Trustee vs. beneficiary: What's the difference?

Creating a trust is a way to preserve assets for your loved ones while helping them avoid some of the bureaucratic hassles that may happen when you die.

Even if you understand the basics of what a trust is, there’s often confusion about the terms you may encounter in the trust creation process — particularly “trustee” and “beneficiary.” These terms might seem interchangeable, but they’re not. Read on to learn more about trusts, and find out what’s the difference between a trustee and a beneficiary.

What is a trust?

A trust is a common financial planning instrument to protect your assets and ensure they’re passed on to the right people when you die. You can transfer assets like property and even a life insurance policy into the trust during estate planning.

The property in the trust can gain value over time if the assets appreciate in value and/or earn interest. The principal is the amount of an asset put into a trust, while income is the amount of money it earns over time.

There are three main parties in a trust: the grantor (or trustor), the trustee, and any beneficiaries. The grantor (or trustor), is the individual who creates the trust and transfers assets into it. As we’ll discuss in detail below, trustees and beneficiaries have different roles, responsibilities, and rights in the trust process. In essence: The trustee looks after the assets in the trust, while the beneficiary receives those assets or their proceeds.

All trusts are not the same. There’s a lot of flexibility when one makes a trust as to who can know what’s in it, when it comes into effect, who controls the assets, who benefits, and whether or not the trust can change over time.

Some types of trusts include:

• Irrevocable trust: An irrevocable trust cannot be changed. An example is a testamentary trust, which cannot be altered once in place.
• Revocable trust: Unlike an irrevocable trust, a revocable trust can be changed. The grantor can revoke or amend the trust at any time.
• Testamentary trust: This kind of trust is also called a will trust. It goes into effect when a person passes away and is often part of a will.
• Living trust: A person creates a living trust during their lifetime. They move their assets into the trust and may use them for their own benefit, depending on the terms. A living trust may be irrevocable or revocable.
• Life insurance trust: This kind of trust is funded with a life insurance policy. Once the life insurance policy is inside the trust, the grantor cannot access the cash value.
• Charitable trust: This trust ensures assets are passed to a charitable organization upon the death of the person who created the trust.
• Blind trust: With this type of trust, beneficiaries do not know the contents of the trust. This is often used to avoid conflict between beneficiaries.

These are just a few examples. Other kinds of trusts include special needs trusts to pay for medical care and spendthrift trusts that limit beneficiaries’ access to assets to preserve those assets.

Why create a trust?

Unlike a will, a trust can help your family to avoid the probate process after you pass away. During probate, the will is declared valid by a court and assets are distributed — and the process can take several months.

With a living trust, for example, you can act as the trustee during your lifetime and still use and benefit from the property inside the trust. When you die, the trust remains in place, and the person you name to be the trustee after you, called the “successor trustee,” distributes the assets without the need to go to probate court.

A trust can also come with tax advantages, depending on the type and purpose of the trust. For example, property put into a trust may be taxed when it goes into the trust but not when the trustee changes or the property is distributed. If the property is passed down as part of an estate outside of a trust, it may be subject to estate tax.

A trust can also help ensure money is set aside for a loved one with specific needs, such as a child needing lifelong medical care, without worrying that the assets may go to another person or be misallocated after your death.

Now that we have a brief overview of what different kinds of trusts can look like, let’s dive more deeply into the people involved.

What is a trustee?

A trustee is a person tasked with handling all aspects of maintaining the trust. There are many parts to this. They may have the responsibility to:

• Distribute assets to beneficiaries
• Maintain the assets
• File and pay taxes on the trust
• Record all trust activity
• Invest funds in the trust
• Sell property in the trust

These duties can mean active involvement in the trust to support beneficiaries. For example, a trustee may have the discretion to invest fund assets, but they cannot do so recklessly or frivolously — they are compelled to act in the best interests of the beneficiaries.

The responsibilities and discretion of the trustee often depend on the wording of the trust. When the grantor creates the trust, they can outline the specific nature of the trustee’s role in maintaining and distributing the assets.

The job of the trustee can be substantial. Often, they will receive monetary compensation for taking on this role. The amount of money they receive is often outlined in the trust document, but if it is not, state law often imposes a compensation schedule.

A trustee can also use trust funds to hire expert help to do their job. For example, they may hire a trust attorney, accountant, or tax preparer.

Trustees can resign, or a beneficiary may ask the court to remove them. If you are a trustee and don’t want the role any longer, you may have to ask a court to appoint someone else if no alternative trustee is named in the trust document.

What is a beneficiary?

The beneficiary is an individual who receives assets or proceeds from the trust. It’s important to note that some trusts may have limits, such as mandating a child not receive money out of the trust until they reach the age of 25 or have finished college.

In general, a beneficiary has some rights such as:

• Receiving timely payments from the trust
• Requesting a full accounting of the trust
• Obtaining information about the trust

A beneficiary can also take some steps to change the trust, including:

• Requesting that a court remove a trustee
• Requesting that a court dissolve the trust, with the consent of all other beneficiaries

A beneficiary does not need to be a person. It may also be an organization, such as a charity, that receives proceeds from the trust.

Can a trustee and a beneficiary be the same person?

The trustee and beneficiary can be the same person. But that depends on the trust. In the case of a revocable trust, the trustor, trustee, and beneficiary are sometimes all the same person. With an irrevocable trust created during one’s lifetime, the grantor usually chooses someone else to be the trustee.

One example of when the trustee and beneficiary are the same is when a grantor has multiple children and creates a trust for them. All their children may be beneficiaries, but the grantor may choose one of them to be the trustee.

This situation can be convenient, but it may also lead to conflict, as the trustee has an interest in the assets they manage. If other beneficiaries think that interest clouds their judgment in how they choose to manage, they can take the trustee to court for breach of contract.

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