Trusts can be a useful tool for estate planning when you want to leave specific instructions about how your assets should be managed during your lifetime and beyond. Part of creating a trust means naming a trustee who’s responsible for overseeing the assets in the trust on behalf of your named beneficiaries. But can a trustee withdraw money from a trust? Yes, but there are rules they’re required to follow.
A financial advisor can potentially help you create an estate plan based on your family’s needs and goals.
What Is a Trust and How Does It Work?
A trust is a legal entity that allows you to transfer assets you own to the ownership of a trustee. You can decide who to name as trustee and you can also name a successor in case they’re unable to fulfill their duties. The trustee’s job is to manage the assets that have been transferred to the trust according to your wishes and on behalf of the beneficiaries you’ve named.
Trusts can be revocable or irrevocable. A revocable trust can be changed during your lifetime; an irrevocable trust is permanent. When you create trust, you can spell out exactly how you want your assets to be managed. For example, if you have children, you might specify that they cannot access their trust fund until they graduate college or turn 30.
The trustee is bound by a fiduciary duty to act in the best interest of the trust and its beneficiaries. This means the trustee can’t just use the money or assets in the trust any way they want. But they do have some leeway in when they can take money out of the trust.
Can a Trustee Withdraw Money From a Trust?
A trustee is allowed to use money from the trust they oversee to pay third-party expenses. It’s possible to include additional circumstances in the trust’s wording in which they may be able to make additional withdrawals. But generally, the trustee is entitled to use trust funds to pay for things like:
- Funeral and burial expenses for yourself or a trust beneficiary
- Expenses related to properties included in the trust, such as repairs or property insurance
- Repaying any debts owed by your estate when you pass away
- Fees paid to professionals who are hired to help with administrative tasks
- Taxes owed once the trust creator passes away
The trustee can also use trust funds to make investments on behalf of the trust and to pay associated investment fees. There is, however, a caveat. In keeping with the trustee’s fiduciary duty, those investments must benefit the trust and its beneficiaries in some way. Making investments using trust funds solely for the trustee’s benefit is considered a breach of fiduciary duty.
It’s also the trustee’s responsibility to distribute assets in the trust to beneficiaries, according to the terms that you established. This is true even if they disagree with your instructions. If one beneficiary believes that a trustee is behaving unfairly or unethically, they could seek to have them removed.
For example, say you set up a trust to divide your $1 million estate between your two adult daughters. One daughter is a saver and the other is a spendthrift. After you pass away, the trustee decides that rather than splitting the trust assets equally as your wishes dictate, they’d rather give a larger share to the daughter who’s a saver.
Even though they may be well-intentioned in trying to protect the wealth you’ve built, they’re still violating fiduciary rules by acting contrary to the terms of the trust. The daughter, who received less than her fair share of assets from the trust, could attempt to have the trustee removed.
Can You Act as Your Own Trustee?
Technically, yes, you can set up a trust and name yourself as a trustee during your lifetime. You’d need to name one or more successor trustees to oversee the trust and its assets after you’re gone or in case you become incapacitated. This is an option you might consider if you’re establishing a revocable trust. With this kind of trust, you’d have the option to modify its terms or abolish the trust completely during your lifetime.
So, can a trustee withdraw money from a trust they own? Yes, you could withdraw money from your own trust if you’re the trustee. Since you have an interest in the trust and its assets, you could withdraw money as you see fit or as needed. You can also move assets in or out of the trust.
For instance, say you transferred a vacation home into the trust, but later, you decide you want to sell that property. You could remove the home from the trust and sell it without having to put the proceeds of the sale back into the trust. This is an indirect way to withdraw money from a trust that you own and have an interest in.
Irrevocable trusts are different. With an irrevocable trust, the transfer of assets is permanent. So, once the trust is created and assets are transferred, they generally can’t be taken out again. You can still act as the trustee, but you’d be limited to withdrawing money only on an as-needed basis to cover necessary expenses.
How Can a Trustee Withdraw Money From a Trust?
The trust document is the primary guide for a trustee when considering withdrawals. It outlines specific instructions on how funds should be distributed, including any conditions or limitations. Trustees must carefully review these guidelines to ensure compliance. For instance, some trusts may allow for discretionary distributions, while others might specify fixed amounts or conditions under which funds can be accessed. Understanding these details is essential for trustees to fulfill their duties effectively and legally.
Trustees must also be aware of the legal and tax implications of withdrawing money from a trust. Depending on the type of trust, withdrawals may have different tax consequences for both the trust and its beneficiaries. For example, distributions from a revocable trust might be treated differently than those from an irrevocable trust.
The trustee is responsible for keeping track of any withdrawals of money from the trust. This is necessary for accountability and the beneficiaries may ask to see records to verify how trust funds are being used. Depending on the terms of the trust, the trustee may be charged with paying certain expenses or making purchases on behalf of one or more trust beneficiaries.
Additionally, trustees should ensure that all actions comply with state laws governing trusts, which can vary significantly. Consulting with a legal or financial advisor can help trustees navigate these complexities and avoid potential pitfalls.
Bottom Line
A trustee can indeed withdraw money from a trust account, but this action must align with the terms set forth in the trust agreement. The trustee’s primary responsibility is to act in the best interest of the beneficiaries, ensuring that any withdrawal serves the trust’s purpose and complies with legal obligations. Trustees need to maintain transparency and keep detailed records of all transactions to avoid any potential disputes or legal issues.
Estate Planning Tips
- Consider talking to a financial advisor about whether a trust is something you might need and who could be a good candidate to act as your trustee. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A trust can be a useful tool for estate planning, especially if you have substantial assets to pass on to your heirs. But it’s also important to consider what else you might need in your estate plan, starting with a last will and testament. A will allows you to specify how you want assets that are not included in a trust to be distributed to your heirs. You can discuss how to make a will with an estate planning attorney, but there are also several low-cost online will-making software programs you might try.
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