Clients often naturally choose 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. The short answer is yes, you can have a trustee who is also a beneficiary of the same trust—but it may not always be wise, 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 beneficiary as trustee. For one, it is convenient. A trust’s beneficiaries are usually known, loved, and trusted by the trust maker, 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 trust maker’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, you should be aware of 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. Keeping in mind the reason the trust was created in the first place is also important. For example, if a primary aim of the trust is asset protection for the beneficiaries, having a beneficiary serve as trustee could endanger that objective. This is why it is important to 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 Fiduciary Duties?

All trustees owe fiduciary duties to the beneficiaries of a trust. In the simplest terms, a fiduciary duty means that the trustee must act in the best interest of the trust beneficiaries and ensure that the trust is administered according to its terms and the intentions of the trust maker. Normally, trustees cannot use the money and property in the trust to benefit themselves. For example, if you have made a trust for the benefit of your child, and named your brother as the trustee, your brother has the duty to administer the trust in the best interests of your child, according to the terms you wrote down in the trust. Additionally, your brother can’t use any of the money or property you used to fund the trust to benefit him, it all must be used to benefit your child.

The obligation to act in the best interest of the beneficiaries becomes fuzzier, however, when the trustee is also a beneficiary. If we go back to our earlier example, this would be as though you created a trust for the benefit of all your children, and made one of those children the trustee. Even though the trust is partially for your trustee-child’s benefit, that trustee-child has a duty to act in the best interest of all your children, not just their own interest. A trustee-beneficiary can successfully navigate these potential pitfalls by following a few simple guidelines.

First, a trustee should be transparent. This means that the trustee should communicate openly and regularly with the other beneficiaries about what they are doing and why. Beneficiaries who do not know what a trustee is doing will often jump to the worst possible conclusion. A trustee, who is also 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 fairly obvious, but many trustees have the mistaken notion that being trustee means that they are in charge and can do whatever they like with the money and property in the trust. This is never true, but a when acting as a trustee, beneficiaries 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 take advantage of this possibility. 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 and should compensate themselves at a reasonable rate. A trustee’s duties can be time consuming indeed, and it is only fair that the trustee be compensated for time spent on trustee tasks. But when a trustee-beneficiary receives hundreds or thousands of dollars in compensation, it can leave the other beneficiaries questioning what they did to deserve that. 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 valid and sensible reasons for choosing a trustee who is also a beneficiary of a trust. Following these simple guidelines will ensure that the trustee-beneficiary does not run afoul of their fiduciary duties.

Give Us a Call

If you have have questions about whether to name a beneficiary as the trustee of your trust, or if you considering drafting a brand new trust, we can work with you to ensure that your wishes are clearly laid out for all your trustees and beneficiaries. Give us a call today! Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area.  For more information and to learn about our firm, please contact us.