Under some limited circumstances, someone could wear two hats as a trustee and beneficiary of the same trust. While it is technically possible to set up your trust this way, you may want to consider alternatives.
What Are Trustees and Beneficiaries?
The trustee or multiple trustees of a trust manage and oversee trust assets for the benefit of trust beneficiaries. Trust beneficiaries receive payments from the trust, on a regular schedule, when some event occurs, or at the trustee’s discretion. The creator of the trust chooses both trustees and beneficiaries when the legal document that creates the trust is prepared.
What Happens if a Trustee Is Also a Beneficiary?
Usually, the trustees and the beneficiaries are different people or entities. Trustees are often relatives, lawyers, or trust companies. Beneficiaries are often children or relatives, or they may be charitable organizations.
Sometimes the creator of the trust is also the trustee. More rarely, the trustee is also one of the beneficiaries. This could occur if one of the trustees steps down and the only person available to replace him is a beneficiary. Also, this could occur if the trust creator (called a “grantor”) intentionally sets the trust up this way.
What Are the Downsides to Having a Trustee Also Be a Beneficiary?
First and foremost, the trustee may have a conflict of interest – especially if there is more than one beneficiary. He would need to be careful not to place his interests above that of the other beneficiaries. Having a conflict of interest could lead to removal of the trustee or a legal battle over control of the trust.
Second, creditors may be able to access trust assets despite the presence of a spendthrift clause in the trust document. In some situations, having a sole trustee who is also a beneficiary gives creditors the ability to make claims against the trust’s principal (not just its income or interest) despite the trust’s supposed asset protection language. Put differently, the trust could lose money because the trustee is a beneficiary.
In short, there are few benefits and some significant downsides to naming someone both a trustee and a beneficiary of the same trust. It is better to select different people for those roles. The trustee or trustees, in particular, should be people that the trust creator really trusts to handle money and make hard decisions.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.