DEFINITION of 'Beneficiary Of Trust'

A beneficiary of trust is the individual or group of individuals for whom a trust is created for. The trust creator or grantor designates beneficiaries and a trustee, who has a fiduciary duty to manage trust assets in the best interests of beneficiaries as outlined in the trust agreement. 

In addition to transferring wealth to beneficiaries such as children, individuals also establish trusts to secure certain gift and estate tax protections. 

BREAKING DOWN 'Beneficiary Of Trust'

Beneficiaries of trust generally fall into two categories. 

One type of beneficiary is ultimately entitled to take ownership and control of trust capital and the income it generates as outlined in the trust agreement. For example, a parent can establish a trust for a child giving the beneficiary control of its assets when the child reaches an age of maturity or upon death. This arrangement is common with revocable trusts, which distribute assets to beneficiaries upon the grantor's death. The identity of beneficiaries is up to the grantor, who can change beneficiaries or terminate the trust during his or her lifetime.

Beneficiaries of an irrevocable trust generally can't be changed and trust terms usually can't be amended without the beneficiaries' permission. However, the grantor still decides how trust principal and income may be distributed to beneficiaries. For example, an individual can set up a trust account to fund a child's educational expenses. The grantor can appoint the trustee to distribute funds to meet this goal without giving the child complete control over how trust income is spent. 

Rights of Trust Beneficiaries 

State law ultimately governs the rights that beneficiaries have to different trusts, but they typically have a general power to monitor the trustee and trust activity. Trustees usually send out annual trust reports to beneficiaries outlining the trust asset's gains, losses and expenses such as commission fees paid out. If a trustee fails to send at least one annual report, however, beneficiaries can request an accounting of trust investments from the court. 

If beneficiaries suspect that the trustee has breached his or her fiduciary duty to prudently manage trust assets with due diligence, beneficiaries can take legal action to replace or sue the trustee. These actions are generally handled by filing a petition with the local probate court. In some cases, the trustee may be held liable for loss of trust principal and for income not realized due to misconduct. Such violations can include bribery, extremely poor investment decisions and profiting at the expense of the trust. 

If all beneficiaries are "adults of sound mind" and agree to terminate a trust, they can take legal action to do so. In most cases, the court would have to rule that the grantor's objectives for creating the trust have been met or they can't reasonably be accomplished before the trust can be terminated. 

 

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