As a trust beneficiary, you may feel that you are at the mercy of the trustee, but depending on the type of trust, beneficiaries may have rights to ensure the trust is properly managed.
A trust is a legal arrangement through which one person, called a “settlor” or “grantor,” gives assets to another person (or an institution, such as a bank or law firm), called a “trustee.” The trustee holds legal title to the assets for another person, called a “beneficiary.” The rights of a trust beneficiary depend on the type of trust and the type of beneficiary.
If the trust is a revocable trust—meaning the person who set up the trust can change it or revoke it at any time–the trust beneficiaries other than the settlor have few rights absent unusual circumstances (such as financial exploitation of the trustee). Because the settlor can change the trust at any time, he or she can also change the beneficiaries at any time. Often a trust is revocable until the settlor dies and then it becomes irrevocable.
An irrevocable trust is a trust that is, by design, is intended to remain in place without changes. Some common reasons are estate tax savings on the death of a Grantor, protection from creditors, or for the preservation of special assets for generations to come. Arizona law provides certain mechanisms for changing some of the terms of an irrevocable trust to address changing circumstances. While some states only allow the trust terms to be changed except in rare cases by court order. Arizona law allows irrevocable trusts, in certain circumstances, to be “decanted” into a more modern trust as long as the beneficiaries are protected. Arizona also allows the trustee and all the beneficiaries to enter into settlement agreements to modify a trust under certain circumstances even without a court order (“non-judicial settlements”).
Beneficiaries of an irrevocable trust have rights to information about the trust and to make sure the trustee is acting properly. The scope of those rights depends on the type of beneficiary and the terms of the trust. Current beneficiaries are beneficiaries who are currently entitled to income from the trust. Remainder or contingent beneficiaries have an interest in the trust after the current beneficiaries’ interest is over. For example, a wife may set up a trust that leaves income to her husband for life (the current beneficiary) and then the remainder of the property to her children (the remainder beneficiaries).
State law and the terms of the trust determine exactly what rights a beneficiary has, but following are five common rights given to beneficiaries of irrevocable trusts:
Payment. Current beneficiaries have the right to distributions as set forth in the trust document.
Right to information. Current and remainder beneficiaries have the right to be provided enough information about the trust and its administration to protect their rights and to know how to enforce their rights.
Right to an accounting. Current beneficiaries are entitled to an accounting. Usually, trustees are required to provide an accounting annually, but that may vary, depending on the terms of the trust. Beneficiaries may also be able to waive the accounting.
Remove the trustee. Current and remainder beneficiaries have the right to petition the court for the removal of the trustee. Trustees have an obligation to balance the needs of the current beneficiary with the needs of the remainder beneficiaries, which can be difficult to manage.
End the trust. In some circumstances, if all the current and remainder beneficiaries agree, they can petition the court to end the trust. State laws vary on when this is allowed. Usually, the purpose of the trust must have been fulfilled or be impossible.