A Trustee is Not Allowed to Borrow Funds From a Trust Account

Can a Trustee borrow money from the trust account? No. Why not? Because he is the one managing the money. So if he takes money from the account, it’s presumed to be embezzlement, which is simply known as stealing.

But how about if a trustee is also a beneficiary? Don’t some of the money in the trust also belong to him? For example, a man left a trust for his four children, and one of the children is a trustee. Can the trustee-child borrow money from the trust and say that he is just borrowing his own money? The answer to that is absolutely not. Even though the trustee is one of the beneficiaries of the trust, at the end of the day the trust is not his. The trust belongs to all the beneficiaries. So if a trustee borrows money, he is considered by the law to be taking everyone’s money, not just his own. As an example, if he borrows four thousand dollars, he is not borrowing four thousand dollars of his own money. He is stealing a thousand dollars from each of his siblings. If he takes a penny, most of that penny belongs to the other beneficiaries of the trust.

What can happen if a trustee neglects good advice and does borrow money from the trust account? Nothing good. The trustee can be removed by the court. The court will force the trustee to return the money. The court might order the trustee to pay for his own attorneys’ fees as opposed to using trust funds to pay for his attorney’s fees. The judge may even order the trustee to pay the beneficiaries’ attorneys’ fees. What is scarier is that the trustee can even be criminally prosecuted for stealing. That’s right, a criminal prosecution even if the trustee is one of the beneficiaries of the trust and even if the amount he took is less than his stake in the trust account and intended to return the funds. The judge can refer the case to the District Attorney’s office, which has the power to prosecute the case in criminal court.

Above, we’ve referred to the trustee as a manager. The legal term for someone managing money, including a trustee is “fiduciary.” ^[2] New York’s Estates, Powers and Trusts Law governs the conduct of a trust fiduciary.

New York Consolidated Laws, Estates, Powers and Trusts Law – EPT § 11-1.6 states that “Every fiduciary shall keep property received as fiduciary separate from his individual property.  He shall not invest or deposit such property with any corporation or other person doing business under the banking law, or with any other person or institution, in his own name, but all transactions by him affecting such property shall be in his name as fiduciary.” ^[3]

New York’s Penal Law (the Criminal Law) states that “A person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof.” ^[4]

The trust as an entity is the owner of the funds. If a trustee borrows money from the trust, he commits larceny.

New York Penal Law continues to say that “Larceny includes a wrongful taking, obtaining or withholding of another’s property, with the intent prescribed in subdivision one of this section, committed … by conduct heretofore defined or known as common law larceny by trespassory taking, common-law larceny by trick, embezzlement, or obtaining property by false pretenses.” ^[5]

To sum up, trustees should keep the trust funds where they belong. In the trust account. Whenever they receive any funds relating to the trust in any way, those funds should be deposited into the trust account and not taken out for any reason without either signed consent from each and every beneficiary or an order of the court authorizing the executor to disburse the funds.

The trustee should place all trust funds into the trust account

Whether you are a beneficiary who thinks that the trustee is borrowing money from the trust, or if you are a trustee and you feel that you are being falsely accused of borrowing money from the trust and not returning it, you can speak with New York trust attorney Albert Goodwin, Esq. He can be reached at (212) 233-1233.

[1] NY EPTL § 11-1.1

[2] NY EPTL § 11-1.1

[3] NY EPTL § 11-1.6

[4] NY PEN § 155.05

[5] NY PEN § 155.05