Can a Trustee be a Beneficiary for Revocable & Irrevocable Trusts

Understanding Trusts

A trust is an entity that has separate but distinct rights by law, a definition that legally places them on similar levels as corporations or people. It refers to a fiduciary relationship in which trustors give trustees the legal right to hold title to property and manage it on behalf of the trustor’s beneficiaries.

Roles in a Trust

Trusts have three different parties, which include:

• A trustor: This is an individual who creates a trust, funds it and transfers fiduciary duty to a trustee who maintains it for the beneficiaries.
• A trustee: Trustees are in charge of holding, maintaining, and administering a trust and acting in the best interests of the beneficiaries.
• A beneficiary(s): This refers to an individual or individuals that receive rights, assets or benefits from a trust.

Types of Trusts

There are several types of trusts and they all fit into one or more of six categories. These categories include:

• Living or Testamentary
• Revocable or Irrevocable
• Funded or Unfunded

Living trusts, also called inter-vivos trusts, are a written document that places a grantor’s property in a trust for their individual use during their lifetime. The trustor names a trustee who handles the trust’s affairs and disburses its assets to the beneficiary when the trustor passes on.

On the other hand, Testamentary trusts refer to will trusts that come into effect and specify how a grantor’s assets are divided among their beneficiaries once they pass on.

Revocable and irrevocable trusts are two sides of a single coin. They refer to trusts that can be changed during a grantor’s lifetime (Revocable Trusts) and those that can not (Irrevocable Trusts). Often the primary factor determining whether trusts are revocable or irrevocable is whether the grantor’s property has completely moved out of their possession.

Funded trusts often have assets put into them during the grantor’s lifetime, while unfunded trusts don’t. Usually, unfunded trusts expose the grantor’s assets to issues they are designed to avoid, so grantors are advised to fund their trusts early on to prevent such instances.

Purpose of a Trust

Trusts serve many purposes and can be used by many different people in society, even though they are often associated with the super-rich. The primary goal of a trust is to protect your property and ensure it goes on to your beneficiaries once you pass on. You could set up a trust to protect your beneficiary from creditors, pay for their education, protect the property from taxes, etc.

Trustee and Beneficiary Roles

Trustee Duties Explained

Simply put, a trustee is responsible for acting as a custodian for all the properties held in a trust. Their responsibilities include managing and administering a trust’s finances following the instructions given in the trust. Often, individuals who create a trust act as trustees until they are incapacitated or even dead.

In such instances then the successor trustees will take over and handle various responsibilities of the trust, including distributing funds to the trustees, recording income, expenses, taxes, and keeping track of any transactions related to the trust. Simply put, trustees act in the best interest of the trust and are responsible for managing its assets on behalf of the beneficiaries.
Beneficiary Rights Overview

Ideally, a beneficiary has the right to information, which means that the trustee should be able to keep them abreast of all current decisions and the state of the trust. More importantly, beneficiaries have the right to distributions, which means they are legally entitled to get their part of the trust as provisioned.

Also, the beneficiary has the right to get proper accounting from the trustee regarding how they’ve managed the estate. They also have the right to challenge the trust or will, and many more. As such, beneficiaries are encouraged to understand their rights to help them protect their interests and ensure the distribution process is fair and transparent.

Dual Role Possibilities

Can the beneficiary of a trust be the trustee? In most cases, trustees can also be beneficiaries in a trust. Regardless, the truster should set up such structures appropriately to ensure they comply with the legal requirements and prevent unintended circumstances. This is done to protect both the beneficiaries and the proper functioning of the trust.

Pros and Cons of Dual Roles

Advantages of Dual Roles

The advantages of being a beneficiary and a trustee include control over the assets and the ability to plan for future distributions. This is particularly advantageous for trustors who want to have some control over the trust’s assets for protection or tax planning and benefit from them during their lifetime.

Challenges Faced by Dual Roles

Holding both roles as a trustee and beneficiary can bring about many legal challenges, making it hard for one to discharge their duties as a trustee. However, the most important one is that other beneficiaries could claim a conflict of interest and declare one unfit as a trustee.

Legal Implications to Consider

Being sued for conflict of interest as a beneficiary and trustee can bring about complex and lengthy court cases, especially if you have violated your legal responsibility as a trustee. Thus, as a trustor then you should consider holding or appointing someone to the dual roles of trustee and beneficiary to avoid conflicts and fulfill the trust’s purpose.

The trustee beneficiary should have a trust and estate lawyer to guide them during trust administration. In contrast, the beneficiaries are advised to work with a trust lawyer who will assess whether the trustee has a conflict of interest that is getting in the way of administering the trust fairly.

State Regulations and Legalities

State Specific Rules

Different state-specific rules guide trustees who are also beneficiaries. For instance, in California, the beneficiary trustees must adhere to California probate law and disclose any conflicts of interest. In New York, beneficiaries must provide an annual accounting to the beneficiaries. Thus, you should contact your attorney for state-specific rules in your state.

Important Legal Advice

The most important step for trustees is consulting an attorney before making major decisions when managing the trust. You should also communicate with the beneficiaries, fill them in on important information, and document everything. You should know your rights as a trustee and beneficiary and avoid instances that could lead to conflicts of interest and potential court cases.

Lastly, can you be the sole trustee and sole beneficiary? Doing this creates a scenario that allows you to exempt your property from taxes, which the government does not allow and makes the entire trust illegal.

Compliance with Laws

Trustees should ensure that they comply with laws regarding trust management when dispensing their duties. Doing this will reduce conflict of interest in cases where they are also the beneficiaries and avoid any lawsuits that would otherwise be filed by other beneficiaries of the trust.

Key Considerations for Trust Management

Trust Structure Variations

There are three types of trust structure variations, including
Relying on the trust deed: This is where trust deeds allow trustees to vary different terms in a trust. It is the quickest way for trustees to effect a variation.

Consent from the beneficiaries: In this instance, beneficiaries who are of age and absolutely entitled to a trust direct the trustee to close the trust and distribute the assets.

Court-driven processes: These are lengthy ways of creating variations where trustees go through court processes to effect changes to a trust. However, the court has to determine that the changes sought are in the trust’s best interests.

Effective Management Tips

Here are some effective management tips as a trustee:

• Read and understand the trust
• Meet with a lawyer and wealth manager (in case there are
• financial assets to manage)
• Accept the trusteeship
• Keep good records
• Get professional help when needed
• Stay in touch with the beneficiaries
• It’s okay to say no to being a trustee

Common Pitfalls to Avoid

• Dome common pitfalls you may want to avoid include:
• Poor communication with the beneficiaries
• Keeping inaccurate reports
• Conflict of interest
• Family conflicts
• Inability to perform well
• Lack of time

Final Thoughts

Beneficiaries assigned as the trustees of an estate have the advantage of working from the inside and ensuring the trust is highly profitable to all beneficiaries, including themselves. Thus, they have to follow all the guidelines stated in the trust to avoid decisions that may cause a conflict of interest or lead to the beneficiaries filing a lawsuit. Lastly, they should work in the best interests of the beneficiaries and ensure the trustor’s wishes are met as stated in the trust.

Frequently Asked Questions