Q

Q

Can a trustee withdraw money from a trust?

A

A

Trustees should only withdraw money in accordance with the terms of the trust document, and they always have a fiduciary duty to act in the best interests of the trust.

Elissa

Elissa Suh

Published August 19, 2020

info
Advertising Disclosure

KEY TAKEAWAYS

  • A trustee is the person or entity in charge of managing the trust

  • Grantors who act as their own trustees during their lifetime may have more flexibility when it comes to withdrawing trust funds

  • Trustees of irrevocable trusts should only withdraw money for the trust’s use

  • Trust beneficiaries can petition to remove a trustee who does not act in the best interest of the trust, such as by stealing or misusing funds

A trust is a legal entity into which you transfer ownership of your assets to be used by your future heirs. It is an estate planning option that often works in conjunction with a last will and testament. All trusts are managed by a trustee, who can be a family member, attorney, or even a financial institution, which is called a corporate trustee.

All trustees have a fiduciary duty to act in the best interest of the trust and should only withdraw funds for the trust’s use in accordance with the terms of the trust agreement. Sometimes the person who created the trust (also known as the grantor, settlor, or trustor) also names themself as the trustee. This is typical for revocable living trusts, which are created during the grantor’s lifetime and can be changed. In this case, the grantor-trustee may have more flexibility when it comes to withdrawing the trust funds.

Some people open irrevocable trusts, which can’t be changed but can provide asset protection or act as a tax shelter. Grantors of irrevocable trusts must typically select someone else to act as trustee — instead of doing it themselves — to take advantage of these benefits. The trustee of an irrevocable trust can only withdraw money to use for the benefit of the trust according to terms set by the grantor, like disbursing income to beneficiaries or paying maintenance costs, and never for personal use. Not following the rules of the trust document could be grounds for the trustee’s removal.

Withdrawing money from a revocable trust

If you establish a revocable living trust, you may decide to act as the trustee. Created when you're alive, this type of trust can be modified or revoked, which provides flexibility since you can opt out and close the trust when it no longer suits your purposes.

You might open a revocable family trust so that your children can receive the assets easily without being subject to probate. You might also name yourself and your spouse as co-trustees. As part of this arrangement, the grantor-trustee can typically withdraw money from the trust as they see fit, since they are the owner of the trust and retain an interest in it until they die. (You can create a living trust with the Policygenius app when you purchase the Plus Package for $280.)

A trust created upon your death based on instructions in your will is called a testamentary trust.

policygeniusSymbolCenter

Build a legacy for your family. Get your estate plan right.

With Policygenius, you can create a tailored will using attorney-approved tools, without the attorney price tag.

Withdrawing money from an irrevocable trust

After the grantor-trustee passes away, a successor trustee will manage the trust, which becomes irrevocable, since the grantor can no longer change it. Now the trustee must manage and withdraw funds from the trust as befits the beneficiaries according to the trust document.

Thinking about creating a trust? Read about the difference between revocable trusts and irrevocable trusts.

What can the trustee use the trust funds for?

The successor trustee to the living trust or the trustee of an irrevocable trust can only use trust funds according to the terms of the trust agreement, set by the grantor who gives instructions on how these funds should be used after their death. For example, the trustee may use trust money to pay for the grantor’s burial costs if that’s what the document says.

Trust funds may be distributed to a trust's beneficiaries all at once or over time, which means the trustee may need to keep managing the assets. The trustee might be paid for their services, but they should not take, borrow, or lend the trust funds or trust income for their own personal use. Instead, the trustee can only use the trust funds for costs related to the trust.

After the grantor has passed away, the trustee must file an income tax return for the trust and they can use the trust money to pay the trust's income taxes.

They can withdraw money to maintain trusts property, like paying property taxes or homeowners insurance or for general upkeep of a house owned by the trust.

The trustee can use trust funds to pay filing fees, registration fees, title fees as necessary when transferring assets into the trust’s name.

If the trustee is responsible for investments, they can pay for management and trading fees with the trust’s money.

If the trustee consults an accountant, attorney, or financial planner, they can be paid with trust money.

Learn more about what a trustee does.

What happens if a trustee does not follow the rules of the trust?

The trustee is legally obligated to follow the terms of the trust document, and if they don’t — like if they steal or mismanage funds — they can be removed from their position. A trust beneficiary can file a petition with the probate court for removal of a trustee. The beneficiary can then petition for a new trustee.

How do you take money out of a trust fund?

The trustee usually establishes a checking account for the trust so the money can be disbursed. Only the trustee — not the beneficiaries — can access the trust checking account. They can write checks or make electronic transfers to a beneficiary, and even withdraw cash, though that could make it more difficult to keep track of the trust’s finances. (The trustee must keep a record of all the trust's finances.)

Sometimes the trustee will make purchases for the beneficiary instead of giving them money to spend on their own. This may happen when the grantor wants more control over a beneficiary who is financially irresponsible, or if the beneficiary needs to qualify for benefits and cannot be seen as having any money to spend on their own.

Recession-proof your money. Get the free ebook.

Get the all-new ebook from Easy Money by Policygenius: 50 money moves to make in a recession.

Policygenius Image

About the author

Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

Was this article helpful?

thumbsUp
thumbsDown