What is ‘Beneficial Interest’
A beneficial interest is the right to receive benefits on Assets held by another party. The beneficial interest is often related to matters concerning trusts accounts. For example, most beneficial interest arrangements are in the form of trust accounts, where an individual, the Beneficiary, has a vested interest in the trust’s assets. The beneficiary receives income from the trust’s holdings but does not own the account.
BREAKING DOWN ‘Beneficial Interest’
A beneficiary interest will change depending on the type of trust account and the rules of the trust agreement.
A beneficiary typically has a future interest in the trust’s assets meaning they might access funds at a determined time, such as when the recipient reaches a certain age. For example, a parent may set up a testamentary trust to benefit their three children upon the parent’s death. The trust creator can stipulate distribution of the account’s assets to the children during the parent’s lifetime,
Parents may set up Crummey trusts, funded through annual gifts, to take advantage of gift tax exclusions. With Crummey trusts, the beneficiary has an immediate interest and access to the trust’s assets for a specified timeframe. For example, the beneficiary may be able to access the trust’s funds within the first 30 days after the transfer of a gift. Those assets fall under the distribution rules governing the trust.
Other Examples of Beneficial Interest
Another example of beneficial interest is in real estate. A tenant renting a property is enjoying the benefits of having a roof over their head. However, the renter does not own the asset. Beneficiary interests can also be applied to employer-sponsored retirement plans such as 401(k)s and Roth 401(k)s, as well as in individual retirement accounts (IRA) and Roth IRAs.
With these employer-sponsored accounts, the account holder may designate a named beneficiary who can benefit from the account funds in the event of the account holder’s death. The rules governing beneficiary interest in these cases vary widely depending on the type of retirement account and the identity of the beneficiary.
A spouse beneficiary to an IRA has more freedom over the assets. The surviving spouse can treat the account as their own, roll over assets into another plan, if the IRS allows, or designate themselves as the beneficiary.
A non-spouse beneficiary to an IRA, for example, can’t treat the account as their own. Thus, the beneficiary can’t make contributions into the account or rollover any assets in or out of the IRA.
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