Stages of Living Trust Distribution

By John Stevens J.D.

The person in charge of distributing assets held in a living trust to the trust beneficiaries is called the trustee. The process of distributing the trust property is a bit more involved than simply handing property over to the beneficiaries. The trustee must identify the trust property, because it is this property that the trustee is responsible for. After notifying the beneficiaries of important information, the trustee must value the property and pay off the debts of the person or persons who created the trust. Only then can the trustee distribute the trust property.

The person in charge of distributing assets held in a living trust to the trust beneficiaries is called the trustee. The process of distributing the trust property is a bit more involved than simply handing property over to the beneficiaries. The trustee must identify the trust property, because it is this property that the trustee is responsible for. After notifying the beneficiaries of important information, the trustee must value the property and pay off the debts of the person or persons who created the trust. Only then can the trustee distribute the trust property.

Identifying Trust Property

A trustee has a legal duty to collect and protect trust property. A property drafted living trust document is accompanied by a page at the end that lists the assets held by the trust. This page is usually titled “Schedule A” or something similar. A living trust created by a married couple may have more than one schedule. If a spouse owned non-marital property, that non-marital property is likely listed on one schedule, Schedule A, for example, and the marital property on another schedule, such as Schedule B. If both spouses owned non-marital property, the trust document might have three schedules. If the schedule does not specify whether it lists marital or non-marital property, language in the trust document will specify which schedule identifies the property type.

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Notifying Beneficiaries

The trustee holds the property in trust for the benefit of the beneficiaries until the trust property is distributed. The trustee owes a legal duty to keep the beneficiaries informed about the trust property. This duty is designed to prevent the trustee from mismanaging the trust assets rather than handling them with the best interests of the beneficiaries in mind. To satisfy this duty, the trustee must notify the beneficiaries that the person or persons who created the trust have died, the trustee is now in charge of the trust and the recipient of the notice is a beneficiary of that trust. Identify the trust beneficiaries by reading the terms of the trust document carefully. If the trust document does not expressly refer to a person as a beneficiary, a beneficiary is anyone to whom the trustee must distribute trust property.

Valuing Property

Before the trustee can distribute trust property to the beneficiaries, he must first determine the value of the trust property. Determining the value of the property may be necessary to determine whether the trust estate has enough money to pay off the debts of the person or persons who created the trust. Determining the value of the trust assets may also be required if the trust document provides that a beneficiary is to receive an amount equal to the value of a particular asset. For example, assume the trust document requires the trustee to deliver a valuable painting to one beneficiary and an amount equal to the value of the painting to another beneficiary. To determine how much money to give the beneficiary that is not entitled to the painting, the trustee must have the painting appraised.

Paying Debts

Before distributing any trust property, the trustee must pay off any debts left by the person or persons who created the trust. Failing to pay these debts may allow creditors to force the beneficiaries to return the trust property. For example, assume that a mother creates a living trust and leaves a coin collection worth $10,000 to her son. Assume further that the mother’s credit card balance at the time of her death was $7,500. Before the trustee can distribute the coin collection to the son, she must pay off that credit card debt. If the trustee distributes the coin collection to the son and there is not enough money to pay off the debt, the credit card company can force the son to return the coin collection. The trustee may then have to sell the collection, pay off the debt and distribute the balance to the son.

Distributing Trust Assets

The trustee must always distribute the trust property in accordance with the terms of the trust document. If the trustee makes a mistake when distributing the trust property, such as distributing too much or too little to a beneficiary, the beneficiaries can sue the trustee. There are a number of ways that living trusts can direct a trustee to distribute trust property. The most straightforward instruction is to identify a specific piece of property and a specific beneficiary. A living trust may instead use broad language, such as “I direct the trustee to distribute all of the trust assets to my two daughters, Samantha and Jennifer.” Some assets, such as cash, are easily divisible. Other assets, such as a table, cannot be divided without destroying their value. In this situation, the trustee may sell the table and divide the proceeds from the sale among the beneficiaries, or may give the table to one beneficiary and some other asset worth half the value of the table to the other beneficiary.

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Tax Treatment of Living Trust Distributions

References

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