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Is There a Beneficiary Hierarchy?

California trust law creates a hierarchy among beneficiaries. That means not all beneficiaries are equal.  Some beneficiaries outrank others. Some beneficiaries have better rights than other beneficiaries.

Current Beneficiaries

The starting point is current beneficiaries, people who are named now who are supposed to be receiving something out of the trust. That’s what we call a current vested beneficiary.  They definitely are going to have better rights than a remainder beneficiary who is not going to receive his or her assets until some point in the future, once somebody dies, or something else happens. Current beneficiaries are in higher order than remainder beneficiaries whose rights haven’t vested yet.

Types of Gifts Beneficiaries Receive

The other difference between beneficiaries comes in the types of gifts that are being given.  If a beneficiary is given a specific piece of real property, that is a specific gift.  That beneficiary is highest in the pecking order. They’re going to get their gift first.

Next in line are people who are getting general gifts. Those are gifts of money. They are going to get their gifts second.  Last in line are the remainder or residue beneficiaries.  They are at the back of the line.  They’re going to receive their gifts last.  There is a hierarchy in terms of the type of gifts that you are going to receive.

Outright vs. Gift in Trust

Lastly, there is a difference between beneficiaries who are getting their gifts outright versus those who are getting them by a gift that is held in further trust. If you’re supposed to receive something out of the trust outright, it’s just yours.  That’s a much stronger claim.  Because you can go to the trustee and say, “Hey, I’m supposed to have this outright and I want it now or within a reasonable time.” You’re going to get that property or gift or cash or whatever it is. You’re going to get it into your own hands without any other strings attached.

If you get your gift in trust, meaning it’s going to be continued to be held in a trust, then your gift is going to come with all sorts of strings attached. Then you have to look at the document and say, “Well, who’s going to be the trustee of your money and what are your distribution rights.  Do you have a right to receive income?  Do you have a right to receive principal?  Is there any limitation on the amount of income and principal you can receive?”  Often times there is, and you’re going to have to figure that out.  Yes, you’re getting a gift, but because it’s in trust, it has a lot of strings attached and it might be a very narrow gift, because there might be a lot of restrictions.  It might be a broad gift, because the restrictions aren’t that bad.  It just depends on your particular trust.