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A trust beneficiary can hold either a vested interest or a contingent interest in assets held in a trust. The type of trust interest the beneficiary holds is dependent upon the terms the grantor put in place for the trust when it was created. There are many ways to structure a trust, but most structures are either fixed, discretionary or sequential beneficiary trusts.
Trusts always involve the grantor who sets up the trust, the trustee who manages it, and the beneficiary who eventually receives the benefit of the trust. The beneficiary is the only party who has any tangible interest in the trust. That interest can be a current or future equitable interest or a future contingent interest. Equitable interests are considered vested, which means that the beneficiary owns something that cannot be taken away from him even though he might not have access to it yet. A beneficiary can borrow money against a vested property interest.
A contingent interest is prospective and dependent upon some other occurrence to determine whether a beneficiary is entitled to anything under the trust. If the contingent interest in a trust is speculative and can be canceled, it is not vested or considered a property interest. An interest that is dependent upon an occurrence that will happen in the future without a doubt is considered to be subject to a contingency but is not itself contingent.
For example, the beneficiaries of a fixed trust are named and the proportion of the trust’s assets that each will receive is clearly indicated in the trust document. This distribution plan is part of the conditions of the trust and cannot be changed. The trust interest that each beneficiary holds is considered a vested property interest because each beneficiary will receive his share, even if it is at some date in the future.
A discretionary trust names eligible beneficiaries but leaves it to the trustee to determine who actually receives trust funds and in what proportion. Since the beneficiaries of a discretionary trust may or may not receive anything at all, their trust interest is contingent rather than vested. They hold no property interest in the trust until the trustee actually allocates funds to them.
Trusts with sequential beneficiaries have a combination of trust interest that has both vested and contingent aspects. For example, if a grantor places a house in trust and allows his wife the exclusive use of the house for her lifetime and then distributes the house from the trust to the kids upon her death, the wife has a vested trust interest as a life tenant and the kids have a vested interest in the remainder that is subject to a contingency. Since the kids are identified beneficiaries that will definitely receive the property at some point even though they have to wait for a current interest to expire, their trust interest is certain and considered a vested property interest.