It is quite common that a trustee will also be a beneficiary of a trust. However, to avoid legal issues between family members, it is important to understand the difference between a trustee and a beneficiary and when it makes sense to appoint someone who will be in both of these positions. A trustee is a person or entity that holds, manages, and eventually distributes property or assets for the benefit of a third party. Because the trustee oversees and manages the assets within a trust, to be able to serve as a trustee in the United States, a person must be at least eighteen years old and not be experiencing any forms of incapacity. While typically dependent on the size and asset value of a trust, a trust may have multiple trustees that co-own the property in the trust.

A beneficiary on the other hand can be any person or entity that the grantor of the trust—the person establishing the trust—wishes to receive a portion of their property after they pass away. Furthermore, a trust can name as many beneficiaries as desired and when the grantor of the trust passes away, it is the trustee’s responsibility to distribute the assets in the trust to the beneficiaries according to the terms of the trust. Overall, when a beneficiary is not a trustee, the trustee of a trust does not receive any of the trust’s assets once the grantor dies as the assets all go to the beneficiaries of the trust. However, the beneficiaries of a trust cannot make any management or disbursement decisions regarding the assets in the trust.

When Can a Trustee be a Beneficiary

The most common situation where a trustee is also a beneficiary to the trust occurs when someone names their spouse or oldest child as the trustee to the trust. For example, a husband may create a trust with the intent of splitting the assets between his wife and kids. However, if the children are too young to act as trustee, the grantor may make his wife the trustee. A similar situation may occur when a couple places their assets into a joint trust. In this scenario, they could name their oldest child as the trustee. Many families like to name a family member as the trustee to their trust. However, there are a few important things to consider before choosing to name a beneficiary as a trustee.

Fiduciary Duty

The fiduciary duty of a trustee requires that the trustee considers the interests of the beneficiaries before their own interests. Thus, if a trustee is also one of the beneficiaries of a trust, conflicts of interest can occur. For example, a trustee who is also a beneficiary may attempt to benefit their own interests. This could be done by taking an unfair share of the assets in the trust or taking assets that were meant to go to another beneficiary. This is a breach of fiduciary duty. However, when a trustee who uses their powers to unfairly benefit their own interest over the other beneficiaries, it is also a breach of trust.

A breach of trust is simply any act that violates the trustee’s duties according to the terms of the trust. Furthermore, a breach of trust does not have to be intentional. Instead, this applies if the trustee acts in a way that is careless or negligent. So even if the trustee does not purchase something from assets that were meant to go to or be split among all the beneficiaries, a breach of trust can occur if the action was prohibited in the terms of the trust. A common example of this occurs when a trustee who is also a beneficiary takes the most prized family assets. In this scenario, each beneficiary could receive the same monetary value of assets. However, because the assets taken by the trustee were meant to be split, a breach could still occur.

Beneficiary Disputes

Even in the closet families, beneficiary disputes can occur if a trustee is also a beneficiary. Commonly, beneficiary disputes will occur when one beneficiary questions the trustee’s objectivity. To avoid disputes, trustees that are also beneficiaries should:

• keep detailed records regarding every transaction that occurs within the trust
• never use trust assets for your own use, and
• if the trustee compensates themselves, they should prepare to justify what they have charged. They should also document what services they provided to the trust.

Even if a trustee is a neutral third party, beneficiaries may still be upset with how the trustee distributes assets. This is only heightened when the trustee is also a family member and fellow beneficiary. Thus, following the above guidelines will help to limit conflicts. This is extremely important for a number of reasons. Most notable of being that if a beneficiary sues the trustee, the trustee uses trust assets to pay for legal fees. Thus, by keeping track of transactions linked to the trust, not using trust assets for personal reasons, and justifying why you paid yourself for certain actions, you prevent yourself and other beneficiaries from losing a portion of the trusts assets for no reason.

Considerations When Naming Trustees

Naming a beneficiary of your trust such as a spouse or child as trustee can offer many benefits. The largest being that you know the person that you are appointing so you will be able to trust them. However, contentious relationships and the added stress of losing a loved one can sometimes lead to issues. One way to limit potential issues occurring from placing a beneficiary as the trustee to a trust is to place a trustee removal provision in the trust documents. Creating a trustee removal provision allows your beneficiaries to remove the trustee. However, beneficiaries can only do this if the trustee partook in actions that the trust prohibits.

Final Thoughts

Trust and estate laws are complex. This is so even when you do not name one of your beneficiaries as the trustee to your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia set up revocable trusts, irrevocable trusts, asset protection trusts, spendthrift trusts, generation-skipping trusts, life insurance trusts, disclaimer trusts, and Qdot trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust. Furthermore, we can also offer advice on whether you should name one of your beneficiaries as your trustee.

Contact our DC Law Office for More Information

Finally, for more information regarding can a trustee be a beneficiary, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.