Im the Trustee and a Beneficiary: If I Neglect My Duty, Can I Lose My Inheritance?
It is common to be listed as both the Trustee and Beneficiary of a Trust, but it is important to remember that both roles have different responsibilities. If you are both the Trustee and Beneficiary and the Trust explicitly states that you can lose your inheritance for neglecting your duties, it is best to ensure your duties are fulfilled. Any other beneficiaries can challenge your role as Trustee (and you could potentially lose your inheritance) for neglecting your duties.
As Trustee it is important that you remember your fiduciary duties, including: Loyalty to the Beneficiaries, To preserve and protect the Trust property and assets, Impartiality when carrying out the provisions of the Trust and to inform Beneficiaries of all actions related to the Trust.
In this post, we will define a trust as well as the roles of trustees and beneficiaries. We will take a look at the duties of a trustee and the rights of a beneficiary. Finally, well review the Nevada case law that applies to individuals who are both trustee and beneficiary.
Lets start with a brief review of what a Trust is, because it will guide our discussion of the various roles, rights, and responsibilities that go along with a Trust.
What is a Trust?
Unless you are a Trusts and Estates attorney, a Trust can seem like a daunting and confusing concept. To better understand your duties as a Trustee and Beneficiary, it helps to understand what a Trust is and how it works.
A Trust is a legal document that gives another party (the Trustee) the right to hold assets for the benefit of a third party (the Beneficiary). The individual who makes the Trust (the original asset owner) is called the Grantor. In some cases, the Grantor, Trustee, and Beneficiary can be the same person, but the roles can also be held by three different people.
For the sake of example, lets say Jim wants to set up a Trust to protect his assets for his children. Jim is the Grantor and he wants his children, Tom and Sue, to be the beneficiaries. He makes his second wife, Sharon, the Trustee. In this case, Sharon would be responsible for managing the Trust for the benefit of Tom and Sue.
What are a Trustees Duties?
As the name implies, a Trustee holds a position of trust. The Trustees job is to follow the rules set out in the trust. Often, these rules pertain to managing the Grantors assets (like their home, business, or bank account) and how, if, and when those assets should be distributed to others.
A Trustee is responsible for settling the Grantors estate when they pass away and filing appropriate tax returns. They will also be responsible for paying debts of the estate and splitting assets according to the Grantors wishes. The Trustee must be loyal and impartial when carrying out the provisions of a Trust so they cannot play favorites.
According to the previous example, Sharon, as Trustee, would be responsible for seeing that Jims children get the assets that Jim wanted them to have. If Sharon does not follow through with Jims wishes as written in his Trust, she can be removed as Trustee and someone else will have to fill the role.
That brings me to my next point: Beneficiaries have rights.
Legal Rights of a Beneficiary
A Trustee holds a special position of trust when it comes to the beneficiaries of an estate. Beneficiaries have to rely on the Trustee to follow the language of the Trust and act fairly. While each Trust is slightly different, here are the main rights of a beneficiary:
- Beneficiaries have a right to request information about the Trust and the Trustees activities related to the Trust.
- Beneficiaries are entitled to income from the Trust (such as income from a business that is held in Trust).
- Beneficiaries have a right to receive their distribution as outlined in the Trust.
- Beneficiaries can request an accounting of all Trust assets and debts.
- Beneficiaries have the right to ask the court to remove a Trustee if the Trustee fails to act in the Beneficiaries best interest.
If the Trustees and Beneficiary do not get along, difficulties can arise. Sometimes it can be even more challenging if at least one of the Beneficiaries is also a Trustee. This exact problem arose in the Nevada case, Connell Living Trust v. Ahern, 426 P.3d 599, 134 Nev. Adv. Op. 73 (2018).
Can a Trustee Who is Also a Beneficiary Lose Their Inheritance?
In Connell Living Trust v. Ahern, the Nevada Supreme Court had to analyze whether a beneficiary, also acting as Trustee, can lose their inheritance for violating their duties as Trustee.
In this case, Eleanor Ahern was the Trustee for a Trust in which she was also one of the beneficiaries. Her two daughters, Jacqueline and Kathryn were also beneficiaries. The creators of the Trust did not want any disputes to arise between the parties, so they incorporated a no-contest clause into the Trust. The no-contest clause stipulated that anyone who challenged the Trust would have their inheritance reduced to $1.
When Eleanor stopped making payments to Jacqueline and Kathryn in accordance with the Trust, the daughters filed suit. The lower court found that Eleanor breached her duties as Trustee and appointed a new temporary Trustee. The new Trustee discovered several other issues with Eleanors handling of the Trust and the daughters tried to invoke the no-contest clause (reducing Eleanors inheritance to $1). The lower court did not enforce the clause and the case was eventually appealed to the Nevada Supreme Court.
The Court tried to determine what the Grantors intended when they wrote the clause, to see if Eleanor could potentially lose her inheritance for breaching her duties as Trustee. Ultimately, the Court found that even though Eleanor neglected her duties, she did not violate the no-content clause. The Court reasoned that if Trustees could lose their inheritance for breaching their duties as Trustee, that would incentivize more Trust challenges and litigation.
What Can Be Learned from Connell Living Trust?
The lesson gleaned from the Connell case is that Trusts must clearly identify any intention to limit a Beneficiarys inheritance because of a neglect of their duties as Trustee. Put simply, if the Connell Grantors had said that Eleanor could lose her inheritance for violating her duties as Trustee the Court would have followed the language of the Trust. Because the Grantors did not specifically state that the Trustee could lose her inheritance for neglecting her duties, the Court refused to enforce the no-contest clause. This means even simple, unforeseen issues with the text of a Trust can make a huge difference in the handling of an estate.
Estate disputes are more common than most people think. To prevent a lawsuit over the assets you have worked hard to earn, it is important to make sure your intentions are clear when creating a Trust. You may not think of all the disputes that could possibly arise, so it is important to consult with an experienced Trusts and Estates attorney.
At Lee Kiefer & Park, we can help you commit your estate planning goals to writing and reduce the risk of disputes. For more information, contact our office to schedule a free consultation at 702-333-1711.
Attorney Kennedy Lee practices in all aspects of trust and estate law. He views all legal issues from multiple angles (e.g. from litigation to administration point of view) to provide a higher quality of service to our client.
By Lee Kiefer & Park, LLP