Key Takeaways

  • A beneficial interest allows someone to receive benefits from an asset they do not legally own, typically in trusts or retirement accounts.
  • The beneficiary’s rights and timing of access depend on the trust type and governing rules.
  • Beneficial interest can apply in real estate (like tenants), retirement accounts (like 401(k)s), and contracts.
  • Notaries must avoid notarizing documents in which they have a beneficial interest to prevent conflicts of interest.
  • A beneficial interest does not equate to legal ownership but provides enforceable rights under property and contract law.

Beneficial Interest

A beneficial interest entails a right in receiving benefits from assets by other parties. This type of interest usually pertains to trust accounts. Trust accounts amount to an individual, also called the beneficiary, who has an interest in the assets of the trust. The beneficiary accepts income from any holding from the trust, but that person is not the owner of the account.

The beneficiary interest changes based on the trust type and the procedures regarding the agreement. The beneficiary usually has an interest in any assets that the trust garners, which means they may get access to the funds at a certain period. For instance, the beneficiary could gain access to the trust’s assets when he or she reaches a certain age.

For instance, a parent can establish a testamentary trust that would benefit their two children when the parents die. The creator of the trust can establish distribution of an account’s assets to children during the lifetime of the parent.

Types of Trusts

Parents can establish a variety of other trusts. Parents can also create Crummey trusts, which get funding via annual gifts, to utilize gift tax exclusion allowances. When it comes to Crummey trusts, the beneficiary has an immediate access and stake in the trust for a certain period. For instance, the beneficiary can access the funds of the trust within the first month after a gift transfer. Such assets go under the distribution rules surrounding the trust.

  • Example: The beneficial interest pertains to real estate. A tenant that rents a property enjoys the benefits of a home. With that, the renter does not own the home.

Retirement Accounts

A beneficiary interest can also pertain to an employer-based retirement plan in the following forms:

With such accounts, account holders can name a beneficiary who benefits from the funds in case of that account owner’s death. The rules that govern the interest in such cases depend on the retirement account type and the beneficiary. Spouses of beneficiaries have greater reign over the assets. A surviving spouse may use the account or roll over the assets into a separate plan, but only if the IRS permits it. Also, they can appoint themselves as a beneficiary.

  • Example: Non-spouse beneficiaries cannot govern the account. Therefore, the beneficiary cannot issue contributions into an account or rollover the assets of the IRA.

Beneficial Interest Breakdown

A beneficial interest can be described as a right, advantage, or benefit that an individual enjoys from properties or other forms of trusts that stem from agreements without controlling or owning a property. 

It can be separated from the rights of the trustee, the person holding the legal title. The beneficiary also enjoys an interest in the trust property.

  • Example: If Jim enters into an agreement with Bob that Jim will pay Sally a certain amount, then Sally is owed a beneficial interest. Even though minors cannot enter into partnership agreements, they can still have a beneficial interest in a partnership in the sharing of profits, but this would not include the losses.

Beneficial interest is a term that can be hard to determine because it entails a mixture of obligations and property law. A trust is the product of an agreement between two parties: the settlor and trustee. Such an agreement is usually made to benefit a third party holding beneficial interests in the asset of the trust. The Hauge Convention on the Law Applicable to Trusts establishes the word trust as the legal relationship that’s created between a settlor when assets have been assigned to the control of trustees to benefit a beneficiary for a certain reason.

The third-party agreement comprises a contract between two people to benefit another party. If a promisee violates the agreement, the third party, the person with the beneficial interest, has a right to a violating party to recover under the agreement. Overall, the beneficial interest is a hybrid nature because it entails a trust, which is the interest created under the agreement (laws of obligation), while a claim underlies an interest to the assets (law of property).

Legal Nature of a Beneficial Interest

A beneficial interest is recognized in both property and contract law. Legally, it refers to a right or expectation to benefit from a property even when someone else holds the legal title. For instance, in a trust arrangement, the trustee holds the legal title, while the beneficiary holds the beneficial interest. The beneficiary can enforce their rights in court if their entitlement is infringed, even though they are not the legal owner. This hybrid concept is enforced through equitable principles and often arises in situations involving third-party beneficiaries of contracts, family trusts, and estate plans.

Notarization and Conflicts of Interest

Notaries must avoid performing notarizations on documents in which they hold a beneficial interest. According to professional guidelines, doing so presents a conflict of interest and could invalidate the notarization. A beneficial interest in this context is any situation where the notary stands to gain financially or otherwise from the outcome of the document. This includes being a named beneficiary in a will or trust, or receiving direct or indirect compensation beyond the standard notarization fee.

Testamentary and Inter Vivos Trusts

Trusts granting beneficial interests typically fall into two categories: testamentary and inter vivos (living) trusts.

  • Testamentary Trusts are established through a will and only become effective upon the death of the testator. Beneficiaries have no enforceable rights until that time.
  • Inter Vivos Trusts are created during the settlor's lifetime and can be either revocable or irrevocable. Beneficiaries of these trusts may receive income or assets according to the terms set out in the trust document during the settlor’s life.

Frequently Asked Questions

1. What does it mean to have a beneficial interest in a trust? 

It means you have the right to receive income or assets from the trust even though you do not legally own the trust property.

2. Can a minor have a beneficial interest?

Yes, minors can have a beneficial interest in a trust or partnership, though they may need a guardian to manage their rights until adulthood.

3. What’s the difference between legal and beneficial ownership?

Legal ownership means holding the title to an asset, while beneficial ownership refers to the right to enjoy benefits from the asset.

4. Can a notary notarize a document in which they have a beneficial interest?

No, notaries are ethically and legally prohibited from notarizing such documents to avoid conflicts of interest.

5. Is beneficial interest the same in all states?

While the concept is generally consistent, some legal interpretations or procedures may vary slightly depending on state law.

To learn more about a beneficial interest, you can post your job on UpCounsel’s website. UpCounsel’s attorneys have graduated from some of the best law schools in the nation and will help you in any matter pertaining to trusts or retirement accounts. Moreover, they will defend your beneficial interests in court if are not getting access to your full rights within an agreement.