When a trustor dies, his or her trust beneficiaries are entitled to receive their shares of trust assets in accordance with the trustor’s instructions. The manner in which assets are distributed depends on the various rights that have been given to each of the beneficiaries. A key factor in determining possession rights is whether each of the beneficiaries has a vested interest or a contingent interest in trust assets. Fixed trust beneficiaries and discretionary beneficiaries are other categories of trust asset recipients. Most trust beneficiaries are people, although an entity, such as a school or charitable organization, may also be a named beneficiary.
Trust beneficiaries who have been given vested rights usually have fixed interests in the trust assets. For instance, a trust may grant Suzy the right to live on Blackacre for the remainder of her life. Suzy would have a vested right to live on Blackacre, which would end when she dies. She could not leave Blackacre to her heirs because she does not have an ownership interest in the property. A vested beneficiary’s right to use, possess, or enjoy trust assets may be delayed until a later time period or until the occurrence of a certain event.
A trust beneficiary who has a contingent interest in a trust only receive trust assets if certain triggering events occur. The triggering event is often the death of a primary beneficiary. For example, a trust may specify that Jane will become the owner of Blackacre if her sister Suzy dies. In this situation, Jane’s interest is contingent on the triggering event of Suzy dying. If Jane dies before Suzy, Jane would never be entitled to own Blackacre.
Generally, fixed trust beneficiaries are entitled to receive income and capital from trust assets as specified by the trustor in the trust document. Basically, a fixed beneficiary owns an equitable interest in his or her share of the trust assets. The trustee has limited or no discretion in determining when and how assets will be distributed to the beneficiary. Rather, the trustee must follow the trustor's instructions.
In a discretionary trust, the opposite is true. A trustee is customarily given limited instructions for managing the trust and is given broad discretion in handling specific trust administration issues. In this case, a trustee typically gets to decide when and how assets will be distributed to a beneficiary. For instance, the trustee may determine whether to accumulate annual income generated from trust assets or whether to pay that income out to the beneficiary.
