Every adult can benefit from a comprehensive, well-structured estate plan. A trust is an effective and efficient estate planning tool that allows many people to pass down property and assets to their selected heirs (beneficiaries). While trusts can be beneficial, they can also be intimidating. Many people have questions and concerns about what exactly you can (and cannot) do with a trust.
You may be wondering: Can a trustee also be a beneficiary? The short answer is ‘yes’—though trustees and beneficiaries have different rights and responsibilities, the same person can generally fill both positions. In this article, our Massachusetts estate planning lawyers provide an overview of the most important things to know about one’s ability to serve as both a trustee and a beneficiary.
Who Serves as a Trustee?
As defined by Black’s Law Dictionary, a trustee is the party appointed to oversee and administer a trust. Many different individuals and entities can serve as a trustee in Massachusetts. In creating a trust, you could appoint a spouse, an adult child, another family member, a close friend, a skilled professional (lawyer), or even a financial institution. There are no rules or regulations that prohibit a beneficiary serving as the trustee. In fact, it is a relatively common arrangement—especially for family trusts where the surviving spouse or an adult child is the primary beneficiary. If you need help on how to set up a living trust, just contact BK Estate Planning Attorneys.
Why May a Beneficiary Decide Not to Be Appointed as the Trustee?
A trustee is responsible for managing the trust. It is a position of power and authority. Many beneficiaries are interested in filling that position so that they can stay fully informed and protect their own best interests. At the same time, not all beneficiaries want to be appointed as the trustee. Indeed, there are several different reasons why a beneficiary may not want to serve as a trustee even though they are eligible to do so under the law. Here are three of the most common reasons why beneficiaries decline the role:
- Too Much Time and Responsibility: Trustees have important duties under Massachusettts law. Overseeing a trust can be complicated and time-consuming—especially if you have no prior experience. Not all beneficiaries are interested in taking on this responsibility. They may simply be busy with other personal or professional responsibilities.
- Worry About Conflicts: Some trusts have many different beneficiaries. As an example, an elderly couple could create a trust for the benefit of their ten (or more) grandchildren. When there are multiple beneficiaries, any particular beneficiary may prefer to decline the role of trustee to avoid potential appearance of conflicts. Even though a beneficiary can still be the trustee for these types of complex trusts, sometimes the parties prefer to appoint an independent person, such as a lawyer.
- Liability Risk: A trustee can be held legally liable for damages caused by a breach of fiduciary duty. Anyone serving as a trustee should be fully aware of the potential liable risk of failing to live up to their responsibilities under Massachusetts law or the terms of the trust. A beneficiary that declines an appointment as a trustee does not have to worry about this type of liability.
Is It Best for a Beneficiary to Serve as the Trustee?
Ultimately, the answer to this question truly depends on the specific circumstances of the case. There are both advantages and disadvantages to naming a beneficiary as the trustee. On the one hand, a beneficiary typically knows the trustee well, understands their wishes, and has a personal interest in making sure that the trust is administered properly. On the other hand, administering a trust can be complicated and time-consuming. There is also a risk of interpersonal conflict if one of multiple beneficiaries is serving as the trustee. As a general rule, a beneficiary should only serve as the trustee if the following three basic criteria are met:
- The beneficiary is willing to take on the responsibility. A beneficiary that does not want to serve as the trustee is not the right choice.
- The beneficiary is capable of fulfilling their responsibilities. A beneficiary that is in over their head is not the right choice.
- The beneficiary is trusted to act in the best interests of all other beneficiaries. A beneficiary likely to end up in a conflict with other beneficiaries is not the right choice.
The bottom line is that it may or may not be the right decision for a beneficiary to act as the trustee. Every case is different. A beneficiary that is willing, capable, and trusted to fulfill the role may be a good choice. Still, it is important to remember that serving as a trustee requires carrying out all of the responsibilities of overseeing the trust in a good faith, competent manner. Failure to abide by the trustee obligations carries a risk of conflict and legal liability.
What Are the Responsibilities of a Trustee in Massachusetts?
Before a beneficiary accepts the position as a trustee, it is crucial that they have an understanding of their responsibilities under the law. Managing a trust is not easy, which is why many people and families turn to an attorney for trust administration. Here are some of the most key things to know about trustee duties under Massachusetts law (Mass. Gen. Laws ch. 203E Article 8):
- Good Faith Administration: First and foremost, trustees are responsible for administering a trust in a good faith manner that is fully consistent with the specific terms of the trust documents. Trustee-beneficiaries must be ready to carry out the instructions laid out in the trust documents.
- Loyalty to All Beneficiaries: A trustee owes a duty of loyalty to the beneficiaries of the trust. The trustee must act in the best interests of the beneficiaries. Notably, this means all of the beneficiaries. A trustee cannot treat themselves better than any other beneficiary.
- Obligation to Inform: Trustees have a duty to keep the beneficiaries reasonably informed about what is happening with the trust. Failure to inform beneficiaries of important matters in a timely manner could constitute a breach of a trustee’s legal responsibilities.
- Prudence in Management: Finally, trustees also have a general legal duty to manage the trust with the proper amount of skill, care, caution, and prudence. A trustee may be liable for negligent mismanagement of trust assets even without a finding of bad faith conduct.
A trustee is a fiduciary. As defined by the Cornell Legal Information Institute, a fiduciary duty is the highest standard of care under United States law. It requires the trustee (agent) to act in the best interests of the beneficiaries (principal). The most important thing to remember is that a trustee owes a duty to all of the beneficiaries.
Can a Beneficiary Still Serve as a Trustee for a Discretionary Trust?
A discretionary trust is a type of trust in which the trustee has been given full authority to determine if and when property and assets will be granted to the beneficiaries. A beneficiary can lawfully serve as the trustee for a discretionary trust. If they are the only trustee for this type of trust they will have near total authority to make decisions about the property/assets within it. Though, in practice, there are often co-trustees appointed for discretionary trusts.
Can a Trustee Get Paid from a Trust (Salary or Assets)?
Yes. Administering a trust can be a complicated and time-consuming endeavor. A trustee has the right to take compensation for their effort. This is no different when a beneficiary serves as the trustee. A beneficiary who is the trustee also has the right to get paid. However, this does mean that a trustee—even a beneficiary-trustee—can simply claim the assets that they want from the trust. A beneficiary-trustee has the right to take a reasonable salary.
What Is Reasonable Compensation for a Trustee?
A trustee is not permitted to pay themselves whatever they want. The law limits them to “reasonable compensation.” In the context of a trust, reasonable compensation is the maximum amount that a trustee can take as a salary. Under Massachusetts law (Mass. Gen. Laws ch. 203E § 708), reasonable compensation is generally 1.0 to 1.5% of the value of the trust per year.
Notably, state law holds that the default is that the trust documents will determine what constitutes reasonable compensation for a trustee. However, the statute also states that Massachusetts courts have the power to override trust documents to allow for less (or more) compensation if reasonable given the specific duties of the trustee.
What Does a Trustee-Beneficiary Need to Do to Meet Their Responsibilities as a Fiduciary?
As noted previously, a trustee has a fiduciary duty to all of the beneficiaries. Anyone serving in the dual-role of a trustee-beneficiary must take proactive steps to meet their fiduciary duties. An alleged breach of fiduciary duty could lead to a serious conflict and, potentially, a finding of liability. Here are three tips for trustee-beneficiaries trying to meet their fiduciary responsibilities:
- Transparency: Conflicts are far more likely to arise with a lack of transparency. Remember, trustees have a duty to inform beneficiaries. Communication is key.
- Diligence: Trustees also have a general duty to act in a skillful, prudent, and reasonable cautious manner. Trustee-beneficiaries can run into problems for mismanagement.
- Careful Records: Proper organization reduces the risk of conflict. As a trustee-beneficiary, you should keep careful records of all of your actions.
What Is a Conflict of Interest?
In a broad sense, Investopedia defines a conflict of interest as a situation that arises when a party becomes “unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities.” This is a potential area of concern that must be carefully considered when a beneficiary is also serving as a trustee. While a beneficiary has the right to serve as a trustee, there are some circumstances in which this could create questions about a possible conflict of interest.
Are There Examples of a Conflict of Interest between a Trustee and Beneficiary?
Yes. There are plenty of different situations whereby a trustee’s actions—including the conduct of a beneficiary-trustee conduct—could constitute a conflict of interests. Some notable examples of conflicts of interests between a beneficiary and a trustee include:
- The trustee making investments in a company, project, or other endeavor in which he or she has a personal financial interest;
- Disposal of property or assets held by the trust at a below fair market value in a manner than advantages the trustee;
- The trustee providing themselves with favorable loans using the funds or assets held by the trust; and
- Self-dealing by the trustee—meaning they are also the counter party of a transaction in which the trust is involved.
Ultimately, a conflict of interest is improper when the trustee puts their personal financial interests (or any other party’s financial interests) against the best interests of the beneficiaries. The trustee’s fiduciary duty holds that they must always put the interests of all beneficiaries first.
Is Appointing an Attorney as Trustee a Conflict of Interest?
You may be wondering: Is it a conflict of interest to appoint a lawyer as a trustee? The answer depends on the circumstances. Lawyers can and often do serve as trustees. However, the specific professional relationship that the attorney has to the individual parties is a relevant consideration. There could potentially be conflict of interest issues if the lawyer-trustee is also the personal attorney of one of the beneficiaries.
Schedule a Confidential Consultation with a Massachusetts Trust Planning Attorney
At BK Estate Planning Attorneys, our Massachusetts estate planning lawyers have extensive experience helping clients set up and navigate trusts. If you have any questions about serving as a trustee while also being a beneficiary, we are here to help. Contact us today to set up your fully private, no commitment initial consultation. With offices in Gloucester, Boston, and Plymouth, we are well-positioned to provide estate planning and trust planning throughout the Commonwealth, including in Essex County, Suffolk County, Plymouth County, and Barnstable County.