Trust relationships involve complicated legal technicalities, including confusing terminology and significant fiduciary duties. A trustee is a fiduciary of the trust relationship, and as such he must take care not to create an internal conflict of interest. Some state laws prohibit the same person or entity from acting as both the beneficiary and trustee under a deed of trust, while other states allow it.
Beneficiary and trustee are terms used in two very different legal worlds. Trust agreements are common estate planning tools. A beneficiary under an estate planning trust agreement is a person entitled to receive some kind of distribution from that trust. Whether a person is a beneficiary under a trust agreement has no impact on whether she can serve as a trustee under a deed of trust.
Deed of Trust
A deed of trust is mortgage substitute. The beneficiary under the deed of trust is the mortgage lender, while the trustee is essentially just a placeholder unless foreclosure becomes necessary under the deed of trust. Generally, state laws allow a mortgage lender to serve as both the trustee and the beneficiary, but some state laws require the lender to appoint different internal departments to those two functions.
A trustee under a deed of trust does absolutely nothing unless the mortgage borrower stops making her mortgage payments. When that happens, the beneficiary can authorize the trustee to carry out foreclosure on the property identified as collateral in the deed of trust. The trustee follows state law to hold a foreclosure sale to raise money to pay off the mortgage loan. In performing that function, a trustee has fiduciary duties to both the mortgage borrower and the mortgage lender (beneficiary). So even if the beneficiary is the same as the trustee, the trustee has a legal duty to foreclose properly and without attempting to conduct any fraudulent or unfair activity in relation to the borrower.
Ultimately, the laws of each state determine whether a trustee and a beneficiary can be the same person or entity. In some states, the dual function is okay, while other state laws expressly prohibit the same person or entity from serving as both trustee and beneficiary under the deed of trust. In California, for example, a trustee and a beneficiary cannot be the same person or entity, but in Utah, the dual role is perfectly acceptable. You will have to review the laws in your particular state to know for sure.
- "Real Estate Finance Law"; Grant S. Nelson and Dale A. Whitman; 2008
- Photo Credit Hemera Technologies/Photos.com/Getty Images