Although a Last Will and Testament remains the most widely used estate planning tool, trusts are an increasingly popular addition to the average estate plan. If you are contemplating the addition of a trust to your estate plan, you may also be wondering about the extent of control and flexibility your beneficiaries will have over their trust benefits. Specifically, can a beneficiary sell, gift, or encumber their trust benefits? The answer to this question largely depends on the type of trust you create, and the specific terms outlined within it. To better help you understand, the Los Angeles attorneys at Schomer Estate & Wealth Advisors discuss whether a beneficiary can sell, gift, or encumber trust benefits.
Understanding Trusts and Beneficiary Rights
A trust is a legal arrangement where a Grantor (the person creating the trust) transfers assets to a Trustee (the person or entity managing the trust) for the benefit of the beneficiaries. Because the rights of beneficiaries to sell, gift, or encumber their trust benefits depend on the type of trust and the specific provisions included in the trust document, it is important to understand how trusts are categorized.
Trusts can be categorized as living or testamentary trusts and further classified as revocable or irrevocable. A testamentary trust is established via a term in your Last Will and Testament and, therefore, does not become active until after your death. A living trust, as the name implies, is created and administered during your lifetime. A revocable trust can be altered or terminated for any reason by the Grantor during their lifetime. This means that the Grantor retains control over the assets and can change the Trustee, beneficiaries, or terms as they see fit. An irrevocable trust, on the other hand, cannot be altered or terminated by the Grantor once the trust is established. As such, the Grantor relinquishes control over the assets, and the terms of the trust are generally fixed.
Selling, Gifting, or Encumbering Trust Benefits
In most cases, the ability of a beneficiary to sell, gift, or encumber (using their interest in the trust as collateral for a loan, for example) their interest in a trust depends on whether the trust is revocable or irrevocable and whether it includes a spendthrift, anti-alienation, or power of appointment clause. State laws can also impact a beneficiary’s ability to control trust benefits.
In a revocable trust, the Grantor has the flexibility to modify the terms, including granting beneficiaries the right to sell their interests after the trust agreement is executed. If the trust is an irrevocable trust, however, the Grantor cannot modify the terms of the trust after the fact. Consequently, the trust would have to include a provision allowing the beneficiary to sell, gift, or encumber his/her interest in the trust from the time of the trust’s inception.
A spendthrift clause in a trust agreement is a provision which is intended to restrict beneficiaries from selling or transferring their interest in the trust which could prematurely deplete trust assets. This provision is designed to protect the trust assets from creditors and prevent beneficiaries from squandering their inheritance. Many trust agreements include an anti-alienation clause that effectively prevents a beneficiary from selling or encumbering his/her interest in the trust. Conversely, the provisions of a trust may specifically give a beneficiary the power of appointment, effectively giving the beneficiary the ability to transfer his or her inheritance to a third party. Sometimes, the Grantor includes a caveat that requires the beneficiary to obtain the Trustee’s approval before selling, gifting, or encumbering his/her interest in the trust. Trustee approval is typically required if a beneficiary wishes to encumber his/her interest in the trust.
Grantor Control Over Beneficiaries
If you are creating a trust, it is essential to consider how much control you want your beneficiaries to have over their trust benefits. If you are concerned about creditors accessing assets or a beneficiary squandering assets, talk to your estate planning attorney about including a spendthrift or anti-alienation clause. Conversely, if you want your beneficiaries to have the ability to sell, gift, or encumber their interest in the trust, it is usually best to state that specifically within the trust agreement.
Do You Have Specific Questions about Whether a Beneficiary Can Sell, Gift, or Encumber Trust Benefits?
For more information, please join us for an upcoming FREE seminar. If have additional questions about the ability of a trust beneficiary to sell, gift, or encumber his or her interest in a trust, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisorsby calling (310) 337-7696 to schedule an appointment.
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