Can a Trustee Also Be a Beneficiary?

If you research the definition of “trust” from the Realized website’s glossary, you’ll see different types of trusts; land trusts, living trusts, irrevocable trusts, and so on. Boiling it down, a trust is a relationship in which a trustor (generally the owner of assets) turns over management and holding rights to another entity (known as a trustee). 

The goal of trusts is to protect assets from excessive taxation and to avoid probate upon the trustor’s death. But the question that also might occur is who should serve as a trustee, and whether the trustee can be a beneficiary, as well.

Technically, the trustee and beneficiary can be one and the same. There isn’t any law or regulation that prevents it; in fact, it’s common practice to do this with irrevocable trusts. For many trustors, putting a trusted spouse, child, or close friend in the position of trustee-beneficiary can be convenient. In such a situation, the trustor can rest assured that the trust will be well managed.

But before dashing off to put your loved one or best friend in these roles, keep in mind that this dual position could result in a conflict of interest, which might erode the trust’s purpose and integrity.

Trustee: Holding and Managing Assets

When a trustor forms a trust, he or she turns over both legal title and asset management to a trustee. The trustee’s main responsibility is to keep an eye on, and administer, property and capital assets for both the trustor and ultimately, the beneficiary. The trustee has a fiduciary duty to act in the trust beneficiary’s best interests. Other duties are indicated through the parameters of the trust, and can include:

  • Distribution from the trusts to its beneficiaries
  • Investment of the trust’s assets
  • Protecting the assets from future creditors
  • Paying the trust’s bills and any federal or state taxes
  • Keeping the trust’s transaction records up to date

Being a trustee is not a job for the faint of heart. Nor is ideal for an individual who doesn’t like paperwork. The issue can also be complicated if that trustee is also a beneficiary of the trust.

Beneficiary: The Recipient of Distributions

While a trustee manages and oversees a trust’s disbursements, a beneficiary is the recipient of those funds. Beneficiaries can be named in trust documents or, in some cases, meet specific stipulations or definitions that make them eligible for receipt of distributions. A close family member might fulfill this requirement, though beneficiaries of trusts are more often specifically spelled out in the paperwork. In fact, a beneficiary of a trust is either an individual, or group of individuals, that the trust was created for. 

One Individual, Two Hats

What happens if a trustee and beneficiary are one and the same? On the one hand, this individual has the responsibility for ensuring that the trust is managed in accordance with the trustor’s requirements and intentions. On the other hand, it also means that the trustee is also entitled to distribution from the trust’s assets. 

If such a situation isn’t managed properly, or the trustee-beneficiary is ignorant or dishonest, this could lead to conflicts of interest. 

Conflicts-of-interests are apparent if the trustee:

  • Invests trust funds in personal business
  • Uses trust funds to pay personal debt
  • Sells trust properties to themselves or to another trust at a lower-than-market value
  • Takes on loans from the trusts
  • Sells trust property to another trust for below-market value

Let The Trustor Beware

Before designating anyone as a trustee-beneficiary, first talk to a competent lawyer. Be sure that your reasons for taking this step make sense, and that the individual you have in mind will follow terms of the trust, is ready to communicate openly and honestly with other beneficiaries, and that he or she avoids any self-preference. 

The goal of a trust is asset preservation and protection for future generations. As such, a trustee should be honest and sincere, especially if also a beneficiary.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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