Can a Trustee Be a Beneficiary?
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Roee Kaufman, Partner at Keystone Law Group, discusses how to prevent problems when the trustee of a will is also a beneficiary. Read the complete article below for more details. Click the YouTube Channel subscribe button to be notified when new videos are published.
Perhaps the trustee, who also is a beneficiary, is a child of the settlor and has a contentious relationship with one of their siblings, another beneficiary of the trust. Will the trustee be able to remain impartial in trust matters concerning their sibling beneficiary? Perhaps the trustee is slated to inherit real property from the trust. Would it be fair for the trustee to use trust funds to make repairs on the property? Perhaps the trustee is in need of money, so they borrow trust funds. Is the trustee entitled to borrow money from a trust?
So can a trustee also be a beneficiary? The short answer is yes, but the trustee will have to be exceedingly careful to never engage in any actions that would constitute a breach of trust, including placing their personal interests above those of the other beneficiaries. Trustees are fiduciaries, which means that they have an absolute duty of loyalty to all the beneficiaries. They are required to be impartial and avoid conflicts of interest.
Beneficiaries, for their part, will have to remain extra vigilant during administration to ensure the trustee’s status as a beneficiary of the trust does not get in the way of their administering the trust ethically.
Who Can Be a Trustee?
When a traditional living trust is created, it is standard for the creator of the trust (i.e., the settlor) to nominate themselves as the sole trustee and beneficiary of their trust during their lifetime. When discussing a trustee and beneficiary conflict of interest, it is usually in reference to the successor trustee (i.e., the person nominated by the settlor to take over as trustee upon their becoming incapacitated or dying) having also been named as a beneficiary. This double role may not pose a problem if, say, the trustee is the sole beneficiary of the trust, but if the trustee is a beneficiary of a trust with multiple beneficiaries, it may be more challenging to fairly manage the trust.
In California, there are very few requirements surrounding who can be a trustee. They include:
- You must be 18 years of age or older.
- You must be a U.S. citizen (to avoid adverse tax consequences).
- You must be of sound mind.
While the majority of people who are named as the successor trustee of a trust probably meet these qualifications, it doesn’t mean that they should necessarily accept their appointment. The next section covers some of the reasons why trustees often decline their appointment as trustee even if they meet the aforementioned qualifications.
Why Might a Trustee Beneficiary Want to Decline Their Appointment as Trustee?
It is an honor to be named as the successor trustee of a trust; however, if trustees have any reason to believe that they may not be able to administer the trust fairly or diligently, declining their appointment may be the responsible thing to do. If beneficiaries can prove that a trustee breached their duties, the trustee could not only be removed but surcharged as well, with them being held personally liable for paying both damages and their own attorney’s fees and costs.
If a person is a trustee and beneficiary, and does choose to accept their appointment as trustee, the other beneficiaries of the trust should consider hiring a trust lawyer to help them keep an eye out for any misconduct that arises as a result of the trustee and beneficiary conflict of interest.
Here are some reasons why the person nominated as successor trustee may decline their appointment:
- They have problems with the other beneficiaries. Can a trustee also be a beneficiary if they have problems with the other beneficiaries of the trust? If a person is a trustee and beneficiary, and they do not get along with the other beneficiaries of the trust, it may be advisable for them to decline their appointment, especially if they don’t think they will be able to treat all the beneficiaries equally. If a trustee is confident in their ability to be a trustee and beneficiary and act impartially despite having conflicts with the other beneficiaries, accepting their appointment as trustee may not be problematic.
- They don’t have the time or knowledge to effectively administer the trust. Administering a trust can be akin to a full-time job, depending on the complexity of the trust assets. There could be a lot of detective work involved since the settlor’s assets will have to be tracked down and appraised, but that is just the tip of the iceberg. The trustee will also have to pay the trust’s debts, prepare trust accountings, make trust fund distributions to beneficiaries, manage the settlor’s ongoing businesses, and much more. A trust lawyer can help the trustee carry out some of these duties, but time and dedication will still be required on the part of the trustee. If a trustee does not have the time or ability to diligently carry out these duties, it might be a good idea for them to decline their appointment as trustee.
Anyone named as a successor trustee has the power to decline their appointment or even resign from their trustee role if they initially accepted the appointment but no longer wish to serve. Likewise, beneficiaries have a right to petition the court to have the trustee removed if the trustee accepted their appointment but are acting improperly or negligently. They can do this with the help of a trust attorney. It is important to note that if a person has been named as a trustee and beneficiary of a trust, declining their appointment as the trustee will not affect their inheritance.
Can a Trustee Be a Beneficiary of a Discretionary Trust?
The short answer is yes. Trustees can be a beneficiary of a discretionary trust, although it would be rare for the trustee to not have a co-trustee appointed to make discretionary decisions.
A discretionary trust is one in which the trustee is able to use their discretion in determining when and to whom to make trust fund distributions. The trustee does legally hold title to the assets held by the trust, but there are no specific beneficiaries to whom the assets are presently designated to go. The reason why some people opt for discretionary trusts is because creditors are generally unable to access the assets held by these trusts, since the assets don’t technically belong to any one beneficiary.
While the trustee of a discretionary trust could hypothetically allocate the majority of assets to themselves if the trust permits it, doing so may be considered a breach of trust if they are favoring themselves at the expense of other beneficiaries, and they could be held personally liable for it. That is why when there is a trust that is discretionary, there are usually co-trustees to hold each other accountable and ensure that trust assets are distributed fairly.
If the potential beneficiaries of a discretionary trust are concerned that the trustee or co-trustees are acting unfairly, it would be in their best interest to hire a trust lawyer to help them investigate.
What Does It Mean to Have a Conflict of Interest?
A conflict of interest can be defined as a person or entity having interests or concerns that are irreconcilable with one another. It can also mean that a person will personally benefit from a decision they are making at the expense of another person or entity.
As an example, if a doctor were to be compensated by a pharmaceutical company every time they prescribe one of the company’s drugs to a patient, there is inherent potential for conflicts of interest. The doctor is supposed to be exclusively looking out for the interests of their patients, but instead may be motivated by personal interest. It should, however, be noted that even when there is the potential for a conflict of interest, it does not always mean that there is an actual conflict that obligates the fiduciary to refrain from acting.
What Are Some Examples of a Conflict of Interest Between a Beneficiary and Trustee?
If a person has been appointed as the successor trustee of a trust, they are supposed to administer the trust for the benefit of the trust beneficiaries. The trustee may hold title to assets held by the trust, but this is only temporary, as eventually they will have to transfer the assets to the beneficiaries who are designated to receive the assets in question. Basically, a trustee’s job is to marshal the assets held by the trust and keep them productive until the assets are eventually distributed.
Anytime a trustee beneficiary’s personal interests coincide with those of the other beneficiaries, there is potential for a trustee and beneficiary conflict of interest — and by extension, for the beneficiaries to hold the trustee personally liable for any trust-related decisions that constituted a breach of duty.
Here are some examples of a conflict of interest between a trustee and beneficiary:
- The trustee investing trust funds in a personal business endeavor
- The trustee using trust funds to pay off personal debt
- The trustee selling trust property to themselves
- The trustee providing themselves with loans from the trust
- The trustee selling trust property to another trust that they manage for below market value
- The trustee defending a trust contest that is valid because the current trust provides them with a larger inheritance
It may seem simple enough for trustees to not place their personal interests above those of the other beneficiaries, but it can be harder than it seems. They may falsely believe that they can use trust funds for personal reasons and return the funds without anyone noticing, but they are required to provide detailed accountings to beneficiaries that contain information about all the assets that entered and left the trust. Beneficiaries should be aware of the trustee’s status as a trustee and beneficiary and be on the lookout for misconduct and/or breaches of trust.
Sometimes, there may be a conflict of interest that the trustee is not even aware of, which is why it is important for both the trustee beneficiary and beneficiaries of the trust to routinely consult with an experienced trust attorney during the trust administration process.
Is Naming a Lawyer as Trustee a Conflict of Interest?
Many settlors wish to name their lawyer as the trustee of their trust. After all, their lawyer likely has knowledge of their assets, knowledge about how to administer a trust and more. Naming a lawyer as trustee, however, can present a conflict of interest.
For example, if the settlor names their estate planner as the successor trustee of their trust, the conflict of interest stems from the fact that the estate planner likely drafted their trust. They could have drafted it in such a way as to provide themselves with more compensation as the trustee than what is standard. Another example of a potential conflict of interest arising from naming a lawyer as the trustee is if the lawyer has to litigate claims on behalf of the trust, which could lead to substantial compensation for the lawyer in question. The lawyer could be motivated to pursue claims, even if they are unfounded.
If a lawyer is named as the trustee of a trust, it may be in their best interest to hire a third-party attorney to help them in their capacity as trustee and protect them against personal liability.
Likewise, beneficiaries should retain a lawyer to oversee administration and ensure that the lawyer trustee is not breaching their fiduciary duties.