Joshua Taylor, partner at Keystone Law Group, summarizes the reasons a trustee can withdraw money from a trust. Read the complete article below for more details. Click the YouTube Channel subscribe button to be notified when new videos are published.
While a successor trustee does have the authority to withdraw money from a trust — indeed, they often can’t carry out their duties as trustee without doing so — this power comes with important limitations. Put plainly, trustees can only withdraw trust funds for purposes that align with the best interests of the beneficiaries.
But what if a trustee is also a beneficiary? Does that entitle them to use trust funds for personal benefit? The answer: it depends.
A trustee who is also a beneficiary may, in some cases, withdraw their share of a trust — provided the withdrawal doesn’t violate the trust provisions and leaves sufficient assets to cover trust administration expenses and outstanding debts. However, they cannot take more than they’re entitled to, nor access trust funds prematurely.
For instance, if a trust states that beneficiaries are to receive 25% of their inheritances each year over four years, a trustee-beneficiary cannot simply withdraw the full amount upfront just because they have access to the trust bank account.
Whether or not a trustee is also a beneficiary, they must also remain impartial. Favoring one beneficiary over another — such as by giving one an advance or a loan while denying the same to others — can be seen as a breach of fiduciary duty.
Even if favoritism isn’t an issue, trustees must act prudently when withdrawing money from a trust. Using trust funds to make reckless investments, such as high-risk stock purchases, could lead to accusations of mismanagement — especially if the trust suffers losses as a result.
Trustees must also be mindful to never use trust assets for personal gain. Misappropriation of trust funds can lead to serious legal consequences, including personal liability. Temptation can arise, particularly when a trustee has access to large sums of money or valuable assets, but ethical lapses can be costly — for both the trustee and the trust.
Because trustees are granted broad authority over trust assets after the trust creator (called the settlor, grantor or trustor) loses capacity or dies, it’s essential settlors select their trustees with care.
Ultimately, trustees must understand the powers they’ve been granted, and trust beneficiaries must understand the limits of those powers. Knowing when a trustee can withdraw money from a trust — and when they can’t — is essential for protecting the trust.
What Is a Trustee Account?
A trustee account is a financial account — usually housed at a bank — opened by a trustee to manage and hold assets on behalf of a trust’s beneficiaries. Although the trustee may control the account, its contents belong to the trust, not the trustee personally.
Unlike executors or administrators of estates, who must wait for formal appointment before accessing estate assets, a trustee can assume their role and access trust assets immediately following the settlor’s death. This allows them to begin the trust administration process without delay.
Once in their role, the trustee can open a new trust account with a bank. The benefits of a trust account are significant. For example, it can help ensure trust funds remain separate from the personal assets of the trustee and other outside assets.
Remember, a trustee commingling external assets with those of the trust constitutes a breach of their fiduciary duties.
As the trustee begins to gather and appraise trust assets, the trustee account becomes an essential organizational tool. It provides a centralized location to deposit monetary assets, proceeds from sales of trust property, income and capital gains.
When Can a Trustee Withdraw Money From a Trust Account?
As mentioned earlier, most trustees will need to withdraw money from a trust in order to fulfill their duties. That being the case, there’s no immediate cause for alarm if you’ve noticed withdrawals from a trust account.
Still, remain aware that unauthorized withdrawals do frequently occur. The key to detecting them is knowing when a trustee is permitted to access trust funds and for what purposes. With this understanding, you’ll be better equipped to spot red flags and, if needed, pursue legal action.
Before withdrawing money from a trust, a trustee should consider whether doing so would serve the best interests of the trust and its beneficiaries. Trustees have an absolute duty of loyalty, which requires them to act impartially and avoid placing their own interests above those of the beneficiaries — even if they are themselves among them.
Below, we outline six legitimate reasons a trustee can withdraw money from a trust account.
Paying Administration Expenses and Debts
Trustees are generally permitted to withdraw money from a trust to pay necessary administration expenses and valid debts. These may include funeral costs, medical bills and even outstanding credit card balances. Settling these obligations is a key part of trust administration and is typically required before any distributions are made to beneficiaries.
Trustees must be diligent in documenting all payments in their trust accountings in case questions arise surrounding the legitimacy of specific withdrawals. While most trusts will incur administration expenses, not all will have debts to resolve. This is because creditors must typically file their creditor claims with the decedent’s estate first; only if the estate lacks sufficient funds might trust funds be pursued to satisfy those claims.
Making Trust Distributions
Because one of a trustee’s primary duties is to make timely distributions of trust assets to beneficiaries, withdrawing money from a trust for this purpose is not only permitted — it’s expected. However, distributions must be made fairly and in accordance with the trust’s terms.
For beneficiaries, this means the trustee must provide them with the correct share of their inheritance at the time specified in the trust. If a trustee fails to make proper or timely distributions, beneficiaries have the right to sue them for trustee misconduct, which can expose them to personal liability.
Depending on the terms of the trust, distributions may be made as a lump sum, follow a fixed schedule, occur in staggered installments or be left to the trustee’s discretion. Both trustees and beneficiaries should carefully review the trust document — or consult a qualified attorney — to thoroughly understand the distribution schedule and any specific conditions attached.
Investing Prudently
Trustees are generally expected to grow trust assets through prudent investing. Withdrawing funds to fulfill this obligation is not only allowed but encouraged, as it helps keep the trust productive and serves the beneficiaries’ long-term interests.
For example, a trustee might choose to purchase a rental property on behalf of the trust, creating a reliable stream of income for beneficiaries even after the trust principal is depleted.
That said, beneficiaries only benefit when investments are sound, so trustees have a fiduciary duty to avoid speculative or high-risk investments that could result in significant losses. All investment decisions should be thoroughly researched, well-documented and aligned with the trust’s purpose.
Preserving Trust Property
Depending on the trust provisions, a trust may remain open and active for years or even decades before all its assets are distributed. During that time, the trustee is responsible for safeguarding and preserving trust property, such as real estate, vehicles and other valuables. If the actions taken serve the trust’s best interests and benefit the beneficiaries, withdrawing money from the trust for this purpose is both appropriate and expected.
For instance, a trustee may need to use trust funds to pay property taxes or insurance premiums, make repairs or improvements on property or cover routine upkeep like cleaning and landscaping.
Preserving the condition and value of trust property is a crucial part of a trustee’s fiduciary duties. Disregarding this responsibility can diminish the trust’s value, potentially harming the beneficiaries and exposing the trustee to personal liability.
Hiring Third-Party Professionals
Trustees are generally allowed to hire outside professionals — such as accountants, attorneys, and real estate agents — when the administration of the trust requires expertise beyond their own. Trust funds may be used to pay for these services, provided the expenses are necessary, reasonable and ultimately benefit the trust.
That said, trustees should avoid over-delegating their duties, as excessive reliance on third-party help can drive up costs and reduce beneficiaries’ inheritances. When used judiciously, however, these professionals can support accurate, efficient and legally compliant trust administration.
Taking Reasonable Trustee Fees
Trustees are generally entitled to reasonable compensation for the time and effort they devote to managing a trust — unless the trust document expressly states otherwise. Trustee fees should reflect the complexity of the trust and the nature of the work performed.
That said, excessive or undocumented withdrawals by the trustee for personal compensation can raise red flags. Transparency is essential. Trustees should not only maintain detailed records of the tasks they completed, the time spent on each and the effort involved, but they should also be sure to document their fees in their trust accountings. Doing so will ensure they have a clear justification for their fees if questioned by beneficiaries or reviewed by the court.
Can a Trustee Borrow Money From a Trust?
So long as trust provisions don’t explicitly prohibit doing so, a trustee may have the ability to borrow money from the trust.
That said, personal loans to a trustee are highly scrutinized under California law and create a presumption that the trustee breached their duty of loyalty to the trust, which forbids them from prioritizing their personal interests over those of the trust and its beneficiaries.
It’s not uncommon for trustees to operate under the false belief that they can withdraw money from a trust account for personal use if they promptly return it. This, however, could still be considered a breach of their fiduciary duties and ultimately result in serious legal consequences for the trustee.
What Happens if a Trustee Spends Money Improperly? — 5 Steps to Take Immediately
If it comes to light that a trustee has made improper withdrawals from the trust, beneficiaries should act quickly. Such misconduct could mean their inheritances are at risk — or worse, already compromised. Delaying action may allow the trustee to continue their unlawful behavior, potentially causing irreversible harm to the trust.
Red flags might include a trustee refusing to share information, providing accountings that don’t add up, making undocumented withdrawals or charging excessive fees. They may also rely too heavily on outside professionals without justification.
All of these signs could point to misappropriation, mismanagement or a misuse of trust funds by the trustee. If you suspect improper withdrawals, consider taking the following steps to investigate and address the issue before lasting damage is done.
1. Carefully Review All Financial Documents the Trustee has Provided
If you suspect a trustee is making improper withdrawals from a trust account, start by reviewing the financial documents they are legally required to provide — including trust inventories and accountings. These records may reveal red flags such as unexplained withdrawals, missing assets and excessive fees.
In many cases, a trustee’s mismanagement or misconduct becomes apparent only through a detailed financial review. If you’re unsure how to interpret these documents, consider seeking help from a probate attorney or accountant with experience in trust administration matters.
2. Try to Resolve the Matter Informally
Before escalating to mediation or litigation, it’s often best to attempt informal resolution. This can help keep trust administration on track and preserve relationships among those involved.
You might start by reaching out to the trustee directly to raise your concerns. In some cases, questionable withdrawals may be the result of a simple oversight that can be corrected with the trustee returning funds to the trust account.
However, if the trustee refuses to engage or address the issue, informal resolution may no longer be a viable path.
3. Maintain a Log of your Correspondence with the Trustee
Keeping a detailed log of all communications with the trustee is crucial, especially if you suspect misconduct. Document every email, phone call and letter, along with any requests you’ve made and responses — or lack thereof — you’ve received.
Whenever possible, submit requests or concerns in writing. This creates a clear paper trail that can serve as evidence should you need to take legal action later.
4. Consult a Fiduciary Misconduct Attorney
If the trustee remains uncooperative or continues making questionable withdrawals, it may be time to consult a fiduciary misconduct attorney. Sometimes, involving legal counsel is enough to prompt a trustee to comply with their duties.
An attorney can evaluate your situation, review relevant documents and determine whether the trustee has violated the law or breached their fiduciary duties. If it turns out they have, your attorney can help you explore legal remedies — such as petitioning for the trustee’s removal, suspension or seeking a surcharge to recover losses.
Should your case require further action, your attorney can represent you in mediation or begin preparing for litigation to protect your interests and those of the trust.
5. Bring a Fiduciary Misconduct Claim Against the Trustee
If your efforts to resolve the issue with the trustee informally have been unsuccessful, litigation may be necessary to achieve results.
To begin, you’ll need to file a breach of fiduciary duty petition with the court. While you generally have three years from the date the cause of action arose to file, it’s wise to act promptly — waiting too long could result in lost evidence or even in the claim being time-barred.
If you have an attorney, they should draft the petition, as they’ll know how to present the facts, legal claims and requested remedies in a way that’s both thorough and persuasive. A strong petition may motivate the trustee to settle early, helping you avoid trial and significantly reducing legal costs.
However, if settlement isn’t possible, trial may be necessary. If you prevail, you may be entitled to recover attorney fees from either the trust or the trustee personally. That said, because most cases don’t reach trial — and outcomes are never guaranteed — it’s best to be prepared to cover your own legal expenses.
If cost is a concern, consider rallying support from other beneficiaries. If the trustee has misused trust funds, others may be affected too and willing to join the effort, potentially helping to share the financial burden.
Trustee Account FAQs
If you still are unsure about trust accounts or when a trustee is permitted to withdraw money from them, the frequently asked questions below may provide additional clarity. For more personalized guidance, don’t hesitate to contact our firm. We’re here to help you navigate your situation with ease.
Can a trustee withdraw money from an irrevocable trust?
Yes, a trustee can withdraw money from an irrevocable trust so long as the withdrawal serves the beneficiaries’ best interests and the funds are used for a legitimate trust-related purpose.
Withdrawals for the trustee’s personal use are forbidden unless specifically authorized by the trust. In most cases, the same fiduciary standards apply to trustees of both revocable and irrevocable trusts — especially since revocable trusts typically become irrevocable upon the settlor’s incapacity or death.
What are the legal remedies for a misuse of trust funds by the trustee?
Legal remedies for trustee misconduct depend on the nature and severity of the wrongdoing. Potential remedies include recovery of assets, damages, suspension or removal of the trustee and surcharges.
If a case goes to trial and the trustee is found liable, the court may also order them to pay the beneficiary’s legal fees — though this outcome is not guaranteed.
Can a trust make a loan to a beneficiary?
A trust may allow the trustee to make loans to beneficiaries, but it depends on the terms of the trust. Before making a loan, trustees should consult the trust document and an attorney to ensure loans and permissibility do not violate their duty of impartiality.
If a trustee lends money to one beneficiary but denies a similar request from another, they could be seen as favoring one beneficiary, which may lead to legal consequences. Trustees should also confirm the borrower is likely to repay the loan.
What are the tax implications of withdrawing money from a trust?
The tax implications of withdrawing money from a trust depend on whether the funds are classified as income or principal. Generally, beneficiaries must pay income tax on distributions of trust income, while principal distributions are usually tax-free.
It’s crucial trustees work closely with a tax professional to ensure they are in compliance with applicable tax laws.
What is the process for opening a trust fund bank account?
To open a trust fund bank account, the trustee is usually required to provide the bank with the trust instrument, a government-issued ID and the trust’s Tax Identification Number (TIN). The trust bank account should be in the name of the trust, rather than in the trustee’s name.
Can you take money out of a trust fund as a beneficiary?
Beneficiaries generally cannot withdraw funds from a trust on their own unless the trust expressly grants them that right. The trustee is typically the only person authorized to access and distribute trust assets.
If a beneficiary requires trust funds, they must request a distribution from the trustee in accordance with the terms of the trust.
Still confused about when a trustee can withdraw money from a trust?
Whether you’re a beneficiary concerned about a trustee’s suspicious withdrawal of trust funds or a trustee attempting to understand your responsibilities and rights, our probate attorneys can guide you.
Don’t leave your questions unanswered or your inheritance at risk. Reach out today to get the clarity you need. Our experienced legal team is standing by to help.
