Can an Heir Be a Co-Trustee of the Trust?

By John Cromwell

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.

Trustee Qualifications

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.

Trust Agreement

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.

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Fiduciary Duty

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.

Creditor Protection

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.

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Enforcing a Trust

References

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What if You Violated an Irrevocable Trust?

The person appointed to oversee an irrevocable trust must act according to the terms of the trust and in the best interest of those who benefit under the trust. While all states recognize this duty, the type of recourse available in cases of breach can vary. Knowing when you may petition the court for removal of a trustee and when he may be personally liable for financial losses will help ensure that your trust operates according to the wishes of its creator.

Roles of a Trustee

A trustee manages property for beneficiaries according to the terms of a trust. Generally, a trustee is appointed by a person, called a grantor or settlor, who establishes and funds the trust. The settlor transfers legal title of assets to the trustee so she may manage and distribute them for named beneficiaries. A trustee's role includes responsibly and honestly handling trust assets and ensuring the purpose of the trust is carried out.

Can a Trustee Be Removed for Not Giving a Accounting?

A trust involves the holding of property for the benefit of another. The relationship is legal in nature; the person appointed to oversee the trust, known as the trustee, has certain responsibilities to the beneficiaries, or those entitled to receive under the terms of the trust. Part of this duty is to provide regular accounting and keep the beneficiaries reasonably informed.

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