Living the Good Life: Can a Bay Area Trust Beneficiary Live Rent-Free in Trust Property?

 

property

Can a Trust beneficiary live rent free in a real property owned by the Trust?  How about the Trustee who is also a beneficiary, can he or she live in real property rent free?

The answer is no, but then again maybe.  Wait this sounds confusing, so let’s break it down a bit.

While the Settlor is alive, the Trust is administered solely for his or her benefit.  The Settlor need not pay rent because the only person owned any duties during the Settlor’s lifetime is the Settlor (and only the Settlor).

But once the Settlor is deceased, the property passes to the remainder beneficiaries.  And the primary tenant of every Trust is that the beneficiaries must be treated equally.  Therefore, if one beneficiary is living in a real property that ultimately will be distributed to multiple beneficiaries, then that one person is receiving an unfair advantage from the Trust.  That sets the requirement that a beneficiary living in real property must pay rent for that occupancy in order to not disadvantage other beneficiaries.

The same is true for a Trustee who is a beneficiary.  Of course, a Trustee who is NOT a beneficiary cannot live free in Trust property because that would be a conflict of interest and a breach of duty for the Trustee.  But even as a Trustee/beneficiary, living rent free is not allowed.

But just because rent is required to be paid, does not mean it will be.  First, not everyone understands that rent is required.  Second, not everyone will voluntarily pay rent when required.  The easy way to deal with rent is to simply subtract the rent amount from the beneficiary’s share before distribution of the Trust assets.  But where the beneficiary share is not enough to offset the rent, then further action in court may be required.

Also, a Trustee has the right to evict a beneficiary from Trust property if the beneficiary refuses to pay.  Although, at times such an eviction can be stopped if the Trust matter is in dispute.

There are exceptions to paying rent and the Probate Court always has discretion to decide if rent will be paid by a beneficiary and how much.  Since the Probate Court is a court of equity, it has wide discretion to fashion whatever remedy is required to create a fair result among the beneficiaries.  I have seen cases where the court allows some rent-free occupancy where a beneficiary was living with the Settlor and taking care of the Settlor prior to death.  Allowing the beneficiary to occupy the home a bit longer after the Settlor’s death may be fair in the court’s view.  But you never know for sure until you take the matter to court.