How Can a Beneficiary Become Trustee in an Irrevocable Trust?

By Cindy DeRuyter, J.D.

How Can a Beneficiary Become Trustee in an Irrevocable Trust?

By Cindy DeRuyter, J.D.

Generally speaking, the person creating the trust agreement, referred to as the grantor, can name a beneficiary as trustee. It is a popular estate planning tool that has a variety of potential uses. It can help you avoid probate court, provide for seamless estate administration, maximize estate tax planning opportunities, and manage assets for minors, people with special needs, or financially irresponsible beneficiaries.

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Individual state laws govern these, so it is important to understand any state-specific restrictions on trustees or beneficiaries.

Irrevocable Trust Basics

When you create one of these, you relinquish your rights to the property you place into it. In some cases, you can keep an income-only right to the assets, but you cannot have a reversionary right in it. The agreement identifies the person who manages the assets, referred to as the trustee, and may name one or more successors to act if the first-named individual dies, becomes incapacitated, or resigns.

These agreements also identify who has rights to receive distributions. These individuals are known n as the the beneficiaries. The agreements sometimes include distribution provisions designed to take effect at the grantor's death, but they may instead provide for long-term asset management for beneficiaries.

Irrevocable trusts are sometimes useful in estate tax planning as a mechanism to remove assets from the grantor's estate or to create liquidity outside the estate to pay estate taxes and other estate administration expenses. Grantors in some states use this type of tool as creditor-protection vehicles.

A key thing to remember is that, after creating and placing assets into it, you cannot change the terms of the agreement. Even if your wishes change about who should manage the trust or to whom and how distributions should transfer, you cannot legally make changes.

Considerations When Naming Trustees

A trust is an important document. Before drafting it:

  • Think carefully before naming the initial and successor trustees. You can name any competent adult. You can also name a professional, such as a corporate trust department or lawyer.
  • Regardless of whom you name, be sure the nominated trustee can carry out their duties. They must be impartial, act with integrity, and be capable of following the agreement's provisions to the letter.
  • Consider also including removal provisions in your irrevocable agreement, establishing under which circumstances to remove a trustee and identifying who has the ability to do so.
  • While it is usually OK to name a beneficiary as the initial trustee or as a successor one, be aware that doing so could raise a potential conflict of interest. There are also potential tax considerations you should evaluate before making this decision.

Trust and estate laws can be rather complex for those not familiar with it. If you want to establish this type of agreement, understand how to create it, and determine who you want to act as trustee. This individual will manage your assets, so ensure that you choose someone you entrust, even if they are also a beneficiary too. Keep in mind, however, that this might cause some issues. Therefore, consider whether it makes the most sense to choose someone who will act as both a beneficiary and trustee.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.