When you learn that you are a beneficiary of a trust, you may assume that the assets designated for you effectively belong to you and that receiving some of your inheritance early should be relatively straightforward. That assumption can become especially tempting when you are facing a significant financial need, such as purchasing a home, paying medical expenses, starting a business, covering educational costs, or dealing with an unexpected financial emergency. Receiving an early inheritance from an Indiana trust, however, is not simply a matter of asking the Trustee to release the money. Whether an early or partial distribution can be made depends first and foremost on the terms of the trust agreement. The Trustee must also consider fiduciary responsibilities, the interests of other beneficiaries, remaining trust obligations, and the potential consequences of making a distribution ahead of the schedule contemplated by the trust. To help you understand where you stand, the Indianapolis lawyers at Frank & Kraft discuss the possibility of an early inheritance from an Indiana trust.
What Is an Early Inheritance from a Trust?
An “early inheritance” is not a specific legal category of trust distribution. Instead, the phrase commonly describes a beneficiary receiving trust property before the time when the beneficiary expected to receive a full distribution. For example, a trust might provide that you receive your inheritance outright when you reach age 35, but at age 30, you might ask the Trustee for $50,000 to use toward the purchase of a home. Similarly, after a parent’s death, you might ask the successor Trustee to distribute part of your inheritance before the Trustee has completed the entire trust administration process. While these situations are different, they both require an analysis of whether the Trustee has authority under the trust agreement to make the requested distribution.
The Trust Agreement Controls the Trustee’s Authority
Whether you are administering an Indiana trust and are faced with a request for an early distribution or requesting an early distribution as a beneficiary, the trust agreement should be the starting point. Indiana law imposes a duty on a Trustee to administer a trust according to its terms. Consequently, the Trustee cannot disregard the distribution provisions simply because a beneficiary has a legitimate need for money.
Moreover, trust agreements can approach distributions in very different ways. One trust might require the Trustee to distribute a beneficiary’s entire share when the beneficiary reaches a particular age while another might divide distributions into stages, such as one-third at age 25, another portion at age 30, and the balance at age 35. A third might keep assets in trust throughout the beneficiary’s lifetime while authorizing distributions for health, education, maintenance, support, or other specified purposes. Likewise, some trusts grant the Trustee broad discretion to distribute income or principal whenever the Trustee determines a distribution is appropriate while other trusts give very little discretionary wuthority to the Trustee.
If the trust requires the Trustee to retain the property until a particular date and provides no authority for earlier distributions, the Trustee generally cannot simply rewrite the Grantor’s instructions because the beneficiary would prefer to receive the money sooner. Conversely, if the trust gives the Trustee discretion to distribute principal before that date, an early distribution may be possible.
A Beneficiary Does Not Automatically Have the Right to Demand an Early Distribution
As a trust beneficiary, your rights depend on the interest created for you by the trust agreement. Indiana law recognizes that the extent of a beneficiary’s interest is determined by the terms of the trust. If the trust gives the Trustee discretion over distributions, you may be entitled to ask for a distribution without having an absolute right to receive one. Indiana law provides substantial protection for properly created discretionary interests and recognizes that such an interest may constitute an expectancy rather than an enforceable right to compel a particular distribution. The Trustee must determine what the trust permits and whether exercising discretion in your favor is consistent with the Grantor’s instructions and the Trustee’s fiduciary obligations.
Why Might You Request an Early Trust Distribution?
There are numerous legitimate reasons you might want access to part of an inheritance before the trust otherwise terminates. You might need money for a down payment on a home, graduate or professional education, significant medical treatment, or the purchase or expansion of a business. An unexpected job loss or family emergency might create another reason for requesting assistance. Whether the Trustee can respond favorably, however, depends on the language of the trust.
A trust authorizing distributions for health, education, maintenance, and support may provide a basis for certain expenses but not others while a provision granting broad discretionary authority may give the Trustee considerably more flexibility. The reason for the request can also influence the Trustee’s decision even when broad discretion exists. Asking for money to pay tuition may be viewed differently from requesting a substantial distribution for a speculative investment.
Early Distributions During Trust Administration Present Different Concerns
A different type of early inheritance request frequently occurs after the Grantor (trust creator) dies. By way of illustration, imagine that your parent’s Revocable Living Trust becomes irrevocable at death and ultimately directs the Trustee to divide the remaining property equally among you and your two siblings. You know that your share will eventually be approximately $300,000, so you ask the Trustee to distribute $75,000 immediately. The Trustee may have authority to make a partial distribution, but knowing that you will eventually receive substantially more than $75,000 does not necessarily mean the money should be distributed immediately. Before making significant distributions, the Trustee may need to identify and value trust property, determine outstanding obligations, address tax matters, resolve claims, sell property, maintain reserves for expenses, and determine what each beneficiary is entitled to receive.
The Trustee Must Consider Other Beneficiaries
Indiana law requires a Trustee managing a trust with multiple beneficiaries to act impartially while taking their differing interests into account. This obligation can become especially important when current and future beneficiaries have competing interests. For example, imagine that a trust allows the Trustee to distribute assets to you during your lifetime but directs whatever remains at your death to your children. Giving you a substantial early distribution may benefit you while reducing the assets eventually available to those remainder beneficiaries. The Trustee must consider both interests within the framework established by the trust. Likewise, if you and your siblings are equal beneficiaries, the Trustee should consider how an early distribution to you affects administration of the other shares.
What Should a Trustee Consider Before Making an Early Distribution?
If you are a Trustee, and the trust gives you discretion to make an early or partial distribution, exercising that discretion requires careful judgment. You should determine whether the distribution is consistent with the language and purposes of the trust. You may also need to evaluate the beneficiary’s circumstances, the amount requested, available trust assets, anticipated expenses, future distributions, tax obligations, and the interests of other beneficiaries. Liquidity can be particularly important because a trust might be worth $2 million but hold relatively little cash because most of its value consists of real estate or business interests. Making a large cash distribution, therefore, could require selling assets at an inappropriate time and/or leave the trust unable to pay upcoming expenses. You should also consider whether the trust contains specific instructions regarding the beneficiary’s other financial resources or the purposes for which distributions may be made. Documenting the reasoning behind a significant discretionary distribution can help demonstrate that you considered the relevant circumstances instead of making an arbitrary decision.
Do You Have Specific Questions About Early Inheritance from an Indiana Trust?
For more information, please join us for an upcoming FREE seminar. If you have specific questions or concerns about an early distribution from an Indiana trust, contact the experienced Indianapolis trust administration attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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