A beneficiary may be able to serve as a trustee in certain circumstances.
Although many wealthy individuals utilize trusts in their estate planning, these estate planning instruments have numerous benefits for the average American.
Some of the estate planning goals they help address include reducing the need for probate, providing greater control over asset distribution, and protecting assets.
In addition to the terms of the trust, trustmakers (also known as grantors, settlers, or trustors) who create these documents with the help of experienced estate planning attorneys must also give special attention to the people included in the trust.
Both trustees and beneficiaries have distinct responsibilities and roles within a trust.
Although beneficiaries can legally serve as trustees in many instances, overlapping these roles can be risky.
To avoid legal complications, the trust must be carefully structured and administered.
A common estate planning question is whether one can designate a trust beneficiary to also serve as a trustee.
The institution or individual appointed to manage the trust assets is known as the trustee.
The trust document provides instructions that the trustee must follow regarding investment management, income and principal distributions to beneficiaries, record-keeping, reports to beneficiaries, and tax return filing.
All trustees have a fiduciary duty.
What is a fiduciary duty?
This is a legal responsibility to act in the best interests of the beneficiaries.
When beneficiaries also serve as trustees, they cannot take action that primarily benefits themselves.
Instead, they must take action to benefit all beneficiaries.
Trust instructions must be followed without personal bias.
Many parents choose to make their adult children both trustees and beneficiaries of their estates.
While the parents may serve as trustees of a revocable living trust while they are alive, they may select an adult child to serve as the successor trustee.
What is a successor trustee?
When the original trustee is unable to manage the trust due to incapacity or death, the successor trustee takes over the role.
For this arrangement to work, the beneficiary who serves as the trustee should not be the sole beneficiary of the trust.
The trust must also have objective and clear terms.
Why?
When the terms are clear and specific, the trustee will be better able to make fair distributions and avoid conflict.
When a trustee who is a beneficiary has more personal discretion in the role, other heirs may become suspicious of decisions.
This makes the language of the trust crucial when beneficiaries serve as trustees.
Even if the beneficiary who is also a trustee has high integrity, it can appear as if there is a conflict of interest.
This is especially true when the trustee is given authority to decide when to withhold or distribute income and how much will be distributed.
When a beneficiary is given too much discretion as a trustee, the risk of tensions and legal battles rises.
What can be done to reduce these risks?
Estate planning attorneys may recommend using trust protectors to provide greater oversight and accountability.
Another possible issue that may arise when the beneficiary trustee is given too much control involves taxes.
The assets of the trust could be treated as part of the estate of the trustee for tax purposes.
If a trust assigns individuals dual roles, the document must be carefully crafted to address legal issues and support the goals of the trustmaker.
Although trusts can be beneficial for estate planning purposes, they must be properly drafted.
By working with an experienced estate planning attorney, you can prevent the designation of a trustee as a beneficiary from undermining your trust.
This professional will also be able to establish safeguards, distribution rules, and the powers of the trustee.
If the estate planning attorney believes an independent trustee would be a better choice to preserve family relationships or protect significant assets, then this professional will advise you accordingly.
As the great Ronald Reagan said, "Trust but verify"!
Although beneficiaries can legally serve as trustees, they must act for the benefit of all beneficiaries and follow the instructions outlined in the trust.
Having a properly drafted trust is essential to providing clarity and reducing the risk of disputes.
Limiting the control a beneficiary who serves as a trustee has over the trust assets is vital to preventing unintended tax consequences.
With over 32 years of experience as an estate planning attorney, I have seen many variations on this theme.
Every family and every estate is different, requiring finesse to achieve a successful outcome for each.
Adding legal oversight to the trust through a trust protector or co-trustee can enhance the trust's functioning.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: SmartAsset (March 2, 2023) "Beneficiary vs. Trustee: Estate Planning Guide"
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