Understanding Trust and Beneficiary Rights
While there are a number of different types of trusts, there are two that are most commonly used. One is called a revocable trust which means that the trustee has the right to modify or completely defund the trust. The second type of trust is an irrevocable trust which is used to gift property to a beneficiary with no rights to defund or modify the trust. There is various language associated with the creation of a trust, such as a living trust. However, this does not address the question that many beneficiaries have which is can a beneficiary can make deposits to a trust? First, it must be understood how the trust is set up and the purposes of the trust.
Registrations for a trust would look something like this:
John J. Doe, Trustee Doe Family Revocable (or irrevocable depending on the terms of the trust) Trust; FBO Catherine Doe, Beneficiary U/A/DTD 04/26/11. This form of registration shows the name of the trustee, the name of the trust, the type of trust as well as the name of the beneficiary and the date of the trust agreement. Under these terms, upon the death of John J. Doe, the assets of the trust would then become the property of Catherine Doe. Once this occurs, there would be a new registration that would read something like this:
Catherine Doe, Beneficiary; Doe Family Revocable Trust U/A/DTD 04/26/11. This form of registration clearly shows the brokerage or financial institution that the assets from the Doe Family Trust now belong to Catherine Doe. There is now distinct legal language which governs the beneficiaries rights to the assets. Because a trust is an estate-planning tool, upon the death of the trustee, the beneficiary gains control of those assets.
Beneficiary: Trusts Transferred
When the beneficiary of a trust takes control of the assets of the trust, they are under no further obligation to report those assets as a taxable event to the extent allowed by the Internal Revenue Service (IRS). The trust has served its initial purpose (e.g., the transfer of assets) and the agreement is no longer in effect. Provided that the beneficiaries of the trust do not have specific medical or financial needs that must be entrusted to a successor trustee or a conservator, the assets are now the sole property of the beneficiary.
Because of the unique tax benefits offered through the transfer of assets to a beneficiary through the trust process, the co-mingling of assets is not allowed. Beneficiaries may set up a new trust, transfer the assets to that trust and then add to those assets as a way of bypassing the estate taxes for their own estate, but they may not comingle the assets in the same trust. Another trust could be set up (using the same method as previously discussed) as the Catherine Doe Living Trust with specifically named beneficiaries or a sole beneficiary. In this instance, Catherine would be the trustee and therefore is allowed to deposit additional assets to the new trust.
Legal and tax ramifications of trusts are often confusing and can result in mistakes being made. Those who have become the owner of a trust due to being a named beneficiary should contact a qualified estate planning attorney or financial advisor with any questions that they may have regarding the appropriate use or comingling of trust assets.
- Estate Street Partners; Beatrice, Rocco; Beneficiary of a Trust https://www.ultratrust.com/beneficiary-of-trust.html
- Law Guru, Tarta, Steven W. Revocable Trusts https://www.lawguru.com/articles/law/trusts-wills-and-probate/revocable-trusts
- Author’s personal experience with over 10 years of dealing with trusts at financial institutions