Many people choose to use a living trust in addition to, or in lieu of, a Will to pass down estate assets. One reason people often choose to use a trust to distribute assets is the ability to direct when assets are distributed and even how assets are used by the beneficiaries. The benefit you gain by being able to dictate how trust assets are used, however, could be threatened if a beneficiary can sell or encumber her interest in the trust. Let’s explore whether or not a beneficiary cannot sell/encumber assets held by a living trust.
Selling or Encumbering Trust Assets
The Settlor (creator) of a living trust creates the terms of the trust within the trust agreement. Those terms determine how and when the trust assets are distributed to the beneficiaries of the trust. Those terms might call for a beneficiary to receive interest only for several years, or to receive staggered disbursements instead of a lump sum. For a beneficiary in need of money, knowing that a disbursement is coming at some point down the road, but isn’t available right now, can be frustrating. This is especially true if the beneficiary is having financial problems. On the other hand, the Settlor may have created a trust and distributed assets through the trust for exactly that reason – to prevent a beneficiary from squandering a lump sum of money. What of the beneficiary decides to simply sell his/her interest in the trust or use that interest as collateral for a loan? Can a beneficiary do that?
What Impacts a Beneficiary’s Control Over Trust Benefits?
Usually, trust property cannot be sold outright by a beneficiary; the property must be first transferred to the beneficiary and placed in his name. The Settlor’s intent, the number of beneficiaries, and/or the existence of a spendthrift clause can all impact a beneficiary’s right to sell trust assets as can the state in which the trust was executed.
The first place to look for an answer if you want to know if a beneficiary can sell his/her interest in the trust is the trust agreement. The provisions of the trust agreement govern the administration of the trust and must be followed by the Trustee. If a provision explicitly states that an heir or beneficiary cannot sell/encumber trust property, the Trustee is not permitted to allow a beneficiary to sell/encumber the property. The same is true for the trust intent. If selling/encumbering the trust property would be contrary to the stated intent of the trust, it cannot be done.
In addition, the Trustee is required to treat beneficiaries impartially and to always consider all beneficiaries (both current and future) when making trust decisions. If there is more than one beneficiary, The trustee cannot transfer property for one beneficiary to sell if it hurts the other beneficiaries’ interests. The only possible exception to this rule would be if the trust agreement specifically authorized doing so because the provisions of the trust agreement govern the trust.
Finally, if the trust agreement includes a spendthrift clause it will specifically prevent beneficiaries from transferring any portion of their interest in the trust to another party. Most states have upheld the validity of spendthrift provisions.
Please download our FREE estate planning checklist. If you have additional questions or concerns about a beneficiary’s ability to sell his/her interest in trust benefits, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.
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