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Can A Trustee Also Be A Beneficiary?

Friends barbecuing. Can a trustee also be a beneficiary?

Trusts are legal documents that allow people to set aside money for future use. They can be used to provide financial support for children, pay for college education, or even cover medical expenses in case of illness. But that could create a conflict of interest if the trustee is also a beneficiary. In that case, the beneficiary would have control of the money that they’re holding for their benefit (and the benefit of others). Keep reading to learn more.

What Is A Trust?

A trust is an agreement between two or more parties who agree to hold property in trust for another party. This means that one party (the “grantor” or “trustor”) transfers ownership of certain assets to another party (the “trustee”). The trustee holds the assets for the benefit of a “beneficiary”. The trustee’s duties are spelled out in a trust document.

Who Should Serve As The Trustee?

If you are creating a trust, you need to pick a trustee. Serving as the trustee gives the person complete control over how the trust operates. But, serving as the trustee requires a lot of work and responsibility. It’s not recommended for everyone.

Picking a trustee for a revocable trust.

For a revocable living trust, you can be the trustee at first. You also need to choose a successor trustee to take over from you at a later date. You are choosing a successor trustee because you may die or become incapacitated.

Picking a trustee for an irrevocable trust.

An irrevocable trust requires someone other than you to be the trustee. This could be a close friend or family member. Yet another option is to appoint a professional such as a lawyer or accountant. There are also trust companies and professional fiduciary companies that serve as trustees.

Who Can Be A Beneficiary?

Anyone can be a beneficiary. But some beneficiaries need more protection than others. For example, a minor child can’t receive a lump sum distribution. Someone on government benefits can only receive certain amounts of money. A person with creditors shouldn’t receive a large distribution from the trust. A beneficiary with addiction issues shouldn’t receive money that will only go to support their habit.

These are just some examples. Talk to a trust attorney about your specific situation.

Can A Trustee Also Be A Beneficiary?

It depends on the type of trust, the purpose of the trust, who the trustee is, and who the beneficiary is. The best way to protect the trust assets is to have the trustee and beneficiary be different people. Talk to an attorney about your specific situation.

The choice is between protection and control. To best protect the trust assets, choose an independent trustee. To give the beneficiary the most control over the trust assets, make them the trustee.

If the trustee and beneficiary are the same person, they have no protection from creditors. Generations of US laws have made it clear that a person’s creditors can reach into a trust if that person is also the beneficiary. Put another way, if you are both trustee and beneficiary, then your creditors can get your assets. The same goes for anyone else you name as beneficiary. If they are both trustee and beneficiary, then their assets are subject to their creditors. Their interest in the trust can get lost through:

  • Bankruptcy
  • Lawsuit
  • Divorce
  • IRS audit
  • Government Action

The biggest risk to the money in trust is this: the beneficiary themselves. Not everyone is good with money. Your kids might be really smart. But if they haven’t managed a large amount of money before, give them a period of time to get accustomed to it. Otherwise, they will simply squander it.

Giving someone access to a large amount of money or property is called “sudden wealth.” People who get sudden wealth are more prone to lose the money than people who are more prepared. Think of all the lottery winners you hear about who are in bankruptcy within a few years of the windfall.

There may be tax considerations to having the trustee and beneficiary be the same person.

The Trustee’s Fiduciary Duties to Other Beneficiaries

If there are other beneficiaries, the trustee owes duties to them. These include:

  • On acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries and in accordance with this law. (A.R.S. § 14-10801.)
  • A trustee has a duty to treat all beneficiaries impartially. (See A.R.S. § 14-10803If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing and distributing the trust property, giving due regard to the beneficiaries’ respective interests.”)
  • A trustee has a duty to act for the benefit of the beneficiaries. (See A.R.S. § 14-10802.)
  • The trustee has a duty of prudent administration. (See A.R.S. § 14-10804.)

This is only a sample of a trustee’s duties. And these are only from Arizona law. If you are in a different state, consult an attorney there.

Can A Trustee Be Paid For Serving As Trustee?

In most situations, a trustee can be paid for their services. However, it depends on what the trust agreement says. It also may depend on state law. Most states have laws protecting trust beneficiaries from mismanagement by the trustee. If you aren’t sure, talk to an attorney.

Who Should You Name As Trustee?

When trying to decide who to name as trustee, consider how much you want to protect the beneficiaries. If the trustee is also a beneficiary, that’s person’s interest in the trust can be lost in a lawsuit. It’s also easier for them to mismanage the trust.

If your number-one priority is flexibility and control, then having the beneficiary also be trustee is the best option. However, if you would rather safeguard your heirs from creditors or the trustee’s poor decisions, then having a separate trustee may be best.

Are You Writing Your Trust?

If you still can’t decide who to name as trustee or beneficiary, contact SWPL. Or just call us at 602-443-4888. During a consultation, our estate law attorneys in Arizona can evaluate your unique circumstances and offer advice that will help you create a lasting legacy.

Is a Trustee Mismanaging a Trust? We Can Help.

We have been handling trust disputes since 2001. We will fight for your rights and ensure your loved one’s wishes are honored. Call us at 602-443-4888.

ABOUT THE AUTHOR

Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.

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