Clients often naturally name their children to be beneficiaries of their revocable living trusts. Many clients also wish to name one or more of their children as the trustee of that trust but are not sure if that is allowed by the law. While a beneficiary is allowed to be a trustee of the same trust, it may not be the best option, and certain guidelines must be followed.
Is it a good idea for a beneficiary to be a trustee?
There are good reasons for naming a trust beneficiary as trustee. For many, it is convenient choice. A trust’s beneficiaries are usually known, loved, and trusted by the trustmaker, so it makes sense to select one of the beneficiaries as trustee. Also, a trustee-beneficiary has a vested interest in ensuring that the trust is administered in accordance with the trustmaker’s intentions because it benefits them (though this might be less true if the beneficiary is unhappy with their portion of the trust proceeds).
However, there are some downsides to naming a beneficiary as the trustee. Making one of the beneficiaries the trustee can potentially create conflict with the other beneficiaries. The other beneficiaries may wonder why they were not selected as trustee and may resent the beneficiary who was selected. Having a beneficiary serve as trustee could jeopardize the objectives of the trust. For example, if a primary aim of the trust is asset protection for the beneficiaries, that protection is weakened if the beneficiary is also named as trustee. Discuss the pros and cons of having a trustee-beneficiary with competent legal counsel experienced in these matters.
How can a trustee-beneficiary successfully perform the trustee’s fiduciary duties?
All trustees owe fiduciary duties to the beneficiaries of a trust, which means that the trustee must act in the best interest of all of the trust beneficiaries and ensure that the trust is administered according to its terms and the intentions of the trustmaker. Normally, trustees cannot use the money and property in the trust to benefit themselves. The obligation to act in the best interest of all the beneficiaries becomes more challenging when the trustee is also a beneficiary. A trustee-beneficiary can successfully navigate these potential pitfalls by following a few simple guidelines.
First, a trustee should be transparent. The trustee should communicate openly and regularly with the other beneficiaries about what the trustee is doing and why. Lack of information often causes the other beneficiaries to jump to the worst possible conclusions. A trustee who is a beneficiary can avoid conflict with the other beneficiaries by being up-front and open about their actions.
Second, a trustee-beneficiary should precisely follow the terms of the trust and avoid the appearance of any preference to themselves. This may seem obvious, but many trustees mistakenly assume that because they are trustee, they are in charge and can do whatever they like with the money and property in the trust. This is never true, but a trustee-beneficiary should take particular care to offer the other beneficiaries the same privileges they take for themselves. For example, if the trustee is going to make a loan from the trust to themselves as beneficiary, the trustee should let the other beneficiaries know that they may also share this benefit. This communication will avoid the appearance of inappropriate self-dealing by the trustee-beneficiary.
Finally, a trustee-beneficiary should keep careful records of the tasks they perform and the time they spend administering the trust. If the trustee is compensated, they should compensate themselves at a reasonable rate. A trustee’s duties can be time consuming, sometimes frustrating, and can take an emotional and physical toll on the trustee. If a trustee-beneficiary receives a fee for acting as trustee, it can leave the other beneficiaries questioning what they did to deserve it. A trustee can strengthen their argument that they are being fairly compensated by keeping careful records of the tasks accomplished and the time spent on those tasks.
There are many valid and sensible reasons for choosing as trustee someone who is also a beneficiary of a trust. Following these simple guidelines will ensure that the trustee-beneficiary does not violate their fiduciary duties and will help to maintain goodwill among the other beneficiaries.
Please schedule time with us to review or start creating your estate plan. We will help you carefully decide who is best suited to act as trustee for your plan, based on your specific circumstances and objectives.