Settlors tend to exercise great caution when nominating a successor trustee, since whoever the settlor nominates will be granted broad control over the assets of their trust after they die or become incapacitated. It is crucial for trustees to understand the powers that have been granted to them by the trust instrument, especially whether or not the terms state that the trustee can withdraw money from the trust. A probate lawyer can help with interpreting the terms of the trust.

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Understanding the Function of a Trust

A trust is created by a settlor for the benefit of beneficiaries (i.e., persons who stand to inherit from the trust). When executing their trust, settlors generally name themselves as the sole trustee and beneficiary while they are living; this allows them to exercise full control over the trust and its assets during their lifetime, as well as to withdraw trust funds as they see fit. So long as the trust is not irrevocable, the settlor is also permitted to amend or revoke their trust.

The successor trustee is the person or entity the settlor nominated to take over trustee duties after they die or become incapacitated (i.e., lose mental competence). The successor trustee will generally not have the broad range of powers granted to a settlor. This is because trusts generally become irrevocable (i.e., they can no longer be amended or revoked) upon the death or incapacitation of the settlor.

Trusts are beneficial in their ability to avoid the formal probate process and, under certain circumstances, protect assets from the reach of creditors (though settlors and beneficiaries should beware because there are instances in which creditors can access the assets held by a trust — see Keystone’s article on defeating spendthrift trusts). Trusts also generally allow the trustee to exercise more control over distributions made to beneficiaries than wills allow.

The successor trustee, however, is a fiduciary, which means that they are required by law to always act in the best interests of all the trust beneficiaries. In other words, while successor trustees generally have a great deal of financial control over a trust, every action they take must be for the benefit of the trust beneficiaries and no one else.

Can a Successor Trustee Access Trust Accounts?

The short answer is yes, a trustee can access trust accounts that were created and funded by the settlor. In fact, one of the primary benefits of creating a trust is that the successor trustee can immediately access trust accounts upon taking over as successor trustee. In contrast, with a formal probate, the person designated as executor in a decedent’s will must wait to be formally appointed by the court before accessing assets belonging to the decedent.

Once successor trustees officially step into their role, the successor trustee also has the ability to open a new trust account with a bank. Having a dedicated trust account during administration can help ensure money held by the trust is kept separate and in one place, not commingled with the personal assets of the trustee (commingling assets is considered a breach of the trustee’s fiduciary duties).

When successor trustees proceed to the next step of marshaling trust assets and valuing them, the trust account — where the trustee can deposit all of the trust’s liquid assets — will prove handy in streamlining the process. It will also make it easier for the trustee to make distributions to beneficiaries when the time comes.

Under What Circumstances Can a Trustee Withdraw Money From a Trust Account?

One of the most common questions trust lawyers are asked by trustees and beneficiaries is: Can a trustee withdraw money from a trust? The answer to this question will depend on the terms of the trust, as well as on why the trustee is seeking to withdraw money from the trust account.

Trust administration is like a full-time job, and more often than not, the trustee will require the help of third-party professionals, such as CPAs and probate lawyers, to complete their duties. The trustee will generally be permitted to withdraw money from a trust to cover the cost of third-party professionals, as well as any other expenses arising as a result of administration. If trustees are unsure about whether using trust funds in a given scenario is appropriate, they should consider consulting with a trust and estate lawyer, who can ascertain whether or not the use of trust funds for a certain purpose is warranted. 

The successor trustee is generally permitted to withdraw money from a trust account for the following reasons:

  • To make distributions to trust beneficiaries in accordance with the terms of the trust (the trust may provide for trust fund distributions to be made all at once or over time)
  • To make investments on behalf of the trust (so long as doing so is not forbidden by the terms of the trust)
  • To pay for the settlor’s funeral expenses 
  • To pay the debts of the trust and the settlor
  • To preserve and make repairs on trust property
  • To hire third-party professionals to help with administrative duties
  • To compensate themselves reasonably for the time and energy they devoted to administering the trust (if the trust’s terms fail to provide instructions for compensating the trustee, the trustee and beneficiaries will have to agree on a reasonable compensation for the trustee, and if they cannot agree, the issue can be resolved by the probate court)

Before withdrawing money from a trust, the trustee should ask themselves whether doing so will benefit the trust and its beneficiaries. Trustees have an absolute duty of loyalty to the beneficiaries of the trust; this means that they cannot favor certain beneficiaries, nor can they place their personal interests over those of the other beneficiaries, even if they are one of the beneficiaries of the trust they manage.

Under What Circumstances Can a Trustee Borrow Money From a Trust?

So long as the terms of the trust do not forbid the borrowing of trust funds by a trustee, a trustee may have the ability to borrow money from the trust. Under California law, however, personal loans to a trustee are highly scrutinized and create a presumption that the trustee has breached their duty of loyalty to the trust – i.e., the trustee’s fiduciary obligation to never place their own personal interests above those of the trust beneficiaries.

Even where the trustee has no authority to borrow funds from a trust, it is possible for the trustee to mistakenly misuse trust funds for improper matters during the course of trust administration. Unfortunately, when trustees do not play by the rules or act negligently, they can end up being held personally liable for the financial harm their misconduct caused the trust.

Also common is trustees falsely believing that they can withdraw money from trust accounts for personal purposes if they promptly return it; however, doing so would be seen as misconduct (since it would be considered a breach of trust), which could lead to the trustee being removed and surcharged.

Trustees may be permitted to make loans to beneficiaries of the trust, but before loaning money to beneficiaries, trustees should review the terms of the trust with a lawyer to ensure making loans to beneficiaries is not prohibited. Likewise, they should ensure that the loan they are providing does not favor one beneficiary over another. As an example, if the trustee were to make a loan to one beneficiary but then deny a loan to a similarly situated beneficiary, they could be sued for breaching their duty of impartiality. Trustees should also take the necessary steps to ensure that the beneficiary requesting the loan is well-positioned to repay the loan when it comes due.

When Can a Trustee Withdraw Money From a Trust? Keystone Can Answer All Your Trustee Questions

Are you a trustee seeking clarification about your financial powers? Are you a beneficiary with questions about when a trustee can withdraw money from a trust account? Or perhaps you are wondering about whether a trustee can borrow money from a trust. Our trust experts can address any concerns you may have about your role as trustee. Call us today to schedule your free consultation.