Yes, a trustee can withdraw money from an irrevocable trust, but only to pay for third-party expenses and not for personal reasons. This is because it is the trustee’s responsibility to manage the trust according to the wishes of the grantor. 

As part of the estate planning process, you (the grantor) set up a trust to ensure assets go where you would like them to. This legal document takes time and effort to create but makes financial matters easier to understand. Trustees are the individuals responsible for managing and withdrawing funds from your trust. 

But when can trustees withdraw money from a trust? Can beneficiaries withdraw money from a trust, too? Get the answer to that and many other crucial questions below!

Related Article: Top Mistakes Trustees Should Avoid with Trusts

Can a Trustee Withdraw Money from an Irrevocable Trust?

Yes, a trustee can withdraw money from a trust. But before we get into who can and cannot withdraw money from a trust, let’s dive into some of the finer details you need to grasp. Let’s start with laying the groundwork: What is a trust? 

A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary or beneficiaries. There are two types of trusts: revocable and irrevocable.

Here is what you need to know about both. 

What Are Revocable Trusts?

A trust is a legal arrangement that transfers assets and property into a trust controlled by the trustee. A revocable living trust is created when the trustor is still alive. 

This type of trust allows the creator to continue to own and control their property while they are alive, transfer it to whoever they want after they pass away, and avoid probate. Revocable trusts allow for further flexibility because they can be modified or revoked.

Related Article: What’s the Difference Between a Revocable Trust and Irrevocable Trust?

When Does a Revocable Trust Become Irrevocable?

A revocable trust becomes irrevocable when the grantor (i.e., the person who created the trust) dies or becomes incapacitated and can no longer make sound decisions. It also becomes irrevocable if the grantor decides to make it irrevocable while they are living. 

Regardless of the situation you are dealing with, it is important to understand that once a revocable trust becomes irrevocable, the trust terms cannot be modified. But we will get into the specifics of irrevocable trusts soon! 

Further, even if a grantor had no intention of leaving behind an irrevocable trust, the trust becomes irrevocable if estate planning arrangements are not made to prevent this from happening.

Does a Revocable Trust Become Irrevocable Upon Death?

Yes, as we mentioned previously, a revocable trust becomes irrevocable upon death. The death of a grantor is one of the most common ways that a revocable trust becomes irrevocable. 

What is an Irrevocable Trust?

Revocable trusts allow you to change the terms of a trust while you are living. However, an irrevocable trust cannot be changed.

Due to some tax benefits and asset protections, some people choose to open irrevocable trusts, but irrevocable trusts are also created when someone who created a revocable living trust dies. 

While these types of trusts can carry monetary benefits, they’re not flexible and don’t allow the trustor to make changes or revoke them. With these types of trusts, the trust creator often turns over control of the assets and funds to a trustee. 

Generally, only a trustee can withdraw money from an irrevocable trust. If the creator also designates themselves as trustee, they could maintain access to funds, but they will still be regulated by the trust document, probate law, and their fiduciary duty.

Related Article: A Beginner’s Guide to Trusts and Trust Accounting

How Does an Irrevocable Trust Work?

An irrevocable trust is a legal arrangement that transfers assets to a trustee so that they can manage them for the benefit of one or more beneficiaries. Typically, in this arrangement, the grantor forfeits ownership and control of the assets. Here’s an overview of how it works:

• The irrevocable trust is created, either by the grantor or upon their death/incapacity. 
• The trustee manages the trust and its assets per the trust terms.
• The trustee distributes assets following the trust document. 
• Once the trustee has fully distributed assets, the trust typically dissolves. 

Why Would Someone Want an Irrevocable Trust?

An irrevocable trust can be a great estate planning tool with several benefits. Irrevocable trusts provide more privacy, help protect assets, reduce estate taxes, and avoid probate. These benefits streamline the process of maintaining and distributing an estate.

Irrevocable trusts can also help loved ones receive government benefits while receiving supplemental resources to give them the quality of life they deserve. Generally, trust assets are not included in the grantor’s taxable estate, which can help their family avoid taxes. 

But your life situation could also come into play. Why would someone use an irrevocable trust? Common situations include those who:

• Have an estate that will exceed the estate tax threshold.
• Have large debts.
• Have assets they want to protect.
• Are at risk of lawsuits. 
• Want to ensure assets are passed on to beneficiaries as they intend.
• Want to make charitable donations. 

Are Irrevocable Trusts Protected from Creditors? 

Yes, irrevocable trusts protect assets from creditors by transferring ownership of assets from the grantor to the trust and, eventually, beneficiaries. As a result, the grantor forfeits control and doesn’t legally own them.

A future creditor cannot use a judgment against the original owner to terminate the trust. Still, remember that it is still illegal to defraud creditors using a trust. If this occurs, the court can reverse the transfer. 

Ultimately, the answer is complicated for the question: Is an irrevocable trust protected from creditors? When devising an estate plan and setting up a trust, it is crucial to work with an attorney and expert fiduciary who can help you in this process. 

Can a Trust Protect Your Assets from a Lawsuit?

Yes, it’s common for people at a high risk of being sued, such as an attorney or doctor, to set up and use an irrevocable trust to protect assets from a lawsuit. Again, once an asset is transferred to a trust, the trust owns it for the benefit of beneficiaries.

Because of this, it is safe from legal judgments because the trust itself will not be a party to any lawsuit that the grantor endures. 

Does an Irrevocable Trust Protect Assets from a Nursing Home?

Yes, an irrevocable trust, specifically a Medicaid Asset Protection Trust, can protect assets from nursing home costs by transferring ownership of assets to the trust itself. In a way, these trusts work similarly to Special Needs Trusts.

Because the elderly individual doesn’t actually own these assets, it is not taken into consideration when determining Medicaid eligibility. So, why do you need an irrevocable trust to protect assets from a nursing home? Simply put, these trusts:

• Protect assets by transferring ownership to shield them from claims made by nursing homes seeking reimbursement for care costs.
• Lower the countable assets an individual has to ensure they maintain eligibility for Medicaid and other government benefits. 

“For these types of trusts in particular, it is crucial to set it up well in advance so you can ensure you comply with legal guidelines and plan strategically. For example, California has a “look-back period,” meaning that assets transferred into the trust within a specific time frame before applying for Medicaid can still be counted. Otherwise, you could end up disqualifying your loved one from receiving crucial benefits, which would undermine their retirement.”

– Marcia L. Campbell, CPA, Professional Trustee, & Fiduciary

Does An Irrevocable Trust Pay Taxes?

Yes, a trust is considered a separate tax-paying entity, and a trust pays taxes on income it generates while beneficiaries pay taxes on distributions. Tax implications of withdrawing money from a trust are crucial for beneficiaries and trustees to understand. 

Who Pays Tax on Irrevocable Trust Income?

Paying taxes on behalf of the trust for the income it generates is one of the many fiduciary duties a trustee has a legal obligation to uphold. Essentially, the trust itself pays this tax and the trustee facilitates payment. 

To pay these taxes, trustees must complete a tax return (or hire a third-party) and use trust funds to pay those taxes, which is one of the many reasons a trustee can withdraw money from a trust. 

When Does an Irrevocable Trust End?

Generally, under California law, an irrevocable trust terminates when one of the following events occurs:

• The trust document specifies an end date and the term has expired. 
• The purpose of the trust has been fulfilled.
• The purpose of the trust becomes unlawful, and the trust is legally revoked.
• The trust’s assets are all removed (in some cases).

Can I Take Money Out of My Irrevocable Trust?

As we will discuss in more detail later, this depends on your relationship to the trust. If you are a trustee and need to use trust funds to pay expenses related to trust administration, then you can take money out of an irrevocable trust. 

However, if you are the beneficiary, the answer is different for the question, Can I take money out of an irrevocable trust? Generally, a beneficiary cannot withdraw money directly from an irrevocable trust and must wait for the trustee to make distributions.

Remember, irrevocable trusts are permanent, meaning once the grantor has created the trust, transferred assets into it, and the trust becomes irrevocable, they cannot be arbitrarily removed unless doing so is in accordance with the trust document.

This applies even in situations where the grantor is also the trustee.

How to Get Your Money Out of a Trust Fund

If you are the trustee, you have more power when figuring out how to get money out of a trust fund. We will discuss in more detail later in our article, but we will provide a brief overview. Typically, you will have access to a bank account for a trust that allows you to withdraw cash, write checks, and make wire transfers. 

For beneficiaries, however, it is not as direct when determining how to withdraw money from a trust fund.  You will likely have to request money from the trustee or wait until the trustee has taken care of things like paying debts and taxes to make distributions.

Ultimately, communication between the trustee and beneficiaries is crucial, and it is also one of the many fiduciary duties a trustee must uphold. Trustees and beneficiaries should touch base so everyone understands the distribution process. 

How to Get Money Out of a Trust Fund Early

If you want early access to money in a trust fund, you will likely have to request it from the trustee. A request requires putting the request in writing and sending it to the trustee. Whether or not they comply depends on if they have fulfilled their fiduciary duties.

Depending on your situation, you may be able to file a petition with the court to compel the trustee to distribute money. Working with a trust lawyer is crucial in making this decision.

When are Withdrawals Acceptable?

It’s important for a trustee to understand the guidelines of your trust before taking any funds from the trust. This ensures they are withdrawing funds correctly and won’t get in trouble for misconduct. For example, money from a trust should not be borrowed or used for personal purposes. 

Trustees can withdraw money from a trust to pay third-party expenses for the grantor. Below are examples of why trustees can withdraw money:

• Funeral expenses
• Repairs on property owned by the trust
• Debt repayment
• Distributions to beneficiaries 
• Administrative fees
• Investments that affect the trust

When are Withdrawals Unacceptable?

The responsibility of a trustee can be overwhelming. However, that does not excuse taking funds from a trust. While it can be a stressful duty, you should consider reminding the trustee (if they are aware of their role) that they must not mismanage your funds; if they do, they may face being held liable for mistakes. It is unacceptable for a trustee to withdraw funds to borrow or use for personal reasons other than what is outlined in your trust. It is an unwise decision and could be caught during a trust accounting, which is an annual requirement needed in the state of California. 

Related Article: Who Can Withdraw Money From A Trust?

Who Can Withdraw Money From a Trust? 

Typically, only a trustee can withdraw money from a trust. But there is much more to answering this question than that. Can you take money from a trust fund? Whether you’re a beneficiary or trustee, here is what you need to know. 

Can a Beneficiary Withdraw Money From a Trust?

Whether or not a beneficiary can withdraw money from a trust depends on the trust document itself. In some trusts, the settlor will include language allowing one or more beneficiaries the ability to withdraw money when they need it. 

Sometimes, the settlor will decide to give the trustee the sole power to access trust funds. If the trustor wants the trust beneficiaries to have the ability to receive money, those instructions must be documented in the trust instrument. 

It’s important to lay out clear instructions outlining reasons a trustee can withdraw, or when a beneficiary can receive money from the trust. Another situation that could impact this is when the beneficiary and trustee are the same person. 

In this situation, they would be able to withdraw money from the trust, but they would still need to ensure they are not violating their fiduciary duty. 

“Like nearly all probate matters, whether or not a beneficiary can get money from a trust depends entirely on your circumstances. Specific terms put forth in the trust document must give the trustee this power. It’s not simply a case of a beneficiary grabbing the keys and raiding the vault. To ensure you keep the peace, your beneficiaries receive their distributions in a timely manner without risking your beneficiaries from overdoing it with withdrawals, and a trustee doesn’t abuse their power over the trust, working with a professional trustee is often the best solution.”

– Marcia L. Campbell, CPA, Professional Trustee, and Fiduciary

Related Article: Three Ways Trust Beneficiaries Receive Their Inheritance

Can a Trustee Withdraw Money from a Trust for Personal Use? 

In most cases, a trustee can withdraw money from a trust account to pay expenses relating to the trust. Trustees can access trust funds immediately upon assuming this role. 

These expenses include expenses related to any trust property, distributions, repaying debts owed by the estate, fees paid to professionals they hired to help with administration, and taxes owed once the trust creator passed away. They can even use funds to make investments on behalf of the trust.

However, there is a caveat. A trust must use trust funds to benefit the beneficiaries and the trust. This, ultimately, is what is known as their fiduciary duty. Trustees must fulfill several duties, and understanding their finer details in relation to probate law is complicated.

A trustee is also entitled to compensation for their work. They receive payment directly from trust assets. While these transactions should be thoroughly documented, and the compensation must be “reasonable,” it is essential to understand this so you do not mistake compensation for treating the trust as a piggy bank.  

Furthermore, strict laws govern how they can use trust funds to prevent conflicts of interest and outright theft. If a trustee uses trust funds solely for their own benefit and personal use, this constitutes a breach of their fiduciary duty and could warrant legal action. 

Working with a professional trustee is the best way to avoid costly mistakes that could lead to litigation, removal, personal liability, and irreversible damage to the trust and family ties. It also ensures an objective third party who is not blinded by deep-rooted family dynamics. 

A professional trustee is also well aware of their fiduciary duty, meaning you minimize the risk of someone taking advantage of this position—which, unfortunately, is all too common.

Can a Trustee Borrow Money from a Trust? 

Technically, as a trustee, you could be allowed to borrow money from a trust if: 

• It benefits the trust.
• Trust documents allow it.
• It benefits the beneficiaries.

Still, this presents some risks and complications. Under California law, such transactions are under intense scrutiny. Even if the trust document allows it, borrowing from a trust can still be considered a breach of your fiduciary duty. 

Ultimately, this could expose you to being held legally and financially liable. Always consult with an attorney before borrowing money from a trust–especially if you are the trustee. 

Can a Grantor Withdraw Money from an Irrevocable Trust?

Settlors, also called grantors or trustors, often create a trust for the benefit of those who will inherit from it. Typically, they designate themselves as sole trustee and beneficiary in their lifetime to maintain complete control over the trust and its assets while they still have capacity. 

As mentioned above, trusts whose creator is still alive are called living trusts, or revocable trusts. Settlors have the authority to withdraw money from a living trust. 

However, things change when it comes to irrevocable trusts. Only a trustee can withdraw trust funds. In many situations that involve an irrevocable trust, the settlor has passed, so it’s impossible for them to withdraw money from it anyway. 

If they have created an irrevocable trust while they’re still alive and designated someone else as trustee, they will lose the ability to withdraw money from it, barring specific language in the trust that grants the settlor special permissions. Still, there will be intense scrutiny even if the trust permits this. People might suspect foul play, and litigation could result. 

For example, imagine the trust document contains language giving the trustee the ability to borrow from the trust. In this situation and under California law, personal loans to a trustee will still be under intense scrutiny and create a presumption that they breached their fiduciary duty of loyalty.

How Can a Trustee Withdraw Money From a Trust?

A trustee can technically withdraw money from a trust whenever they want because of their access, but they must ensure that they are using the trust funds for the benefit of the trust and beneficiaries, and they must ensure that their withdrawals are in agreement with trust terms. 

There usually has to be some mechanism that allows the trustee to take out money when needed, which often means establishing a bank account just for the trust that the trustee has access to. The trustee can then use this account to write checks, schedule transfers, or withdraw cash.

Still, the trustee is responsible for keeping track of all withdrawals. They must meticulously document every transaction, whether a transfer, withdrawal, or payment, and its purpose. Beneficiaries can also ask to see records to see how it’s being used.

Keeping good records is crucial. Trustees also have to prepare and submit a trust accounting at least annually, which is a comprehensive overview of all transactions pertaining to a trust and must adhere to specific rules. 

The intensive financial aspect makes working with a professional trustee or fiduciary crucial. 

Related Article: Who Should You Name as a Trustee? Why to Hire a Fiduciary!

Can You Withdraw Cash from a Trust Account? 

Yes, a trustee has the authority to withdraw cash from a trust account to use on expenses related to trust administration. 

How to Transfer Money from a Trust Account

You can transfer money from a trust account, similar to how you transfer money from a regular bank account. Simply open the bank account for the trust, have all the receiving party’s bank information readily available, and make a transfer. 

Keep detailed records of all transfers! Thorough records are vital for your protection and trust accounting. We also advise checking with your bank to see if online or mobile banking is an option. This could streamline transferring money from a trust account. 

Where Can I Withdraw Money from a Trust Bank?

As a trustee, you can withdraw money from a trust bank account by visiting a bank or using an ATM. To determine which ATMs you can use for these transactions, contact the financial institution directly and ask. You can also use a debit card connected to your trust account to access funds. 

Can a Power of Attorney Create an Irrevocable Trust?

No, a generic power of attorney cannot generally create an irrevocable trust by itself. But that doesn’t mean it can’t ever create one. Because, like always, there are exceptions. You can tailor a power of attorney to grant this authority if you desire. 

Per California Probate Code Section 4264, a power of attorney can be used to give the power to create, modify, revoke, or even terminate a trust.  To grant this power, work with a lawyer to create this document so it is legally binding and grants this authority. 

Who Is the Best Trustee for an Irrevocable Trust?

To ensure you make the best choice when appointing the trustee, there are several factors that you must consider. It is not uncommon for someone to appoint a loved one, like a friend or family member, as the trustee. But this is not always the best option.

Managing a trust is a complex task, and if a trustee is unaware of their responsibility to fulfill their fiduciary duties or is unfamiliar with probate laws, this could expose them to litigation, hurt beneficiaries, and, ultimately, undermine the trust.

A trustee should possess a few of the following skills and traits:

• Integrity
• Impartiality
• Interpersonal skills
• Communication skills
• Financial acumen
• Organizational skills
• Decision-making
• Knowledge and experience navigating trust law
• Tax knowledge
• Real estate savvy
• Investment knowledge

Just as importantly, managing a trust is a full-time job, so you need someone who has the time available to devote to this undertaking. Ultimately, this is why hiring a professional trustee is often crucial. 

Do You Have More Questions About Trust Accounts or Who Can Withdraw Money from a Trust? We Can Help!

With your trust, you have built a secure financial foundation for your loved ones that will fortify them for years or possibly generations. Now, it’s time to ensure your wishes are carried out smoothly and avoid potential family conflicts. Make sure the person overseeing the trust has the financial acumen, probate law experience and expertise, and integrity your legacy deserves.

Schedule a consultation today for trusted, professional trustee and fiduciary services.