Have you ever worried about a trustee emptying out a trust account? You’re not alone. Many beneficiaries lose sleep over this exact concern, and for good reason – trustees do have access to trust funds, but there are important rules that limit what they can do.
As someone who has helped a lot of clients find their way through these murky waters, I want to make it clear what trustees can and cannot do with trust money. In short, no, a trustee usually can’t keep all the money for themselves. But the truth is a little more complicated.
What Powers Does a Trustee Actually Have?
Trustees have significant authority over trust assets but that power comes with strict limitations. Here’s what you need to know
A trustee can access and withdraw money from a trust account, but only for specific legitimate purposes that benefit the trust and its beneficiaries. Think of them as managers, not owners, of the trust assets.
When Can a Trustee Legitimately Withdraw Money?
Trustees can withdraw trust funds for these main purposes
-
Making distributions to beneficiaries – This is actually their primary duty! Distributing assets according to the trust’s terms.
-
Paying administration expenses and debts – Things like:
- Funeral costs
- Medical bills
- Outstanding credit card balances
- Property taxes
- Insurance premiums
-
Making prudent investments – Trustees are often expected to grow trust assets through sensible investments.
-
Preserving trust property – Maintaining properties, vehicles, or other valuables owned by the trust.
-
Hiring the right people—Paying accountants, lawyers, or real estate agents when you need their help
-
Taking reasonable trustee fees – Yes, trustees are typically entitled to compensation for their services, unless the trust document says otherwise.
Joshua Taylor, a partner at Keystone Law Group, says, “A successor trustee does have the power to take money out of a trust—in fact, they often can’t do their job as trustee without doing so—but this power comes with important limits.” “.
What Keeps a Trustee from Taking Everything?
Several important safeguards prevent a trustee from simply emptying a trust account:
1. Fiduciary Duty
The most important constraint is the trustee’s fiduciary duty – the highest standard of care recognized in law. This requires trustees to:
- Act with complete loyalty to beneficiaries
- Put beneficiaries’ interests above their own
- Make decisions with reasonable care and skill
- Avoid conflicts of interest
Any violation of these duties can lead to serious legal consequences.
2. Trust Document Limitations
The trust document is the main document that tells trustees what they can and cannot do. Many trusts include specific language that:
- Outlines exactly when distributions can be made
- Specifies how trust assets should be managed
- May include an “ascertainable standard” clause limiting distributions to health, education, maintenance, and support
3. Legal Accountability
Trustees who misuse trust funds can face serious consequences:
- Personal liability to repay misappropriated funds
- Removal as trustee
- Legal fees and court costs
- In extreme cases, even criminal charges
Red Flags: When to Suspect a Trustee Is Taking Too Much
Not sure if your trustee is crossing the line? Watch for these warning signs:
- Unexplained withdrawals from the trust account
- Refusing to provide financial information when requested
- Providing accountings that don’t add up
- Charging excessive fees without justification
- Commingling trust funds with their personal accounts
- Making loans to themselves from the trust
One major misconception I see is trustees thinking they can “borrow” from the trust if they return the money later. This is generally NOT allowed and is considered a breach of fiduciary duty.
What if the Trustee Is Also a Beneficiary?
This situation gets a bit more complicated. A trustee who is also a beneficiary may withdraw their share of the trust – but only if:
- The withdrawal doesn’t violate trust provisions
- There are sufficient assets left to cover expenses and debts
- They’re not taking more than they’re entitled to
- They’re not accessing funds prematurely
As the SmartAsset article explains: “if a trust states that beneficiaries are to receive 25% of their inheritances each year over four years, a trustee-beneficiary cannot simply withdraw the full amount upfront just because they have access to the trust bank account.”
Can a Trustee Borrow Money From a Trust?
While technically possible in some cases, personal loans to trustees are highly scrutinized under the law. Such loans create a presumption that the trustee has breached their duty of loyalty.
The bottom line? A trustee should generally NOT borrow money from the trust they manage.
What to Do If You Suspect a Trustee Is Taking Trust Money
If you believe a trustee is improperly withdrawing funds, take these steps:
- Review all financial documents the trustee has provided
- Attempt informal resolution by discussing concerns directly with the trustee
- Document all communications with the trustee
- Consult a fiduciary misconduct attorney for professional guidance
- Consider legal action if necessary, such as:
- Demanding a formal accounting
- Filing a breach of fiduciary duty petition
- Seeking the trustee’s removal
- Requesting a surcharge to recover misappropriated funds
Remember, you generally have three years from when the cause of action arose to file a claim, but it’s best to act promptly before evidence is lost.
Different Types of Trusts, Different Rules?
The rules can vary slightly depending on whether you’re dealing with a revocable or irrevocable trust:
Revocable Trusts: While the grantor is alive and competent, they typically serve as trustee and can use the assets however they wish. However, once they become incapacitated or die, the successor trustee becomes bound by the same fiduciary duties as with an irrevocable trust.
Irrevocable Trusts: These have stricter limitations from the start. The trustee must always follow the trust terms and fulfill their fiduciary duties to beneficiaries.
Common Questions About Trustees and Trust Funds
Can a trustee withdraw money from an irrevocable trust?
Yes, a trustee can withdraw money from an irrevocable trust, but only for legitimate purposes that benefit the beneficiaries and comply with the trust terms.
Can beneficiaries take money directly from a trust?
Generally no. Beneficiaries cannot withdraw funds from a trust on their own unless the trust explicitly grants them that right. They must request distributions from the trustee.
What are the tax implications of withdrawing money from a trust?
The tax consequences depend on whether the withdrawal is classified as income or principal:
- Beneficiaries typically pay income tax on distributions of trust income
- Principal distributions are usually tax-free
- Trustees should work with tax professionals to ensure compliance
Final Thoughts
While trustees have significant control over trust assets, they do not have unlimited power to take money for themselves. The law provides important protections through fiduciary duties, the terms of the trust document, and legal oversight.
If you’re creating a trust, choose your trustee carefully – they’ll have significant responsibility over your assets. If you’re a beneficiary with concerns, don’t hesitate to take action. Understanding your rights and the trustee’s obligations is the first step toward protecting your interests.
Have you had experiences with trustees withdrawing funds from a trust? We’d love to hear your story in the comments below!
