There seems to be a good deal of confusion around about the proper distribution of Trust assets when a beneficiary of a Trust dies. If a Beneficiary dies, who receives his share of the Trust: his estate, his family, the other Trust beneficiaries?
That all depends on (1) what the Trust requires, and (2) whether the beneficiary survives the Settlor (Trust creator).
First, let’s talk about the trust requirements. Most Trusts have language that requires a Beneficiary to survive the Settlor. And if a Beneficiary dies before the Settlor dies, then the Beneficiary’s share of the Trust assets pass to whomever is specific in the Trust. For example, a Trust might say “to my child, Bob, provided he survives me, but if Bob fails to survive me, then to the issue of Bob.” This language would require Bob’s share to be distributed to his children or grandchildren depending on who was alive at that time.
The Trust may specify, however, that if Bob predeceases the Settlor, then his share passes to the other Trust beneficiaries and thereby passes over Bob’s children and grandchildren. It all depends on what the Trust says.
If a Trust does not have a survival requirement—as in “all my estate passes to Bob”—then even if Bob predeceases the Settlor, his share of the Trust will pass to Bob’s estate. Again, it goes back to the type of language used.
Second, the survivorship issue. The examples above all assume that Bob dies BEFORE the Settlor dies. But what if Bob dies AFTER the Settlor dies. In a vast majority of Trust documents, once a Beneficiary survives the Settlor, then his or her share of the Trust is vested and cannot be taken away. Thus, if Bob dies after the Settlor, then his share of the Trust will go to his estate—even if the Trust has not been distributed yet. That’s because most Trusts require survivorship until after the Settlor dies, but NOT until the time of Trust distribution. There are a few instances when a Trust will require survivorship until time of distribution, but that is a rare provision.
The bottom line: if you outlive the Settlor, you take your share of the Trust…dead or alive. But if you die before the Settlor, then you probably are left out.