Self-Dealing by Trustees

Trusts are an important component of an estate plan because they offer flexibility and the potential to minimize estate taxes. When the grantor creates a trust, he or she appoints a trustee to manage the trust assets on behalf of beneficiaries. The trustee is a fiduciary who owes substantial duties to the trust’s beneficiaries, including the duty of loyalty. The trustee needs to administer the trust only in the interests of the beneficiaries. Trustees can’t place their interests above the beneficiaries’ or engage in any competition with the property that’s part of the trust. If you are concerned about self-dealing by trustees, you should consult with New York City estate litigation attorney Jules Haas. He represents both beneficiaries and trustees in estate litigation.

A trust is a legal arrangement whereby a grantor transfers property to the trust. The trustee must manage the trust property on behalf of one or more beneficiaries according to the terms of the trust instrument. Trustees have a complicated and challenging fiduciary role. In some cases, the trust must be managed on behalf of multiple beneficiaries who may have competing interests. As a fiduciary, a trustee is held to the highest standard of conduct.

Fiduciary duties owed by trustees in New York City include duties of loyalty, care, impartiality, prudent investment, and accounting. Trustees owe an absolute duty of undivided and complete loyalty to those whose interests the trustee is supposed to protect. Trustees are required to administer the trust solely in the beneficiaries’ interests; they need to put the interests of the beneficiaries ahead of their own interests, and the interests of other parties. Trustees are also supposed to avoid conflicts of interests or transactions that would benefit them, whether directly or indirectly. Before agreeing to serve as a trustee, you may want to speak with a lawyer so that you fully understand the responsibilities and duties associated with that position.

Self-dealing can occur in different ways. For instance, a trustee may engage in self-dealing if the trustee is an officer or director of a business in which the trust assets are invested. Similarly allegations of self-dealing could arise in connection with transactions between the trustee’s family members and the trust. Self-dealing could also occur if the trust purchases or sells property in which a trustee has an interest.

Certain conflicts may be waived by an express provision in a trust instrument or with the settlor or beneficiaries’ consent. For instance, investing in the stock of a corporate fiduciary is usually impermissible self-dealing unless the trust contains terms that expressly permits it.

Self-dealing is strictly prohibited in New York. When a trustee engages in self-dealing or breaches fiduciary duties in another way, the result may be litigation. Generally, a trustee who has engaged in self-dealing can’t overcome a breach of the duty of loyalty even when he or she has acted in good faith. The courts apply a “no further inquiry” rule when a transaction involves a conflict of interest; it applies whenever the trustee’s personal interests are substantially affected.

Under the no further inquiry rule, a trustee (or other fiduciary) can’t profit from self-dealing entered into without the court’s or the trust beneficiaries’ prior approval or consent. When this rule applies, the court will not look at whether a particular contract or transaction was fair or not. It doesn’t matter whether the terms or compensation were reasonable. Rather, the court will stop examining the situation once a relationship is disclosed and set the transaction aside or refuse to enforce it at the request of a party the fiduciary was supposed to represent.

Beneficiaries can void transactions regardless of whether terms were reasonable or in the beneficiaries’ best interests. Trustees are liable per se if a beneficiary can show that they had a personal interest in the transaction.

In addition to avoiding obvious self-dealing, trustees should avoid entering into situations where their personal interests collide with beneficiaries’ interests. Indirect self-dealing can be subtler and it may be more difficult for a fiduciary to stay cognizant of it. Trustees are supposed to take steps to avoid self-dealing by identifying whether a conflict of interest exists in every transaction and if so, seek out alternatives. If no reasonable alternatives exist, the trustee is supposed to obtain consent from all the parties or the court.

Trustees are fiduciaries. They have serious responsibilities and are not allowed to use their role to benefit themselves. Whether you’re worried about self-dealing by trustees or you are a trustee against whom accusations have been made, you should talk to lawyer Jules Haas. Mr. Haas has represented both trustees and beneficiaries in these types of claims for more than thirty years. He represents people in Manhattan, Queens, and the Bronx, along with Suffolk, Nassau, Westchester, Kings, and Richmond Counties. Contact us at (212) 355-2575 or complete our online form.