April 16, 2015

Vested Benficiary and Contingent Beneficiary

Two terms that can describe a beneficiary of a testamentary instrument are "vested" and "contingent." There is a stark difference between the two terms. The former means that the beneficiary has a present interest in the estate, i.e. they can receive distributions now. The latter means that the beneficiary has a possible future interest in the estate, i.e. they may or may not receive a distribution down the line.

This distinction can be very consequential when administering an estate. The reason is that, generally speaking, certain rights inure to a vested beneficiary and not a contingent beneficiary. One of those rights is the ability to receive an accounting. "The trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed." Probate Code § 16062.

The following example illustrates the difference between a vested and contingent beneficiary.

Thomas, a widower from Campbell, CA, created a revocable trust that named his daughter Dawn as the sole beneficiary upon his death. The trust permitted the trustee to spend as much or as little as the trustee deemed necessary on Dawn's health, education, maintenance and support. If any property remained in the trust after Dawn's passing, such property would be distributed to Thomas' nephew Ned.
When Thomas dies, his trust becomes irrevocable and sets in motion the trust's distribution scheme. If Dawn survives Thomas, she becomes a vested beneficiary. She is considered a vested beneficiary because she satisfied the one requirement to become the sole beneficiary of Thomas' trust estate, outlive him. On the other hand, Ned becomes a contingent beneficiary if Thomas passes away and Dawn survives Thomas. The reason is that Ned may or may not receive anything upon Dawn's death, assuming Ned survives Dawn. The trustee may or may not expend the entire trust estate on Dawn during her lifetime. This decision on whether or not to expend the entire trust estate on Dawn is up to the trustee's reasonable discretion.

Going forward, Dawn would be eligible to receive an annual accounting under Probate Code § 16062, given that she is a vested beneficiary. Ned however would not be eligible to receive an annual accounting under Probate Code § 16062, as he is merely a contingent beneficiary. 

There are other probate code sections that Ned could invoke if he wanted details about the trust's administration. The issue with these other probate code sections is that they are not as clear as Probate Code § 16062. For instance, Probate Code 16061 states "on reasonable request by a beneficiary, the trustee shall report to the beneficiary by providing requested information to the beneficiary relating to the administration of the trust relevant to the beneficiary’s interest." Clearly such is an example of ambiguous legal language that makes people ponder in bemusement. What is relevant to one person can reasonably be considered irrelevant to another. Whereas an accounting under Probate Code Section 16062 has specific requirements of what must be mentioned in it. Hence, an accounting will almost invariably be more informative than an information request under Probate Code 16061.