Can I Serve As Trustee AND Beneficiary?

When a trustee also serves as a beneficiary, particularly if they are a child of the trust creator (settlor, grantor, or trustor), various complexities can arise. Here are some considerations related to this situation:

1. Contentious Relationships: If the trustee-beneficiary has a contentious relationship with another beneficiary, especially a sibling, questions may arise about the trustee’s ability to remain impartial in trust matters involving that sibling.
2. Inheritance and Use of Trust Funds: If the trustee stands to inherit real property from the trust, questions may arise about the fairness of using trust funds for repairs on that property. Similarly, if the trustee is considering borrowing trust funds due to personal financial needs, it raises concerns about the appropriateness of such actions.
3. Withdrawing Money from the Trust: The question of whether a trustee, who is also a beneficiary, can withdraw money from the trust may arise. Trustees have a fiduciary duty to act in the best interests of all beneficiaries and must avoid any actions that could constitute a breach of trust.

While it is indeed possible for a trustee to also be a beneficiary, they must exercise extreme caution to avoid breaching their fiduciary duties. Trustees, as fiduciaries, are obligated to demonstrate absolute loyalty to all beneficiaries, maintain impartiality, and steer clear of conflicts of interest. They should never prioritize their personal interests above those of other beneficiaries.

Beneficiaries, on the other hand, should remain vigilant to ensure that the trustee’s dual role does not compromise fair administration of the trust. This emphasizes the importance of transparency, communication, and adherence to fiduciary responsibilities in trust management.

When establishing a traditional living trust, it is common for the settlor to initially nominate themselves as the sole trustee and beneficiary during their lifetime. The discussion about conflicts of interest between trustees and beneficiaries often revolves around the successor trustee, who is nominated by the settlor to assume the role of trustee upon the settlor’s death or incapacitation. The potential conflict arises when the successor trustee is also named as a beneficiary, especially in trusts with multiple beneficiaries.

In California, the requirements for someone to serve as a trustee are relatively few:

1. Age: The trustee must be 18 years of age or older.
2. Citizenship: The trustee must be a U.S. citizen to avoid adverse tax consequences.
3. Mental Capacity: The trustee must be of sound mind.

While many individuals named as successor trustees likely meet these qualifications, it does not necessarily mean they should accept the appointment. The next section discusses reasons why trustees might decline their appointment, even if they meet these basic qualifications.

Why Might a Trustee Beneficiary Want to Decline Their Appointment as Trustee?

A trustee who is also a beneficiary may have valid reasons for declining their appointment as trustee. Here are some considerations:

1. Diligence and Fair Administration: If a trustee believes that they may not be able to diligently and fairly administer the trust, it is considered responsible for them to decline the appointment.
2. Risk of Breach of Fiduciary Duty: A trustee who is also a beneficiary faces the risk of being accused of a breach of fiduciary duty. If beneficiaries can demonstrate such a breach, the trustee may not only be subject to removal but could also face a surcharge. In this scenario, the trustee may be held personally liable for paying damages, as well as their own attorney fees and costs.
3. Conflicts of Interest: The conflict of interest arising from being both a trustee and beneficiary could potentially lead to disputes and allegations of impropriety. Other beneficiaries in the trust may be concerned about potential misconduct related to this conflict of interest.

In situations where a trustee and beneficiary conflict of interest is present, beneficiaries are advised to consider consulting with a trust lawyer. Legal guidance can help them monitor the trustee’s actions and address any concerns related to potential misconduct. It is crucial to ensure that the trustee fulfills their fiduciary duties and acts in the best interests of all beneficiaries to maintain the integrity of the trust.

Can a Trustee Be a Beneficiary of a Discretionary Trust?

Yes, a trustee can be a beneficiary of a discretionary trust. In a discretionary trust, the trustee has the authority to use their discretion in deciding when and to whom trust fund distributions should be made. However, it’s important to note that the trustee may not be able to make unilateral decisions, and there may be co-trustees involved who need to approve discretionary decisions concerning the trust.

In a discretionary trust, the trustee holds legal title to the trust property, but there are no specific beneficiaries designated to receive trust assets at present. The trustee has the flexibility to determine distribution recipients based on their discretion.

Can a Trustee Remove a Beneficiary of a Discretionary Trust?

Technically, since there are no specific beneficiaries designated to receive trust assets in a discretionary trust, the trustee cannot “remove” a beneficiary. Instead, the trustee has the discretion to decide whether or not to provide a particular beneficiary with a distribution.

Concerns and Accountability:

While a trustee of a discretionary trust could potentially allocate a significant portion of assets to themselves if the trust allows it, doing so may be considered a breach of trust if it is perceived as favoring the trustee’s interests over other beneficiaries. In such cases, the trustee may be held personally liable for breaching their fiduciary duties.

To ensure fairness and accountability, discretionary trusts often involve co-trustees who can hold each other accountable and ensure that trust assets are distributed impartially. If potential beneficiaries have concerns about the trustees acting unfairly, seeking legal advice from a trust lawyer can help them investigate the situation and take appropriate action.