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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References

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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.

Requirements for a Irrevocable Family Trust Agreement

An irrevocable trust is an arrangement whereby a grantor relinquishes legal ownership of property and places it under the administration of a trustee, who administers it for the benefit of the trust beneficiaries. A family trust is a trust in which the beneficiaries are all relatives of the grantor. A grantor creates a trust deed by drafting a deed of trust and signing it. A deed of trust does not require the agreement of trust beneficiaries.

Can an Heir Sell Property When the Title Is in a Revocable Living Trust?

Revocable living trust property generally cannot be sold outright by a beneficiary; the property must be first transferred to the beneficiary and placed in his name. However, if under the terms of the trust, the beneficiary has the right to claim trust assets for personal use, this is a simple issue of transfer. The key issue is the trust's restrictions on distributions. The trust creator's intent, whether there are multiple beneficiaries or the existence of a spendthrift clause can limit a beneficiary's ability to sell trust assets. Trust law varies by state so consider consulting an attorney if you wish to sell trust property.

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