When Can a Trustee Refuse to Distribute Assets to a Beneficiary?
Trusts can be powerful estate planning tools to protect and distribute assets. But what happens when a beneficiary wants or needs money from the trust, and the trustee refuses to distribute? As an estate planning law firm in North Carolina, we often get asked – can a trustee withhold money from a beneficiary?
The short answer is sometimes trustees can refuse distributions, but beneficiaries may have legal recourse. There are duties trustees owe beneficiaries and types of trusts that dictate distribution rules. Let’s explore when trustees can and cannot refuse disbursements.
What is a Trust, and Who is Involved?
First, a quick trust primer. A trust is a legal arrangement where assets are transferred to a trustee to manage and distribute for specific beneficiaries. The person who creates the trust is called the grantor, settlor, or trustor.
The trustee oversees the trust assets and administers the trust terms. Trustees have legal duties, like prudently investing the assets and making distributions. Beneficiaries receive benefits from the trust, like income distributions or access to principal.
Fiduciary Duties Govern Trustee Actions
A vital aspect of a trustee’s role is their fiduciary duty to the beneficiaries. This legal obligation requires the trustee to act in the beneficiaries’ best interests when managing and distributing trust assets.
Trustees must invest assets wisely, provide accountings, and make disbursements according to the trust terms. If trustees breach their fiduciary duties, beneficiaries can take legal action.
Following Trust Terms is Paramount
Another central trustee duty is adhering to the terms and distribution provisions in the trust document. The grantor establishes these rules on how much, when, and what conditions must be satisfied before the trustee can or must distribute assets.
For example, many trusts state beneficiaries cannot access principal until they reach a certain age, like 30 or 40. The trustee would breach their duty by disbursing the principal before the Beneficiary meets the age requirement.
Discretionary vs. Mandatory Distributions
One factor determining the trustee’s flexibility to refuse distributions is whether the trust is discretionary or non-discretionary.
Discretionary trusts give the trustee discretion over when and how much to disburse to beneficiaries. The trustee can evaluate requests and refuse unreasonable ones.
Non-discretionary or mandatory trusts require the trustee to make disbursements or distribute all income to beneficiaries at certain times, like quarterly or annually. The trustee has little or no flexibility to refuse mandated distributions.
Types of Trusts
There are two main types of trusts:
- Revocable trusts can be changed or terminated by the grantor during their lifetime. The grantor typically serves as the initial trustee. These are commonly used in estate plans as an alternative to wills.
- Irrevocable trusts cannot be changed or undone once created. The grantor gives up control of the assets, and the terms of the trust are permanent.
In addition, some trusts give the trustee discretion over distributions. Discretionary trusts allow the trustee to decide how much to distribute to beneficiaries rather than requiring set distributions at certain times.
When Can a Trustee Refuse to Distribute Assets?
While trustees typically must follow the distribution instructions in a trust, there are some circumstances where they may be able to withhold funds legally, including:
The Trust Instrument Allows Discretion
If the trust is discretionary, the trustee may have broad discretion over distributions. The language granting discretion is typically found in the distribution provisions of the document.
The level of discretion can vary widely among trusts. Some allow complete discretion, while others limit it to specific situations like education expenses or health emergencies. Trustees should have a trust attorney review the document.
The Beneficiary Has Not Met Conditions
The trust may require the Beneficiary to meet certain conditions before receiving a distribution. Common examples include reaching a specified age, graduating from college, or overcoming a drug addiction.
If the Beneficiary has not met the required conditions, the trustee may be justified in withholding funds. Again, the trustee should verify the trust terms allow this.
The Beneficiary Cannot Be Located.
Trustees must make reasonable efforts to locate beneficiaries before transferring trust assets. If a beneficiary still cannot be found after diligent searching, the trustee may be able to keep their share in the trust.
The trust often names contingent or alternate beneficiaries to receive the missing Beneficiary’s share. The trustee can then distribute assets to the contingents.
The Beneficiary Declines the Distribution
Beneficiaries can disclaim or refuse an inheritance from a trust for various reasons. For example, they may want to avoid creditor claims or tax consequences.
When a beneficiary declines a distribution, the trustee cannot force them to accept it. Instead, they may distribute it to alternate beneficiaries if any are named.
What Recourse Does a Beneficiary Have if Improperly Withheld?
Beneficiaries can take legal action if trustees wrongly withhold required distributions. Common options include:
Petition the Court for an Accounting
Beneficiaries can petition to formally compel the trustee to account for all trust transactions. This creates a record of distribution history and may reveal improper withholding.
Petition for Instructions
Beneficiaries can ask the court to clarify whether distributions can or should be made. The court can provide instructions to the trustee on carrying out their duties.
Lawsuit for Breach of Fiduciary Duty
If the trustee’s refusal to distribute violates the terms of the trust, the Beneficiary can sue for breach of fiduciary duty. This may result in the trustee being removed and ordered to pay damages.
Petition for Removal and Replacement of Trustee
Beneficiaries can request the court remove a trustee who is not properly administering the trust. The court can appoint a new trustee to take over management.
There Are Limits on Trustee Refusal Power
While trustees have some discretion to refuse distributions, they cannot do so arbitrarily or in bad faith. Refusing to make any disbursements or refusing to provide an accounting would likely constitute a breach of fiduciary duties.
Trustees also cannot refuse to follow explicit mandatory distribution provisions without justification. And beneficiaries have legal options to compel compliance.
When in Doubt, Seek Legal Counsel
Consult competent legal counsel if you are a trustee dealing with an unreasonable beneficiary or a beneficiary coping with a limited trustee. An estate planning attorney can guide you in navigating these tricky situations.
The North Carolina trust attorneys at Cary Estate Planning have extensive experience advising trustees and beneficiaries on their rights and duties. If you need assistance ensuring the trustee administers your trust correctly, contact their office for a consultation. Visit https://caryestateplanning.com/ today.
