Q I am the trustee of my sister’s trust. Her daughter, “Annie” who is an adult, wants to buy a house. The trust does not tell me I can give her such a large amount of money. It tells me that I can give her the income from trust investments but nothing else. Annie is to receive all of the trust’s assets when she turns 40. She needs a place to live, and it seems reasonable that she buys a house now as the prices of houses just continue to go up. What do you think?

A Your thinking is good and would benefit Annie now and in the future but you want to be sure that you, as a trustee, have the authority to take such a step. I strongly encourage you to discuss this with your attorney. Another option to consider would be that rather than give her a large amount of cash and let her buy a house, you arrange to have the trust buy the house and allow Annie to live in the home. When Annie attains age 40, you can distribute the house to her according to the terms of the trust.

If a trustee buys a house for a beneficiary and allows the beneficiary to live in the home, the trustee should treat it like a business arrangement. In other words, you should have Annie sign a lease agreement which lays out your expectations.

The lease would cover things like who will pay utilities, your expectation as to maintenance and whether or not the beneficiary can have roommates or rent out part of the house. If Annie moves out of the house, you need to have an agreement with her whether the house will be sold or rented — and you, as trustee, would handle the sale or rental.

Also, if Annie does have a roommate or if she decides to rent out part of the house, you should have any roommates or tenants similarly sign a rental agreement.

Also, make a provision in the lease that you have authority to inspect the house at least annually and then do so to be sure things are being maintained properly and nothing untoward or illegal is being done on the premises.

Finally, the trust would be responsible for tax and insurance and the beneficiary should get renter’s insurance to cover her personal property.

Be sure you have all this reviewed and completed by your attorney. One of the reasons I push toward the trust owning the house and allowing the beneficiary to live there is that your sister created a trust to keep assets out of her daughter’s hands for a reason.

She must have believed that her daughter was not good with finances and hoped she would grow into the responsibility.

There have been cases where a “nice” trustee like you distributed assets to a beneficiary before the time stated in the trust only to have the beneficiary blow through the funds (or sell the house and then spend all the money) and the beneficiary successfully sued the trustee.

The beneficiary’s legal argument was “the trustee should have known I was not financially responsible and should have kept me from harming myself.” Yep, it has happened!

Another reason to have the trust own the real estate is that if your niece were to get in an accident or other lawsuit and a judgement were obtained, the debtor could not attach her home. Irrevocable trusts like the one you are administering are one of only ways to insulate assets from a successful judgment. She’s young, accidents happen. Having the house fully protected against creditors is a true benefit for her.

An esteemed law professor recently stated that there is currently a “storm of fiduciary litigation.” Most lawsuits are brought by beneficiaries against their trustees.

Our society is, in general, more litigious and the rights of beneficiaries to bring lawsuits continue to expand.

So, as a trustee and fiduciary for Annie, you need to be extremely careful in how you handle the trust. Not only for Annie’s benefit, but to protect yourself.

Liza Horvath has over 30 years of experience in the estate planning and trust fields and is a licensed professional fiduciary. Liza currently serves as president of Monterey Trust Management. This is not intended to be legal, tax or investment advice. If you have a question call (831) 646-5262 or email liza@montereytrust.com.