Clients often naturally choose their children to be beneficiaries of their revocable living trusts. Many clients also wish to name one or more of their children as the trustee of that trust, but are not sure if that is allowed by the law. The short answer is yes, a beneficiary can also be a trustee of the same trust – but it may not always be wise, and certain guidelines must be followed.
Is it a good idea for a beneficiary to be a trustee?
There are good reasons for naming a trust beneficiary as trustee. For one, it is convenient. A trust’s beneficiaries are usually known, loved, and trusted by the trustmaker, so it makes sense to select one of the beneficiaries as trustee. Also, a trustee-beneficiary has a vested interest in ensuring that the trust is administered in accordance with the trustmaker’s intentions because it benefits them, though this might be less true if the beneficiary is unhappy with their portion of the trust proceeds.
However, you should be aware of some downsides to naming a beneficiary as the trustee. Making one of the beneficiaries the trustee can potentially create conflict with the other beneficiaries. The other beneficiaries may wonder why they were not selected as trustee and may resent the beneficiary who was selected. Keeping in mind the reason the trust was created in the first place is also important. For example, if a primary aim of the trust is asset protection for the beneficiaries, having a beneficiary serve as trustee could endanger that objective. Discuss the pros and cons of having a trustee-beneficiary with competent legal counsel experienced in these matters.
How can a trustee-beneficiary successfully perform the trustee’s fiduciary duties?
All trustees owe fiduciary duties to the beneficiaries of a trust, which means that the trustee must act in the best interest of the trust beneficiaries and ensure that the trust is administered according to its terms and the intentions of the trustmaker. Normally, trustees cannot use the money and property in the trust to benefit themselves. The obligation to act in the best interest of the beneficiaries becomes fuzzier, however, when the trustee is also a beneficiary. A trustee-beneficiary can successfully navigate these potential pitfalls by following a few simple guidelines.
First, a trustee should be transparent. This means that the trustee should communicate openly and regularly with the other beneficiaries about what the trustee is doing and why. Beneficiaries who do not know what a trustee is doing will often jump to the worst possible conclusion. A trustee who is a beneficiary can avoid conflict with the other beneficiaries by being up-front and open about their actions.
Second, a trustee-beneficiary should precisely follow the terms of the trust and avoid the appearance of any preference to themselves. This may seem fairly obvious, but many trustees have the mistaken notion that being trustee means that they are in charge and can do whatever they like with the money and property in the trust. This is never true, but a trustee-beneficiary should take particular care to offer the other beneficiaries the same privileges they take for themselves. For example, if the trustee is going to make a loan from the trust to themselves as beneficiary, the trustee should let the other beneficiaries know that they may also take advantage of this possibility. This communication will avoid the appearance of inappropriate self-dealing by the trustee-beneficiary.
Finally, a trustee-beneficiary should keep careful records of the tasks they perform and the time they spend administering the trust and should compensate themselves at a reasonable rate. A trustee’s duties can be time consuming indeed, and it is only fair that the trustee be compensated for time spent on trustee tasks. But when a trustee-beneficiary receives hundreds or thousands of dollars in compensation, it can leave the other beneficiaries questioning what they did to deserve that. A trustee can strengthen their argument that they are being fairly compensated by keeping careful records of the tasks accomplished and the time spent on those tasks.
There are valid and sensible reasons for choosing a trustee who is also a beneficiary of a trust. Following these simple guidelines will ensure that the trustee-beneficiary does not run afoul of their fiduciary duties.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
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