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The Tricky Task of Dividing Non-Financial Assets

How do you divide trust assets among the trust beneficiaries?

When a Trust holds assets other than money, it can be difficult to divide the assets among the beneficiaries. For example, let’s say a Trust owns two houses; on is worth $500,000, and the other is worth $1 million. There are two beneficiaries and they are supposed to share the Trust assets equally. If the Trustee gives each beneficiary a house, there will be an unequal distribution. One beneficiary will receive a house worth $500,000, and one will receive the $1 million house. How do you fix this problem?

 

One solution would be to give each beneficiary half of each house. By transferring the deed of the houses into the joint names of the beneficiaries, the beneficiaries will each receive an equal amount. But it also will require the beneficiaries to jointly own the properties moving forward. That could be a problem if the beneficiaries do not agree. The beneficiaries may not get along, or maybe they have different plans for the future. If one beneficiary wants to sell everything and invest in stocks, it can’t be done without the cooperation of the other beneficiary.

The next solution would be to sell both houses and distribute the sales proceeds equally to the two beneficiaries. This would avoid the problem of an unequal distribution, and it would also avoid joint ownership of the houses by the two beneficiaries. This solution works great if the beneficiaries agree that the properties should be sold. But what if one of the beneficiaries is living in one of the Trust houses and does not want it sold? Now you have a problem. If you sold the $1 million house, then there would be enough money to equalize the two beneficiaries. One would get the $500,000 house plus $250,000 in cash, and the other would get $750,000 cash. If, however, you sold the $500,000 property, then there would not be enough cash to equalize the beneficiaries. It all depends on which property must be sold.

The next solution would be to have one of the beneficiaries buy out the other. If a beneficiary retains the $1 million house, then he can simply refinance the property to raise enough cash to equalize the distributions. This assumes that the beneficiary has the financial wherewithal to qualify for a mortgage loan.

While the above example uses houses, the same can apply to any non-cash assets. Family businesses, land, farms, private investments, anything that cannot be easily separated. These type of assets may pose a problem when making distributions, but there are various ways in which to be creative and obtain a fair (and equal) distribution of Trust assets.