Yes, a trustee can be a beneficiary of a will, but they must be very careful to avoid any actions that could be seen as a conflict of interest or a breach of trust. Their decisions must always prioritize the interests of all beneficiaries, not just their own.

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Introduction

Quite often, one can find a person acting in the capacity of trustee and beneficiary, especially in family trusts. This has always brought many questions on its legality, equitability, and conflict of interest that may arise. Trustees have a legal duty to act in the best interests of all beneficiaries, which frequently creates a challenging dynamic when the trustee happens to be a beneficiary. It requires a lot of care to balance the interest of a person against the fiduciary duty in ensuring fairness for all parties.

In the given article, the legal platform that prescribes the role of trustees who are also beneficiaries is considered, conflicts of interest that might arise from such cases are reviewed, and best practices that could help a trustee efficiently act in both roles are put forward. We will delve further into the common scenarios in which trustees are beneficiaries and review how disputes can be avoided, ensuring the trust is managed in a just and transparent manner.

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Is It Legal for a Trustee to Be a Beneficiary of a Will or Trust?

It is absolutely legal for a trustee to be a beneficiary in addition. This also happens in common family trusts where the settlor would name his wife or another adult child to serve as trustee and beneficiary too. That can make practical sense in that the trustee already understands the family's assets, values, and financial goals, and there may also be cost savings in naming a family member as opposed to a professional trustee.

This, however, is where the dual role of both trustee and beneficiary brings a number of potential conflicts of interest. A trustee has the legal duty to consider the wishes of the settlor in managing the trust and also protect the interests of all beneficiaries in the process. When he also becomes one who benefits from the same, making this balance can be quite tricky. These are best confronted upfront so that any trust is managed equitably and within the legal dictates of managing such a trust.

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Fiduciary Duties of a Trustee

Whatever the nature of the trust or whoever the trustee might be, whether a beneficiary or not, his fiduciary duties are always the same as every other trustee. These are essential in the fair treatment of all the beneficiaries and proper management of the trust. The primary fiduciary duties include:

• Duty of Loyalty: A trustee should act in the interest of all beneficiaries and ensure that such interests are placed above his or her own. That is, one should not engage himself or herself in any dealings or activities that will result in personal profit at the expense of another beneficiary. Suppose the trustee is also a beneficiary; he or she should not perform the duties in favor of themselves over other beneficiaries.
• Duty of Impartiality: He must deal equitably with all beneficiaries, balancing interests and not favoring one over another. This will ensure that no beneficiary is unfairly favored or prejudiced. In such an instance, as in the case where the trustee-beneficiary is at discretion in the distribution of trust assets, he has to do it equitably and not favor himself unduly.
• Duty to Follow Terms of the Trust: These are obligations bound upon the trustees to follow strictly the terms and provisions provided within the document. This may mean following instructions provided by the settlor and conducting the trust in conformity with its established guidelines. Any failure to follow through on these may lead to disputes for legality and mismanagement claims.

Duty of Care: A trustee has the duty to handle trust assets with such a degree of care and diligence that a reasonably prudent person would use in conducting his own affairs. An example would be informed decisions, no unreasonable risks, and proper investment of the assets of the trust.

While these fiduciary duties apply equally to all trustees, they are of paramount importance when the trustee is also a beneficiary. Because of that fact, the potential exists for self-dealing or acting in a manner where the trustee benefits more from a transaction than other beneficiaries. Thus, the trustee-beneficiary has an even greater need to follow the highest level of care and fairness when discharging the duty owed.

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Conflicts of Interest for Trustee-Beneficiaries

There are a great many conflicting interests arising out of such a dual role, which generally involve some kind of tension between personal interest and discharge of fiduciary responsibilities. These include but are not limited to:

• Self-dealing: The self-dealing deals with the situations where the trustee conducts the business in a manner so as to be beneficial to oneself at the expense of other beneficiaries. For example, a trustee who is also a beneficiary might want more trust property to be allocated to their lot or invested in schemes that will benefit their particular financial interests. The former represents a breach of fiduciary duty and can thus be judicially contested by the other beneficiaries. To prevent self-dealing, the trustee should ascertain that all decisions are made neutrally in consonance with the trust instrument.
• Fairness: Sometimes, it is quite challenging to ensure perfect fairness amongst the beneficiaries when the trustee himself is one of the beneficiaries. It might vest the discretion for the distributions in the trustee who, more often than not, may give unfair priority to himself or his close associates. Again, this can create disputes amongst the beneficiaries if others perceive this to be biased. Openness in decision-making and adherence to the provisions of the trust can be the only way to ensure that decisions on distributions are perceived as equitable.
• Balancing Self-interested and Fiduciary Responsibilities: In those situations where the trustee is also a beneficiary, the line between personal gain and fiduciary duty is rather ambiguous. This is one of the most important situations for the trustee to exercise fairness absolutely and retain the trust of the other beneficiaries. The trustee should be on guard, monitoring his self-interests against the fiduciary interest, for the avoidance of any conflict of interest.
  
  

Common Situations in Which Trustee-Beneficiaries Are Appointed

• Family Trusts: Many family trusts name a close family member—such as a spouse or adult child—as trustee. The advantage to this approach is that the trustee is generally quite familiar with the family's finances, values, and goals.
  
  However, the potential problem in doing so is that decisions may appear to not be objective but rather made with the trustee-beneficiary in mind.
  
  For example, if a beneficiary serves in the role of trustee, other family members may view this as a conflict in the trustee's discretion, as the trustee would be using family money to favor him or herself. For these reasons, openness and transparency are crucial.
  
  Regular communications, along with clear explanations of decisions, can sometimes serve to keep potential conflict at bay and preserve trust among family members.
  
  
• Discretionary Trusts: This means that, under discretionary trusts, the trustee may determine who and when each of the beneficiaries gets any part of the trust's assets and, for that matter, just how much.
  
  However, if the trustee is also a discretionary beneficiary, there is always a chance of unfair distribution because of the self-interest leading to larger distributions.
  
  For example, he or she may make biased allocations towards himself or herself or family members.
  
  For this reason, the document should clearly state how much each beneficiary gets, in order to be specific. Being clear on the instructions reduces the opportunity for unfair distributions and treats all the beneficiaries fairly.
  
  
• Revocable and Irrevocable Trusts: The settlor, with revocable trusts, retains ownership of his properties during his lifetime.
  
  He may appoint himself trustee and name a successor trustee to take over if he dies. As a corollary, irrevocable trusts often prohibit the settlor from acting as trustee, further restraining the discretion of successor trustees.
  
  Special attention must be paid when a successor trustee is also a beneficiary, to avoid the potential of such a trustee acting in a self-serving manner.
  
  Example: A successor trustee who is also a beneficiary of a trust may be sorely tempted to serve his own interests in the management and disbursement of the trust. To that effect, the deed of trust should expressively spell out what provisions and guidelines a trustee is to follow in performance, and the trust administration should be transparently conducted.
  
  

Trustee Fees: How Much Can a Trustee/Beneficiary Take?

Trustee compensation tends to be highly contentious, especially when the trustee is also a beneficiary. Generally speaking, trustees may receive reasonable compensation for services rendered even when they are beneficiaries. The extent of compensation is generally provided by the trust document or, if the trust document does not, then under state law. There are a number of ways to determine trustee compensation:

• Percent of the Trust Assets: Many professional trustees charge based upon a percentage of the value of the trust assets. Such a charge usually runs from a minimum of 1% to 2% per year. Of course, for a family member trustee, the fee could be lower based upon the terms of the trust. Example: Assume the value of the trust principal is $1,000,000. An annual fee of 1% of the principal would be $10,000.
• Flat Fee or Hourly Rate: Sometimes, the trust document calls for a fixed fee or an hourly rate for the trustee's services. This can be beneficial if the amount of work by the trustee is extensive or the work is complex. Example: A trustee might charge a $5,000 flat fee for managing the trust for a year, or charge per hour at an hourly rate of $100 for his or her time.
• Reasonable Compensation Under State Law: When the trust document is silent on the issue of compensation, state law will typically provide that trustees may receive "reasonable compensation" for their work and time devoted to administering the trust. Reasonableness is typically found within the standards of complexity of the trust, the time involved, and the size of the trust estate.

Legal Consequences of Mismanagement and Breach of Fiduciary DutyFailure to manage properly, or in acting in self-interest, the results may be quite serious legally for a trustee-beneficiary. Possible consequences include:

• Removing the Trustee: Beneficiaries who feel that the trustee is not operating in their best interest may petition the court to remove the trustee. The courts are quite conservative in removing trustees but will do so if overt mismanagement, self-dealing, or partiality occurs. For example, if it is found that a trustee has used trust funds for personal gain, he may be removed by the court order.
• Restitution: A trustee can be made to restore the trust to the position it was in before the trustee's self-dealing or other acts of financial injury to the trust. This normally will involve making up any losses to the trust that are attributed to the trustee. For example, where a trustee has made poor investments and lost the trust $50,000, that trustee could be ordered to pay the trust the $50,000.
• Litigation Costs: Disputes of the trusts regarding its management may become costly and emotionally charged. Unless exonerated by the instrument or the court, trustees found to have committed a breach could be held personally liable for attorney's fees and other litigation expenses. Lengthy and complex legal issues, if it involves courthouse battles in court.

Avoiding Conflicts of Interest for the Trustee-BeneficiaryYou may want to consider the following in order to manage your dual role of trustee and beneficiary effectively, while lessening the impact of conflicts of interest:

• Naming Co-Trustees: This would typically include co-trustees with impartial third-party or professional trustees that can balance the load and minimize partiality. Co-trustees may have oversight over the actions taken and ensure that no decision is made without the agreement of all of the co-trustees involved.
• Clearly stated and detailed trust provisions can reduce areas of discretion for the trustee to follow and can clearly state guidelines regarding asset management and distribution. Specific provisions can be included to avoid disputes or to ensure that any action taken by the trustee is consistent with the settlor's intent.
• Transparency and Open Communication: Transparency to the other beneficiaries by way of frequent updating and detailed reporting may bring about cooperation and build trust. Decisions made and the whys of major actions, if clearly explained, will help avoid misunderstandings and disputes.

Take Advice: Trust management is too complex, and it may be advisable to take legal and financial advice on how to discharge fiduciary duties to avoid court disputes. Professionals can advise on legal compliance requirements and also help in the resolution of disputes that may arise.
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Conclusion

While the law provides that a trustee can also be a beneficiary, this introduces some challenges in the process. The trustee has to balance the thin line between his or her personal interest and his or her fiduciary duties to see that all beneficiaries are dealt with fairly in accordance with the terms of the trust.

Strategies put forward for the management of this dual role include the appointment of co-trustees, clear and comprehensive drafting of trust provisions, transparency, and seeking professional advice. If the trustee-beneficiaries adhere to these meritorious practices, they should effectively discharge the office of the trusts with integrity.