Trustee vs. Beneficiary. Relationship, Roles, Rights, Duties and Conflicts.

A trustee and a beneficiary are both parties to a trust agreement, together with the grantor. A trust agreement is an arrangement, where the grantor transfers property to the trustee, who then manages the property for the benefit of the beneficiaries.

In essence, a trust agreement has three parties: a grantor, a trustee, and a beneficiary. The grantor is the person who establishes the trust. A trustee is a person who holds legal title to property of the trust and manages the trust for the benefit of the beneficiaries. A beneficiary is a person named by the grantor who benefits from the trust.

Sometimes, the trustee and the beneficiary can be one person. More often, in revocable trusts, the grantor, the trustee, and the beneficiary are one and the same person. In other cases, there can be several beneficiaries, some with a current interest, while the others with a remainder interest. Who the trustee and the beneficiary are would depend on the grantor’s purpose for establishing the trust.

The reason the trust was established

The reason the trust was established plays a role in the trustee vs. beneficiary relationship. Grantors establish trusts for many reasons: for the grantor to be eligible for Medicaid, to ensure the grantor’s children with special needs will still be eligible for Medicaid, to protect assets, to save on taxes, to avoid probate, or to be flexible and have control in the distribution of wealth upon death.

How the trust was set up

How the trust was set up also plays a role in the trustee vs. beneficiary relationship. To establish a trust, the grantor signs a trust document outlining the terms of the trust. It will include:

the names of the trustee, successor trustees, beneficiary, and successor beneficiaries
the powers of the trustee
how income and principal will be distributed by the trustee during the trust term

Trusts are usually established for the long term, and for this reason, successor trustees and beneficiaries or the procedure for determining or identifying them are always provided.

For the trust to be effective, the grantor must transfer property to the trust by legally transferring them to the name of the trustee. For example, in real estate or bank accounts, the property will be in the name of X, Trustee of ABC Trust. This signifies to the public that the property is trust property, being held by the trustee not in the trustee’s personal capacity but as a fiduciary. Signing a trust document without transferring any property to the trust will not produce any effect.

The relationship between the trustee and beneficiary

To understand the difference between a trustee vs. a beneficiary, some examples are illustrative.

If you are in your second or third marriage and you would like to have control over who would receive your property when you die while still providing for your current spouse, establishing a trust is a way to achieve this objective. First, you will establish a trust (i.e., ABC Trust) naming yourself as trustee and beneficiary. In this case, you will be both the grantor, trustee, and beneficiary. In the trust document, you will name your spouse as successor income beneficiary and your children from a previous marriage as successor remainder beneficiaries. You can name any person you trust as the successor trustee, even if such successor trustee is also a beneficiary.

To make the trust effective, you transfer property to the trust. Your residential house will be transferred from your name to your name, as Trustee of ABC Trust. Your bank account can be transferred from your name to your name, as Trustee of ABC Trust. While you are still alive, you have total control over the house and bank account since you are the trustee and the beneficiary.

When you die, the house and the bank account will be transferred to your designated successor trustee (for example, X). The house and the bank account will now be in the name of X, Trustee of ABC Trust. X will now manage the trust in accordance with the terms of the trust agreement for the benefit of your beneficiaries. Since your current spouse is the income beneficiary, your current spouse will be entitled to the use of all income arising from the house and the bank account. X can rent the house and/or invest the proceeds of the bank account and give the income to the current spouse as successor income beneficiary. The principal that is left when your current spouse, the successor income beneficiary, dies is transferred to your children from the previous marriage, who you have named as successor remainder beneficiaries. In this type of trust, you are initially the grantor, trustee, and beneficiary. When you die, X is the successor trustee, your current spouse is the income beneficiary, and your children are the remainder beneficiaries. This type of trust allows you more control over who will receive your property when you die.

Another example would be a Medicaid eligibility trust. Under Medicaid rules in New York as of 2022, in order to be eligible, your non-exempt assets should not be greater than $16,800. You have $300,000 in the bank account and foresee that you might need Medicaid assistance in the future. More than five years prior to applying for Medicaid, you transfer $290,000 in a trust to be administered by your brother, X (the trustee), for the benefit of your child, A, whose family you live with and who is taking care of you. When you apply for Medicaid, you only have $10,000 in your bank account since you transferred your assets to a trust before the 60-month lookback period. Assuming your income is also eligible, you will be eligible for Medicaid. Here, the trustee is your brother, and your child is the beneficiary.

Trustee vs. beneficiary roles

As seen in the examples above, the trustee is the person who holds legal title to the trust property and who manages the trust property for the benefit of the beneficiary. As the legal owner of the trust property, the trustee holds a lot of power. However, the trustee’s power is subject to trust laws, which hold the trustee as a fiduciary. A fiduciary, under state laws, is always expected to act in the best interests of the person owed the duty. A fiduciary owes the duties of care, loyalty, and honesty. In cases of breach of fiduciary duties, the fiduciary is liable for damages.

In the case of the trustee, the trustee should exercise the duties of care, loyalty, and honesty in accordance with the terms of the trust agreement to the beneficiaries. The trustee is required to always act in the best interests of the beneficiaries in accordance with the trust agreement, even if such a course of action will be detrimental to the trustee’s own personal interests.

Trustee rights vs. beneficiary rights

The trustee’s powers depend on the powers granted to it by the trust agreement. Sometimes, the trustee is given discretion as to how much income or principal is to be distributed among the beneficiaries. Other times, the trustee is given the power to decant a trust – to distribute assets of a trust to a new trust with more favorable terms. The powers of the trustee will primarily depend on the trust agreement and state law. These powers, however, are always subject to the trustee’s fiduciary duties – the duties of care, loyalty, and honesty to always act in accordance with the terms of the trust agreement to the best interests of its beneficiaries.

The beneficiary, on the other hand, does not hold or manage the trust property. The beneficiary is entitled to a copy of the trust agreement. The beneficiary is entitled to an accounting of the trustee’s administration of the trust. The beneficiary is entitled to object to the accounting. Still, the beneficiary cannot manage the trust property.

It is always prudent, however, for the trustee to keep the beneficiary informed of the trust activities and to always have communication lines open with the beneficiaries in order to avoid any appearance of a conflict of interest and to prevent litigation from happening in the future.

Conflict of interest of the trustee and beneficiary

The most common conflicts of interest that occur between the trustee and the beneficiary are:

When the trustee invests trust property in the trustee’s own businesses
When the trustee uses trust property to pay for the trustee’s personal expenses or debts
When the trustee sells trust property to himself, his spouse, or his child
When the trustee takes out money from the trust as a loan to himself
When the trustee sells trust property for a price below market value without a valid reason

When these conflicts occur, beneficiaries usually file petitions with the court to remove the trustee, compel the trustee to submit an accounting, and restrain the trustee from committing a particular act.

Trustees and beneficiaries should work together to accomplish the objectives of the trust. When trustees breach their fiduciary duties or act in contravention of the terms of the trust, litigation will normally ensue, especially when real property or large sums of money are involved. If you are a trustee, it is advisable to have a trust lawyer beside you to guide you through certain decisions which might have legal implications. If you are a beneficiary and you suspect your trustee of breach of fiduciary duty or conflict of interest, a trust lawyer will be able to help you assert and enforce your rights. Beneficiary vs. trustee litigation is very common but can be expensive. For the trustee, it is recommended to refrain from committing any act that may lead to litigation.

Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].