Handling an Inheritance: How a Corporate Trustee Can Help

By Margaret A. Zywicz, Senior Trust Officer, First Republic Trust Company
May 23, 2023

When you include a trust in your estate plan, you have to name a trustee — a person or entity whose job is to ensure the trust is managed and distributed according to the instructions laid out in the trust.

One of the major benefits of naming a corporate trustee is their ability to provide expert guidance to beneficiaries and help them navigate often-complex questions and decisions regarding their inheritance.

The many roles of a corporate trustee

A trustee’s key role is to effectively manage the trust’s assets while following the requirements the grantor laid out in the trust documents. Given the ever-changing legal and financial regulatory environment, trustees must stay abreast of proposed and current trust-related laws. They also must comply with any administrative requirements, such as tax filings.

But they also serve as a key resource to beneficiaries who often have many questions about how their trust works or concerns about receiving and sustaining their inheritance. The trustee can walk them through the trust’s provisions and explain key requirements — so they aren’t searching for answers during difficult times.

Here are common questions and misconceptions beneficiaries may bring up with their trustee:

  • I had no idea my parents left me this much money.
  • I had no idea my parents had this much debt.
  • How am I going to support myself?
  • How do I handle this inheritance?
  • How long will it take for the distributions to come?
  • Why can’t I have all the money at once?
  • Why is the trustee preventing me from accessing my own money?

Ideally, a beneficiary would know at least the basics of how their trust works by the time the grantor passes away. Realistically though, many beneficiaries have little understanding of their trust’s provisions — and their corporate trustee thus becomes a valuable advisor.

Understanding discretionary powers

Many trust documents give the trustee “discretion” over distributions of income and principal to the beneficiaries. This means the trustee determines the amount the beneficiary receives from the trust. This is often a difficult concept for a beneficiary to understand.

There can be a range of terms used in trust documents that guide the trustee’s discretion over distributions. For example, some trusts grant the trustee “full and absolute discretion” with no further guidance. When a trust document provides broad discretion to the trustee, a letter of intent drafted by the grantor in their own words and accompanying the trust document can be extremely helpful. A letter of intent offers only guidance, not strict instructions, and may answer, in broad terms, what the grantor hopes the trust will provide to the beneficiary. In the best-case scenario, the trustee has an opportunity to discuss the grantor’s intent with the grantor, but that rarely happens.

Many trusts use the HEMS (health, education, maintenance and support) standard, but rarely does the grantor truly understand how that term is implemented in practice. When distributions are limited to HEMS, it is up to the trustee to determine the beneficiary’s financial needs and to balance those needs with the resources available. For example, the trustee must balance many factors, including the term of the trust, the ages of the different beneficiaries, and the current and potential future needs of the different beneficiaries. Again, a letter of intent to guide the trustee when interpreting HEMS can be extremely helpful.

In practice, a trustee often will request a beneficiary to provide a budget when making a request for a distribution, whether under the HEMS standard or a broader standard. Although requesting a budget may be upsetting to a beneficiary at first, the trustee can walk the beneficiary through the process and explain the purpose. The trustee merely wants to carry out the grantor’s intent and doesn’t want to deplete the trust if that was not the intent.

Maximizing the trustee relationship

Dedicated trust officers also have access to a wide range of expertise, including investment management, insurance and estate planning. The trust grantors and beneficiaries thus have the benefit of this expertise. A trust officer works closely with beneficiaries to help them understand the terms of their trust and maximize their inheritance. For example, if a beneficiary of a net income trust doesn’t want or need the net income, the portfolio could be adjusted to grow principal and reduce income. If estate taxes are a concern, distributions may be taken from a non-tax-exempt trust rather than a tax-exempt trust. An experienced trust officer can make adjustments to the current situation and abide by the trust terms.

Some families may want to appoint a family member as co-trustee who partners with the corporate trustee. This gives the family member a greater role in overseeing the trust once the grantor passes away and allows them to tap the corporate trustee’s expertise and services. A family member may not want the responsibility and emotional stress that often comes with being the primary trustee, so being co-trustee allows them to leave major responsibilities to a corporate fiduciary.

An experienced and knowledgeable corporate trustee can take on many roles and work with both grantors and beneficiaries to achieve their long-term financial goals. It’s important for families to understand that role and find a corporate trustee that provides them with the best experience possible.

Strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you as is, does not constitute legal advice and is governed by our Terms and Conditions of Use, and we are not acting as your attorney. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.