endorsed by the American Bar Association and AARP. The UTC offers a good general framework. However, when attempting to determine the rules specific to your situation, review your state laws and consider consulting with a licensed attorney.
Beneficiary's Rights After Death
The rights of a beneficiary’s estate to a trust depend on the declaration of the trust. Many times a trust will allow a beneficiary to use the property only for as long as the beneficiary lives. When the first beneficiary dies in that situation, the trust will automatically go to a new beneficiary, and the former beneficiary's estate will have no rights to the trust's assets. For example, a trust may say "to Jane for the rest of her life, then to John." If both Jane and John pass away, John’s estate may have rights to the trust depending on the phrasing of the trust document.
No Beneficiary Left
If there are no more living beneficiaries, the trust may terminate or be modified. Under the UTC, when a trust no longer has a purpose that can be achieved, the trustee must go to the appropriate local court to determine what is to be done with the trust’s property. The purpose of a trust is to distribute assets to beneficiaries, so without beneficiaries a trust has no purpose. When the trust terminates, the property is distributed either based on a plan described in the trust document, or using the trustee’s best judgment. You should consider consulting with an attorney and double checking your state’s law to ensure that this standard applies to your trust.
Trust Creator Rights
When a beneficiary passes, the creator of the trust may want to change the terms to reflect the new circumstances. Assume a trust names Jane as a beneficiary for as long as she lives, and then John becomes beneficiary after she passes. If both were to die, the creator of the trust may want to alter the terms of the trust so that Jane's and John’s relatives become the new beneficiaries. This would apply in a revocable trust, where the trust's creator has the ability to change the terms, and beneficiaries, whenever he wants.