Below, our Modesto estate planning lawyers explain how to protect yourself from claims of self-dealing while serving as a trustee.
What Is Self-Dealing in Trust Administration?
A trustee has significant discretion when managing a trust’s assets. However, that authority also comes with a strict fiduciary duty. A trustee must remain loyal to the beneficiaries and avoid self-dealing at all times.
Self-dealing occurs when a trustee uses trust assets for personal benefit instead of for the beneficiaries. Although the definition sounds simple, identifying self-dealing can be challenging. It often happens unintentionally, especially when the trustee is also one of the beneficiaries. Protect Yourself
Common examples of self-dealing include:
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giving themselves gifts from the trust
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borrowing trust money
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investing trust assets in their own business
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making risky investments for their personal benefit
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buying or selling property to or from the trust
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mixing trust assets with personal funds
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paying themselves more than reasonable compensation
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receiving kickbacks related to trust expenses
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taking distributions not offered to other beneficiaries
Examples of Innocent Self-Dealing
The following real-life scenarios show how trustees sometimes engage in self-dealing without realizing it. Protect Yourself
Example 1
Tom is Dad and Mom’s eldest son. He runs the family business and later becomes trustee. After Dad dies, Tom works long hours on trust administration but never pays himself compensation, even though the law allows it.
Tom and his brother want to buy a yacht. Because neither has enough cash, Tom lends trust money to himself and his brother. He does not offer similar loans to his sisters. This situation raises a serious question: Is Tom engaging in self-dealing? Even if Tom charges market interest and takes proper security, the issue still requires careful analysis.
Example 2
Tom wants to expand the family business, which he co-owns with his brother and one sister. His other sister is an employee. Tom uses trust money to pay for the expansion. Because Tom benefits from the business, this action can be viewed as self-dealing.
Example 3
Sue is a physician and the trustee of her family trust. The trust owns a lake house filled with childhood memories. The trust cannot afford the expenses, and her brothers cannot contribute. Sue decides to buy the home from the trust at fair market value. Is that self-dealing?
If the market drops before she buys the home and she still pays the higher, pre-crash value, does that change the analysis? These questions illustrate how complicated self-dealing can be.
How to Avoid Claims of Self-Dealing
Because self-dealing is not always obvious, trustees must be careful. Fortunately, several safe-harbor options can protect you from claims of wrongdoing. Protect Yourself
1. Follow the Trust Instructions
A trustee may take actions that appear to be self-dealing if the trust document specifically allows them. For example, in Example 1, Dad should have put his oral instructions in writing. A trustee should never rely on unwritten directions.
2. Get Beneficiary Approval
A trustee can also avoid liability by obtaining consent from all beneficiaries. Full disclosure is essential. If everyone understands the facts and agrees in writing, the trustee may proceed. This approach could have protected Tom and Sue in the examples above.
3. Seek Court Approval
A trustee may also ask a court to approve a proposed action. While this option requires more time, it provides the strongest protection. However, unless the trust allows a transaction or the beneficiaries consent, the safest approach is to avoid any action from which the trustee might personally benefit.
Contact Our Modesto Estate Planning Lawyers
If you are now serving as a trustee—or will serve in the future—and want guidance on how to carry out your duties, contact us Modesto estate planning team today. We can help you understand your responsibilities and avoid costly disputes.
Call us at (209) 876-8886 or fill out our online contact form. We look forward to assisting you.