Trusts are useful estate planning tools. They can help you pass assets to intended beneficiaries while limiting tax burdens. Many people also use them to pass assets along while they are living to qualify for assistance programs. But can the trustee be a beneficiary when you set up an estate? Let’s find out.
In Most Cases, the Trustee Can Be a Beneficiary
In many situations, a trust beneficiary can also be a trustee. Many family trusts use this format for convenience. However, any trustee must be able to carry out their fiduciary responsibilities. There must also be no conflicts that could jeopardize the standing of the trust.
The Trustee Role
A trustee is the person or business that oversees the trust’s assets. They have several duties, including responsibility for investments, distributions, and tax filings. Trustees must follow the instructions laid out in the formation documents, which may run counter to their own wishes. As a general rule, trustees must act in the best interest of the beneficiaries within the confines of the trust’s instructions.
The Beneficiary Role
Trust beneficiaries are the individuals who receive the assets from a trust. It can be in a form of a lump-sum payment, regular income payments, or access to trust assets. For example, a trust may allow a beneficiary to live in a property held in trust.
Beneficiaries are entitled to information about trust assets and their management, and they can hold a trustee responsible for mismanagement. They are different from heirs and typically have more rights to trust assets.
Potential Conflicts of Interest When a Trustee Is Also a Beneficiary
While the trustee can also be a beneficiary, that scenario leaves room for conflicts of interest. These can range from decisions about assets to failing to inform other beneficiaries of decisions.
Because a trustee is responsible for all the decisions regarding investment and distribution of a trust, there is a potential for them to prioritize their own interests over those of the trust. They may also engage in self-dealing, where they make trust decisions or distributions that disproportionately benefit themselves.
The potential exists for a beneficiary to display bias, either conscious or unconscious, in their decisions. This can lead to other beneficiaries feeling overlooked or neglected. In some cases, the others may choose to contest the terms of the trust.
Managing Risks of Appointing a Trustee-Beneficiary
With careful planning and oversight, it is possible to manage the risks of appointing a beneficiary to serve as a trustee. This starts before the decision is made and announced.
As a grantor, you should evaluate any potential conflicts of interest a trustee has. This can be anything from current investments to business interests to personal beliefs.
If you are establishing a family trust, you also want to consider any unique dynamics between members that may cause you to reevaluate the decision. While the trustee can be the sole beneficiary of a trust, you should always exercise caution when designating a family member as the trustee. A simple family dispute or rivalry can quickly spiral out of control when assets enter the picture.
Additionally, trusts with complex business interests or very large sums of money may be better served with a professional manager.
As part of the formation process, consider adding processes that help ensure transparency and impartiality. For example, while trustees can generally sell assets without outside approval, you could require the trustee to notify all other beneficiaries of any distributions. Another approach is to require in-depth documentation that any beneficiaries or an outside party can review to ensure proper management.
Benefits of the Trustee Being a Beneficiary
While there can be conflicts of interest when a trustee is also a beneficiary, there can also be advantages to the arrangement. First, it is an efficient system. A trustee-beneficiary has a clear interest in managing the trust assets.
It is also cost-effective. When you choose a family member to be the trustee, you do not have to pay an outside firm or representative to manage trust assets. That can help lower overhead and preserve trust assets for eventual distribution.
Another positive aspect of appointing a beneficiary to be a trustee is that there is already a level of trust established between the parties. A grantor generally plans to leave assets to someone they know, respect, and trust.
The Trustee Can Be a Beneficiary: Learn How With AmeriEstate
A trustee can be a beneficiary, and this is a very common practice. It can be a solid choice in some situations, such as smaller family trusts or one between spouses. The legal professionals at AmeriEstate can help you navigate the process of forming a trust, including deciding if having a beneficiary as a trustee is a good idea. Contact us to request more information.