Can a Trustee Also Be a Beneficiary?

Executive Summary

• Trust administration usually follows a three-party system with settlors who establish trusts, trustees who manage them and distribute assets, and beneficiaries who receive distributions.
• In most cases, a trustee can also be a beneficiary, but this dual role can lead to conflicts of interest that can jeopardize fiduciary duties and spur legal complications.
• Dual-role trustees should prioritize transparency, follow trust terms, and rely on co-trustees, independent oversight, and liability insurance to mitigate risks.
• Different trust types, such as revocable, irrevocable, discretionary, and self-settled, uniquely impact trustee-beneficiary dynamics and demand certain legal safeguards like appointing contingent beneficiaries or co-trustees to maintain compliance and trust validity.

Introduction

In most cases, the person responsible for managing a trust can also receive benefits and assets from the trust. Even though a trustee can be a beneficiary of a trust in most cases, it may generate issues like favoritism over other beneficiaries, potentially compromising the trustee’s fiduciary duties and leading to legal complications.

Understanding the traditional three-party trust structure and the corresponding responsibilities of settlors, trustees, and beneficiaries is essential before considering dual role opportunities. If the creator of the trust, known as the settlor, affirms that a trustee can be a beneficiary, the individual still has to follow their state’s probate laws. For example, California Probate Code § 16003 states that a trustee of a trust with multiple beneficiaries must act impartially and in the best interest of all beneficiaries.

The guide below explores what holding a dual role could look like, potential restrictions, and trustee vs beneficiary rights. Still, you should seek legal guidance to confirm if a trustee can also be a beneficiary based on your specific situation.

Key Roles in Trust Administration

To ensure effective trust administration, you must have clarity on the roles of various parties. Read through the breakdown below to learn what key roles are involved in administering the trust.

Settlor: Powers and Limitations

The person creating a trust is known as the settlor. In revocable trusts, the most common type of trust, the settlor continues to hold broad powers to amend or revoke the trust at any given time. Alternatively, irrevocable trusts require the settlor to forfeit most of their power once the trust is established, meaning they cannot alter the trust without the beneficiaries’ consent. 

It is also worth noting that the settlor may face unique tax implications depending on the type of trust they choose. For example, the settlor will likely be responsible for reporting income generated by trust assets while they are alive, especially if they use a revocable trust. Nevertheless, consulting a reliable estate planning attorney is the best way to receive insight about potential tax implications related to a settlor’s trust setup.

Trustee Responsibilities: Legal Duties and Authority

The settlor will select a trustee to manage the trust while upholding a fiduciary duty to act in the trust’s best interests. This means they are held to a legal standard that requires them to invest assets reasonably, manage trust assets responsibly, and maintain their duty of loyalty and impartiality.

To accomplish this, trustees should keep clear and accurate records of all transactions and provide regular accountings to beneficiaries. Although each trust requires unique duties, most trustees can ensure they always act in the trust’s best interest by following the checklist below.

Again, each situation is unique, meaning settlors, and trustees, and their attorney should build a unique task checklist based on the needs of their specific assets and other relevant demands.

Ensuring Trustees are the Right Fit

To help guarantee a candidate will adequately fulfill the role of a trustee, the settlor should ask questions to get a feel for their capabilities before they subject them to a more in-depth interview process. Some questions or prompts that may be beneficial to ask include:

• Do you have experience with managing trusts? If so, please describe your experience.
• How would you describe the settlor’s wishes based on what you know about the trust?
• How financially knowledgeable would you describe yourself on a scale of 1-10?
• How legally knowledgeable would you describe yourself on a scale of 1-10?
• Explain a time you were impartial and fair.
• What techniques do you use to remain organized and decisive under pressure?
• Do you have the necessary time and commitment to serve?

Although the individual’s answers will never fully illustrate how effective they will be serving as trustees, they can help settlors direct their attention to promising candidates.

Successor Trustees: Selection Criteria and Transition Planning

Although every settlor hopes their primary trustee(s) can perform their job for as long as possible, selecting a successor trustee is critical to trust planning. Doing so ensures that when the original trustee can no longer serve, there is a smooth transition to the next best person or entity that can guarantee the assets maintain or increase their value and are distributed to beneficiaries accordingly. 

Some things a settlor should consider when selecting a successor trustee are:

• Choosing someone who has previous experience with trust administration
• Picking a candidate that truly understands the trust’s objectives
• Ensuring the selection will always exhibit impartiality

Beneficiary Rights and Entitlements

Any individuals or entities intended to benefit from the trust are entitled to certain information and services. For instance, beneficiaries have the right to know about the trust’s existence, be informed about how trust assets are managed, and receive distributions that align with the trust’s terms.

Trustees should send out a beneficiary notice to alert beneficiaries of the existence of the trust and its status, and ongoing updates are essential. California Probate Code § 16062 states that California-based trustees must provide beneficiaries with periodic, transparent accountings. Beneficiaries also have the right to request an accounting from a trustee, and if the trustee refuses to comply, the beneficiary has the right to pursue legal remedies.

Heirs vs. Beneficiaries: Critical Legal Distinctions

Heirs and beneficiaries are not the same. Beneficiaries are designated in a trust or will, while heirs inherit assets under intestate succession laws when no will or trust exists. The comparison table below can help you clarify the differences between heirs and trust beneficiaries, particularly when it comes to the probate process or estate administration.

Dual Roles: When Trustees Are Also Beneficiaries

Sometimes a settlor wants to ensure a trustee can also be a beneficiary of their trust. The following considerations will help you figure out if this dual role option is feasible based on your specific situation.

Can a Trustee Also Be a Beneficiary of a Trust? Legal Analysis

Yes, the United States usually deems it legally permissible for one person to serve as both a trustee and a beneficiary of a trust. However, some examples of important rules to remember for people living in California include:

• The person holding the duel rule has to be careful about self-dealing, which is prohibited by California Probate Code § 16004, meaning trustee-beneficiaries must justify transactions that benefit themselves.
• Trustees must act impartially if they are managing trust assets for multiple beneficiaries according to California Probate Code § 16003, and holding this dual role can make it hard to remain fair.

Following the demands of the probate codes mentioned above can help eliminate conflicts of interest of people holding the dual roles of trustee and beneficiary. Still, some courts regularly rule against dual-role arrangements that violate fiduciary duties by undermining the interests of other beneficiaries.

Family Trust Scenarios: Spouse as Trustee-Beneficiary

A typical scenario involves a settlor’s surviving spouse serving as both trustee and beneficiary in a marital trust. Although this arrangement is commonly used for continuity and facilitating the management of assets for the surviving spouse’s benefit, it may raise legal concerns and create tension with remainder beneficiaries if the surviving spouse’s decisions favor their own interests over the remainder beneficiaries, often children that are scheduled to receive distributions upon the surviving spouse’s death. This is especially true in second marriages where the remainder beneficiaries are the deceased spouse’s children who are not the children of the surviving spouse. 

Self-Settled Trust Advantages and Pitfalls

If the settlor wants to serve as both the trustee and a beneficiary, they must set up a self-settled trust. While this approach can offer flexibility in asset management, some states like California may impose limitations, especially regarding asset protection. On the other hand, states like Nevada or South Dakota offer more favorable rules for self-settled trusts.

Sole Trustee-Sole Beneficiary: Avoiding Trust Invalidation

If the sole trustee and sole beneficiary of a trust are the same person, there is a risk of merger, which is a legal doctrine that may invalidate the trust. To prevent this, the settlor must carefully draft the trust, name a contingent beneficiary or co-trustee, and include specific language to preserve the trust’s validity. If your trust is at risk of invalidation, contact a reliable trust litigation attorney to increase your chances of achieving the best possible outcome.

Successor Planning for Trustee-Beneficiaries

Careful succession planning is essential to ensure continuity in trust administration, especially as a trustee who doubles as a beneficiary approaches incapacity or death. The trust documents should include alternates using straightforward language, such as “Upon the [trustee-beneficiary’s name]’s incapacity, [successor’s name] shall serve as successor trustee.”

Trustee-Beneficiary Arrangements in Different Trust Types

Dual role arrangements can look different depending on the trust type. Some examples of trust types and their corresponding impact on trustee-beneficiary arrangements include:

• Revocable living trusts – Initially, the settlor typically serves as both trustee and beneficiary, retaining complete control while they are able. Then, upon incapacity or death, a successor trustee will take over.
• Irrevocable trusts – If a trustee is also a beneficiary in an irrevocable trust, they must limit their control over asset distributions to avoid estate tax inclusion.
• Discretionary trusts – To prevent conflicts of interest, a co-trustee should oversee distributions for a trustee-beneficiary. Including provisions in the trust that require an independent co-trustee’s approval can help.
• Special needs trusts – In this type of trust, a beneficiary usually cannot serve as trustee due to strict SSI/Medicaid rules. Ensure proper trustee selection to guarantee benefits are not lost.

In general, serving as both trustee and beneficiary may weaken asset protection. Appointing independent co-trustees and choosing trust types wisely can help provide additional security and protect against acts of impartiality or self-dealing.

Legal and Practical Implications

Consider the following implications that may accompany someone holding the dual role of a trustee and beneficiary.

Trust Validity: Essential Requirements Under California Law

For a trust to remain valid in California, it must meet all legal requirements, including clearly distinguishing roles. Without clear language in trust documents, overlapping roles can create legal ambiguities, potentially risking invalidation under the doctrine of merger if a sole trustee is also the sole beneficiary. 

Some elements you should confirm to ensure trust validity in California are:

• The trust should name at least one non-trustee beneficiary to prevent merger
• The trust instrument should explicitly outline trustee powers and limitations
• Co-trustees or successor trustees should be designated for continuity
• Language must stress the need for impartiality among beneficiaries in alignment with the trustee’s fiduciary duty

Conflict of Interest: Prevention and Management

Trustee-beneficiaries must avoid conflicts of interest to maintain trust integrity because preferential distributions, self-dealing, or lack of transparency can spur legal challenges. 

Some examples of red flags that may suggest a conflict of interest are:

• Distributions that unequally benefit the trustee-beneficiary
• A trustee-beneficiary failing to disclose decisions or trust accountings to other beneficiaries
• A trustee-beneficiary neglecting professional advice on trust administration

To avoid these issues, if the trustee-beneficiary is making a distribution to themselves, they should seek independent co-trustee approval. Additionally, if a trustee-beneficiary’s decisions would impact other beneficiaries financially, they should document their impartiality and provide justification. 

A good question for a trustee-beneficiary to regularly ask themselves is “Would a neutral third party perceive the action as self-serving?” If yes, they should consider delegation or seek court approval.

Fiduciary Duty Compliance for Trustee-Beneficiaries

A trustee-beneficiary must always act in good faith, meaning they cannot unfairly use their position to further their personal interests. Since courts scrutinize people with this dual role, trustee-beneficiaries should document all their trust-related decisions, explaining their potential impact on other beneficiaries, their rationale for the decision, and approval from a co-trustee or other party as necessary. 

Aside from keeping detailed records of all trust-related decisions and distributions, some other compliance-related tips trustee-beneficiaries should follow are:

• Seek independent appraisals for asset valuations for fairness
• Keep regular communication with beneficiaries to avoid disputes
• Turn to professional oversight like co-trustees or legal counsel for significant decisions

Co-Trustee Arrangements: Balancing Powers

Appointing co-trustees can help prevent conflicts, enhance oversight, and ensure fair trust management during dual-role scenarios. Implement an independent co-trustee or majority approval model to provide checks and added expertise that can reduce self-dealing risks.

Trust Amendment Options When Roles Change

In most cases, if the trustee-beneficiary role changes due to conflicts, incapacity, or legal concerns, a trust can be modified through various methods, including decanting or a court petition. Talk to a qualified trust litigation attorney in your area if legal issues arise that warrant a trust amendment.

Trustee Compensation Framework

Trustee compensation varies based on the type of trustee and the specific terms laid out in the trust. California Probate Code § 15681 entitles the trustee to “reasonable” compensation for the work and time provided if the trust document does not specify a trustee’s compensation. In many cases, courts accept 1% of the trust estate as reasonable, but this can vary based on the value of the trust, the trust’s complexity, and the trustee’s responsibilities.

In California, trustee compensation usually takes the following model: 

• Corporate trustees typically charge an annual fee that ranges from 1% to 2% of the trust’s assets. 
• Professional trustees may opt for a different payment plan—they are usually compensated hourly, and charge around $100 per hour in California. 
• Private trustees, who are usually friends or family members of the grantor, may only ask for somewhere between $25 to $45 per hour for their services, though some may choose not to accept payment at all.

It is important to remember that trustee fees are taxable income to the trustee and should therefore be reported on their personal income tax returns.

Risk Management for Trustee-Beneficiaries

Since serving as both a trustee and a beneficiary can present unique challenges around conflicts of interest, fiduciary duties, and trust administration, being equipped with risk management strategies is essential for maintaining compliance with legal requirements and protecting the best interests of all beneficiaries.

Some examples of relevant risk management strategies trustee-beneficiaries can try include:

• Consistently providing accurate accounting to beneficiaries
• Avoiding self-dealing and conflicts of interest
• Adhering strictly to trust terms and fiduciary duties
• Having a third party conduct periodic audits to ensure fair administration
• Keeping detailed records of income, expenses, distributions, and investments
• Holding routine meetings with beneficiaries to discuss trust matters
• Encouraging open dialogue to quickly and proactively address concerns

Although the strategies above may help mitigate risks by maintaining transparency in trust management, liability insurance can protect trustees against legal claims from beneficiaries. For instance, errors & omissions insurance can help cover legal mistakes or omissions while fiduciary liability insurance can protect against certain breaches of fiduciary duty.

Special Considerations for Blended Families

Blended families include a couple and their children from this and previous relationships, who may find it challenging to select trustees and manage trusts due to complicated family dynamics. Some approaches you can take to ensure that the interests of all beneficiaries, including children from previous marriages, are fairly represented are:

• Select an impartial trustee who understands your family dynamic and trust administration needs
• Promptly address conflicts between income beneficiaries like a current spouse and remainder beneficiaries, such as children from a prior marriage
• Include strategic trust provisions that balance financial support for the surviving spouse while preserving assets for children after the spouse’s passing
• Since step-children may feel disadvantaged, especially if the trustee is a biological parent, it is important to prevent favoritism by implementing straightforward trust provisions
• Check to ensure that any trust provisions for a former spouse comply with divorce agreements. For example, clearly define any alimony or ongoing financial obligations within the trust

Family communication is essential, especially for complex family dynamics like those in blended families. In addition to the steps above, try holding family meetings to provide updates and address concerns related to the trust.

Ready to Navigate the Trustee-Beneficiary Relationship? Consult with RMO Lawyers Today

In most situations, a trustee can be a beneficiary of a trust. Still, it truly depends on the trust type and the individual’s ability to meet other standards and exhibit traits like impartiality. To ensure your trust remains effective and compliant, consider regular trust reviews, especially if a party holds the dual role of trustee and beneficiary.

Consider consulting legal experts if you face any uncertainties regarding whether a trustee can also be a beneficiary. The trust administration attorneys at RMO Lawyers have decades of experience in trust administration and litigation cases. Our team can skillfully guide clients through the complexities of trust administration and fiduciary duties to help avoid conflicts.

Schedule a free consultation with the reliable attorneys at RMO Lawyers for invaluable support.