A trust beneficiary has a legal ownership interest in the assets held by the trust. The trust terms will dictate when the beneficiary is entitled to receive distributions from the trust and in what amount. Sometimes, however, a beneficiary needs (or wants) the value of his/her interest in the trust prior to the scheduled distribution. The Los Angeles trust administration attorneys at Schomer Law Group, APC discuss whether a beneficiary can sell his/her interest in a trust.
Although trusts can be highly specialized to accomplish very specific goals, the structure of all trusts is fundamentally the same. A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee administers the trust according to the terms created by the Settlor which includes distributing trust assets to beneficiaries.
Why Might a Beneficiary Want to Sell His/Her Interest in a Trust?
The interest a beneficiary has in trust is tied to the value of the trust assets. What that value is worth will depend on things such as what type of assets are held by the trust, how many beneficiaries have an interest in the assets, and the terms created by the Settler. If the trust terms don’t call for distributions until a beneficiary reaches a certain age or calls for small disbursements over a period of years, the beneficiary’s interest is of no practical value currently. That beneficiary may want or need the value of that interest now, not down the road. In fact, there are companies that offer to buy a beneficiary’s interest in a trust at a discounted price. For example, if a beneficiary’s interest in a trust is worth $500,000 but the disbursements are spread over the next ten years, a third-party buyer might offer to buy the beneficiary’s interest right now for a discounted rate of $200,000.
Can an Interest in a Trust Be Sold?
Whether or not a beneficiary has the legal right to sell his/her interest in a trust will depend to a large extent on the terms of the trust agreement. A beneficiary cannot sell assets outright that are held in a trust, even if the beneficiary is the only beneficiary, because those assets are legally owned by the trust until such time as they are distributed to the beneficiary. The Trustee is legally obligated to abide by the terms of the trust, meaning the assets cannot be distributed until the trust terms call for it. The trust agreement, however, may determine if a beneficiary does or does not have the right to “sell” his/her legal right to the trust assets.
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. The same analysis applies to a beneficiary’s ability to encumber an interest in a trust. For example, if a beneficiary wants to use his/her interest in a trust as capital for a loan. The trust agreement may specifically allow a beneficiary to do so or may prohibit encumbering trust assets.
Contact Los Angeles Trust Administration Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about a beneficiary’s right to sell or encumber trust assets, contact the experienced Los Angeles trust administration attorneys at Schomer Law Group APC by calling (310) 337-7696 to schedule an appointment.
- Ideas for Eco-Friendly Estate Planning - February 15, 2024
- What to Do After a Terminal Diagnosis: A Practical Guide - February 14, 2024
- The Importance of Estate Planning for Members of the LGBTQIA+ Community - February 10, 2024