Beneficiary vs. Trustee: Estate Planning Guide - SmartAsset

Establishing a trust as part of your financial plan is something you might consider if you have extensive assets or simply want a measure of control over how those assets are managed after you’re gone. When creating a trust, there are two important elements to include: a trustee and one or more beneficiaries. Whether someone is a beneficiary vs. trustee can determine what rights and responsibilities they have with regard to trust assets. If you need help navigating the process of creating a trust, consider working with a professional financial advisor.

Beneficiary vs. Trustee: What’s the Difference?

A trust is a legal arrangement in which one person or entity, called a trustee, manages assets on behalf of another person or entity, called the beneficiary. A trust beneficiary is entitled to receive trust assets or income generated by those assets, according to the conditions set by the trust creator.

Trustees have a fiduciary duty, meaning they’re obligated to act in the best interests of the beneficiary or beneficiaries at all times while upholding the terms of the trust. If a beneficiary is unhappy with the way a trustee is managing the trust or they believes the trustee has committed a breach of fiduciary duty, they can seek to have them removed.

A trustee is not the same as an executor. Executors are responsible for settling someone’s estate when they pass away. That includes creating an inventory of their assets, notifying creditors, paying outstanding debts and distributing remaining assets among the deceased person’s heirs.

Trustees can carry out their duties during the trust grantor’s lifetime if they’ve established a living trust. A living trust takes effect while the trust creator is alive. If it’s a revocable trust, the grantor can change its terms at any time. That includes naming a new trustee or successor trustee and adding or removing beneficiaries.

What Are the Duties of a Trustee?

The main duty of a trustee is to manage the assets in the trust on behalf of the beneficiaries, following the terms of the trust. That being said, trustees have a fairly broad scope of powers they can exercise in managing a trust. For instance, trustees have the power to:

Hold trust property and accept new properties into the trust
Invest trust assets
Pledge trust property as security for loans
Mortgage trust property
Borrow money from the trust
Pay taxes and other administrative fees necessary to the management of the trust
Make loans from trust property to trust beneficiaries
Distribute principal or income from the trust to beneficiaries
Hire support staff, including attorneys, accountants or appraisers

Trustees are entitled to collect a fee for their services, which is typically paid out of the trust assets. In terms of what a trustee cannot do, they’re prohibited from doing anything that contracts their role as fiduciaries.

For example, a trustee is not allowed to use trust assets for their own personal gain. So they wouldn’t be able to use a piece of land that’s held in the trust as security for a business loan they’re taking out for themselves. They can’t go against the wishes of the trust grantor either by withholding assets from beneficiaries that they’re entitled to have.

What Are the Rights of a Trust Beneficiary?

Trust beneficiaries have certain rights that trustees are obligated to uphold. In addition to the rights to assets that are conveyed by the trust terms, beneficiaries also have the right to:

Request a copy of the trust documents
Be notified if the trustee changes
Know who all of the trustees are if more than one is named
Ask questions about the administration of the trust
Request the removal of the trustee if they believe they’re unfit

Removing a trustee isn’t an easy process and it typically requires beneficiaries to petition the probate court if no specific remedy for replacing a trustee is mentioned in the trust document. Beneficiaries would need to be able to provide proof to support their reasoning for the trustee’s removal, such as bank statements or emails that suggest they’ve breached their fiduciary duty or otherwise mismanaged the trust.

Beneficiary vs. Trustee: Can They Be the Same Person?

It’s possible that a trust grantor may name a beneficiary as a trustee or vice versa. Naming a beneficiary as trustee could make sense if they’re the only beneficiary or you fully trust them to manage the trust according to your wishes on behalf of all beneficiaries named.

What’s important to remember is that a beneficiary who is also a trustee must still adhere to a fiduciary standard. They don’t get a pass simply because they happen to be a beneficiary. That means they must follow the instructions left by the trust grantor to the letter; they can’t do as they wish with trust assets.

If you’re considering naming someone as both trustee and beneficiary, it may be helpful to discuss your expectations with them beforehand. Being a trustee can be time-consuming if the trust is complicated or holds a substantial amount of assets. If they’re daunted by the level of responsibility required, you may be better off naming someone else as a trustee.

Here are a few additional considerations for selecting a trustee:

Trusting the Trustee: Choose an individual or entity that you trust to uphold your wishes with regard to the way the trust should be managed. If you don’t have a family member that fits the bill, you might consider asking your financial advisor to step into the trustee role.
Successor Trustees: Consider naming one or more successor trustees who could take over if the primary trustee passes away or is removed by the beneficiaries.
How to Remove Trustees: Include a remedy in the trust document that specifies what beneficiaries will need to do to remove a trustee if you’d like to save them the trouble of having to petition the court.

It’s also wise to be specific in your instructions for the trustee and how you’d like them to manage trust assets on behalf of your beneficiaries, so there’s no room for confusion or error.

The Bottom Line

There’s a significant difference between being a beneficiary or trustee of a trust. If you’re named as a beneficiary then you stand to benefit from the assets in the trust. On the other hand, if you’re the trustee it’s your job to manage those assets according to the wishes of the trust creator. That’s a simplified explanation but one that’s helpful to keep in mind if you’re tapped for either role or are planning to create a trust of your own.

Estate Planning Tips

Consider talking to your financial advisor about the different types of trusts and whether you might benefit from establishing one as part of your estate plan. You might also ask your advisor about the pros and cons of naming them as a trustee. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Being a beneficiary to a trust is slightly different than being a beneficiary to a life insurance policy or retirement account. Life insurance beneficiaries can receive a death benefit when the policy owner passes away. The same is true for the beneficiary of a 401(k) plan or an IRA. A key difference is that trust beneficiaries may benefit from trust assets while the grantor is still living if the trust document provides for that.