Trusts are powerful tools in estate planning. They control how assets are distributed, minimize the need for probate and provide long-term financial protection. One question that often arises is whether a trust beneficiary can also act as the trustee.
The answer is yes, under certain conditions. However, while it’s legally permissible in many cases, this arrangement can be risky without proper guidance. A trust must be structured carefully to avoid legal complications, tax issues, or accusations of self-dealing.
A trustee is the person or institution appointed to manage the assets held in a trust. Their job is to follow the instructions laid out in the trust document, which may include:
Trustees have a legal duty to act in the best interests of the beneficiaries. This is called a fiduciary duty. Even if the trustee is also a beneficiary, they must treat all beneficiaries fairly and follow the trust’s instructions without personal bias.
It’s common for adult children to be both trustee and beneficiary of a parent’s trust. In revocable living trusts, for example, a parent may name their child to manage the trust if they become incapacitated or after death.
This arrangement usually works well if the trustee-beneficiary is not the sole beneficiary and the trust has clear, objective terms. The more specific the instructions in the trust, the easier it is for the trustee to avoid conflicts and distribute assets fairly and equitably.
However, if the trustee has too much discretion and is also a beneficiary, other heirs may question their impartiality. That’s why well-drafted trust language is essential.
Serving as both trustee and beneficiary can create the appearance of a conflict of interest. For example, a trustee-beneficiary may have the authority to decide how much income to distribute or when to withhold funds.
This discretion can cause tension with other beneficiaries and increase the likelihood of legal disputes. To mitigate this risk, many estate planning attorneys recommend incorporating oversight mechanisms, such as co-trustees or trust protectors, to ensure the trust's integrity.
Tax consequences may also arise if the trustee-beneficiary has too much control. In some cases, this could cause the trust’s assets to be considered part of the trustee’s estate for tax purposes.
Trusts that include these dual roles must be drafted with precision to ensure that the arrangement is both legal and aligned with the grantor’s goals.
One of the most crucial aspects of trust planning is selecting the right trustee and establishing clear boundaries. An estate planning attorney can help ensure that naming a beneficiary as trustee does not undermine the trust’s purpose.
They can also help define the trustee’s powers, establish distribution rules and establish safeguards to protect all beneficiaries. Naming an independent trustee may sometimes be a better option, especially if the trust involves significant assets or complicated family dynamics.
Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. Schedule a quick and easy consultation with our estate planning attorney, Sedric E. Collins, Esq., or call 323-900-5450.
Reference: SmartAsset (March 2, 2023) "Beneficiary vs. Trustee: Estate Planning Guide"
