Beneficiary of Trust: Definition and Role in Estate Planning

What Is a Beneficiary of Trust?

A beneficiary of trust is the individual or group of individuals for whom a trust is created. 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. 

Key Takeaways

  • Trusts are often established to transfer wealth to children but they can also be used for protection against gift and estate taxes.
  • A beneficiary of trust is the individual or group of individuals for whom a trust was created.
  • The person who creates a trust also determines the trust beneficiary and appoints a trustee to manage the trust in the beneficiary's best interests.
  • The rights of beneficiaries generally depend on the type of trust and state laws.
  • However, all beneficiaries typically have the right to monitor trust activity and take legal action if they suspect the trustee has breached their fiduciary duty.

How a Beneficiary of Trust Works

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 the parent’s 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 their 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 the 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. 

Example of a Beneficiary of Trust

A grantor has named a beneficiary, Sam, in a trust. The grantor determines how the funds in the trust will be administered, and for which purposes they will serve. For example, it may state that a certain amount of funds are to be directed to education for Sam, the beneficiary, over a given time period and at a certain age.

Trust Beneficiary Rights

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 that outline 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, beneficiaries can request an accounting of trust investments from the court.

If beneficiaries suspect that the trustee has breached their fiduciary duty to prudently manage trust assets with due diligence, they 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 can't reasonably be accomplished before the trust can be terminated.

How Do Trust Distributions Work?

Most often, distributing assets from a trust can take one of three approaches. First, assets can be disbursed outright, which is where the assets in the trust carry no restrictions. Second, distributions may be staggered over time, and third, the trustee may determine when the assets are distributed. Importantly, the grantor of the trust determines how the distribution is conducted.

Can a Trustee Remove a Beneficiary From a Trust?

While beneficiaries can be removed from a trust by a trustee, it is uncommon. There are two conditions where it can occur: if the grantor expressly indicates that a trustee can remove a beneficiary in the trust documents, or if the trustee is also the grantor.

What Are the Rights of the Beneficiary?

While beneficiary rights can differ from one form of trust to another, overarchingly, beneficiaries can monitor the trustee and the activity in the trust. Typically, trustees issue an annual report of the trust's performance, gains, losses, and expenses. Beneficiaries may take legal action if they aren't adequately kept up to date or if they suspect the trustee has breached their fiduciary duty while overseeing the trust.

Article Sources
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  1. Keystone Law Group. "Trust Beneficiary Rights | Can a Beneficiary Sue a Trustee?" Accessed Sept. 23, 2021.

  2. Merrill. "Beneficiary of a Trust? What you Need to Know." Accessed Sept. 23, 2021.

  3. Free Advice | Legal. "The Rights of Trust Beneficiaries." Accessed Sept. 23, 2021.

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