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.
Settlors tend to exercise great caution when nominating a successor trustee because whomever they nominate will be granted broad control over their trust assets after they die or become incapacitated.
If you’re a trustee, it’s crucial you understand the powers you’ve been granted by the trust instrument – particularly whether or not you have the authority to withdraw money from the trust.
A probate lawyer can help provide clarification if trustees are having trouble understanding the terms of a trust. A lawyer can also help beneficiaries who suspect a trustee to be withdrawing money from a trust for improper reasons.
Understanding the Function of a Trust
A trust is created by a settlor (also called a grantor or trustor) for the benefit of trust beneficiaries (i.e., persons who stand to inherit from the trust).
Settlors, when creating a trust, generally designate themselves as the sole trustee and beneficiary for their lifetime; this allows them to exercise full control over the trust and its assets while they are alive and have capacity, as well as 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 nominates to take over trustee responsibilities after they die or become incapacitated (i.e., lose mental competence). The successor trustee will usually 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 can be beneficial because they generally avoid the formal probate process and, under certain circumstances, protect assets from the reach of creditors (although settlors and beneficiaries should be aware that there are certain instances in which creditors can access trust assets to satisfy creditor claims — see Keystone’s article on defeating spendthrift trusts). Trusts also generally allow the trustee to exercise more control over trust fund distributions to beneficiaries than wills allow.
The successor trustee is a fiduciary, which means they are required by law to always act in the best interests of the trust beneficiaries. 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. They especially should be careful to avoid favoring their personal interests over the collective interests of the beneficiaries if they are a trustee who is also a beneficiary of the trust.
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 a trust is that the successor trustee will be able to immediately access trust accounts upon taking over management of the trust. In contrast, probate requires the person nominated as executor of the estate in a decedent’s will to be formally appointed by the court before they can access estate assets.
Once successor trustees officially step into their role, they will have the ability to open a new trust account with a bank. Having a dedicated trust account during trust administration can help ensure the money held by the trust is kept separate and in one place, and not commingled with the personal assets of the trustee (commingling assets is considered a breach of the trustee’s fiduciary duties).
When successor trustees are in the process of marshaling trust assets and having them appraised, 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 is right.
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 the money.
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 generally has the authority 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 pay themselves reasonable trustee fees for the time and energy they devoted to administering the trust (if trust provisions 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 all its beneficiaries. Trustees have an absolute duty of loyalty to the beneficiaries of the trust; this means they cannot favor certain beneficiaries over others, nor can they place their personal interests over those of the other beneficiaries, even if they are a beneficiary of the trust.
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 has violated their fiduciary obligation to never place their personal interests above those of the trust beneficiaries.
Even when the trustee does not have the authority to borrow money from a trust, it is possible they will misuse, mishandle or misappropriate trust funds. For example, the trustee may hire third-party professionals to help them with their administrative duties, but in their trust accounting, claim the third party’s services cost much more than they actually did so they can pocket the difference.
Unfortunately, when trustees are negligent or fail to play by the rules, they can end up being held personally liable for the financial harm their fiduciary misconduct caused the trust.
It’s also common for trustees to falsely believe they can withdraw money from a trust account for personal reasons if they promptly return it; however, doing so would be seen as a breach of trust, which could lead to the removal of the trustee and/or the trustee being 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 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 becomes due.
When can a trustee withdraw money from a trust? Get your trustee questions answered by Keystone today.
Are you a trustee seeking clarification about your financial powers? Are you a beneficiary with questions about the circumstances under which a trustee can withdraw money from a trust account? Or perhaps you are wondering whether a trustee can borrow money from a trust.
Keystone’s trust attorneys can address any questions or concerns beneficiaries or trustees may have surrounding the role of a trustee and their power to withdraw money from a trust. Call us today to request a free consultation.
