An heir can be named as a trustee, even if he is a beneficiary. However, there are issues to consider when naming an heir as a trustee. The role of the trustee is to ensure that property is maintained and distributed for the benefit of the beneficiaries. As such, a beneficiary-trustee may be tempted to not share the trust property with the other beneficiaries and keep it all for himself.
While an heir can be a trustee, other issues may disqualify him from serving the trust. The selected heir must be able to legally possess and manage trust property. Generally, the trustee must be 18 or older and mentally competent.
A trust agreement is the document that defines the terms of the trust. It identifies the beneficiaries, trustees and time when trust property should be distributed to the beneficiaries. Something to look for when reviewing the trust agreement is how much discretion the trustee has when distributing the trust property. Some trusts firmly define what distributions can be made with a specific clause. An example of a specific trust limit would be “$10,000 to each beneficiary annually.” Other trusts might give the trustee discretion to distribute trust’s assets based on the circumstances. If a beneficiary-heir serves as a co-trustee in a trust you are creating, you may want to limit the co-trustees’ discretion in distributing trust property.
Read More: Requirements for a Irrevocable Family Trust Agreement
Trustees owe a fiduciary duty to beneficiaries. Among other issues, a trustee cannot act in a way that enriches himself at the expense of the beneficiaries. If a co-trustee is an heir-beneficiary, this may pose a problem. A trustee is responsible for distributing the trust assets to the beneficiaries. As a result, a trustee-beneficiary could take actions to enrich himself. To protect against a potential breach of fiduciary duty, consider structuring the trust agreement so that the beneficiary-trustee cannot distribute property either at all or to himself. If the other co-trustee is not a beneficiary, he can be put in charge of distributing the trust property and minimize the possibility of a breach of fiduciary duty.
One benefit of a trust is that it can protect trust property from being seized by the beneficiaries’ creditors. If a beneficiary is also a trustee, the beneficiary’s creditors might be able to seize the trust property through a court order. The theory is if the trustee can withdraw property from the trust for himself at any time, he should be able to obtain the necessary cash to pay off the debt. As a result, the trust should not offer protection against a beneficiary-trustee's creditors in that scenario. A few ways to prevent a beneficiary’s creditors from seizing trust property is to have multiple beneficiaries to the trust, make the co-trustee an unbiased third party and limit distribution by detailing specific, clear standards in the trust agreement.
- American Law Institute – American Bar Association: Tax-Sensitive Powers Regarding the Beneficiary-Trustee
- National Paralegal College: Appointment and Qualification of Trustee as Fiduciary
- Living Trust Network: Types of Trusts
- Mitchell & Associations: Fiduciary Duties of Trustees
- HuschBlackwell: A Beneficiary Serving as Trustee May Affect Asset Protection