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Know If the Trust Beneficiary Can Also Act as Trustee

In California, Trustees can also be beneficiaries of a Trust. Even if the Trust has multiple beneficiaries. That means one person can be both the Trust manager (Trustee) and benefit from the Trust (beneficiary). You may ask ‘isn’t this a conflict of interest?’ Maybe yes and maybe no.

Anytime one person is acting as both a Trustee and a Trust beneficiary, there is a potential for conflict. The Trustee is the legal owner of all Trust assets and has the right to manage those assets. Whereas the beneficiaries are the beneficial owners of the Trust assets. They get the benefits without having the right to make the decisions. A potential conflict of interest is acceptable under California Trust law provided it does not result in the Trustee violating his duties to the beneficiaries. An actual conflict of interest is generally not acceptable. As such, a Trustee/beneficiary must be careful not to cross the line from potential to actual conflicts of interest.

Problems arise when the Trustee uses Trust assets to benefit themselves or assets they will be receiving from the Trust. For example, if the Trustee is supposed to receive a home as his specific gift and he then uses Trust funds that are to be shared among other beneficiaries to improve the home, that would be an actual conflict of interest. It could also be a breach of the Trustee’s fiduciary duties. Or if the Trustee lives in a home without paying rent for two years when the house is supposed to be distributed equally to multiple beneficiaries, that would be an actual conflict of interest and possible breach of trust. (Note that breach of trust and breach of fiduciary duties means the same thing in this context: the Trustee violated his duties to the beneficiaries.)

Being a Trustee is a hard job. There are many duties and obligations the Trustee must follow. Failure to do so could subject the Trustee to personal liability. The job is even harder for Trustee/beneficiaries because they can cross the line from potential to actual conflicts of interest without noticing it.

Furthermore, perception can become reality. In other words, a Trustee/beneficiary can act properly, but be viewed as acting improperly simply because of the potential conflict of interest. Suspicions can run high, actions can be questioned, and claims of breach can be filed with the court faster than would otherwise be the case.

Does this all mean that a beneficiary should not be named as a Trustee? It depends on the individual acting as Trustee. Some people are able to walk the line between actual and potential conflicts well, and others are not. Typically, a bad Trustee/beneficiary is someone who is ignorant of his fiduciary duties. If you don’t know what your duties are, you cannot fulfill them. As a result, the burden is on the Trustee/beneficiary to learn the duties they must fulfill and then take reasonable steps to ensure they meet the requirements of those duties.

Again, being a Trustee is a hard job, but with a little effort the job can be accomplished successfully. If, however, you are a beneficiary who is being harmed by a bad Trustee/beneficiary, then you better act fast. A bad Trustee can do a lot of harm in little time if given the chance.