A trustee is a person who is given control over or the power to administer a trust. This person has a fiduciary duty to the beneficiaries, which means they must put the interests of the trust beneficiaries ahead of their own. Doing so allows them to keep the beneficiary’s trust and faith in their ability to administer the trust.
Since a trustee has quite a bit of discretion over how the trust’s accounts, money, and property are managed, they may be accused of self-serving. Self-serving happens when a trustee uses the trust’s assets for their own benefit instead of for the benefit of the beneficiaries.
It’s difficult to determine a person’s intentions, which makes it difficult to determine when self-dealing is intentional.
Examples of Self-Dealing
Here are some examples of self-dealing as a trustee. When a trustee:
- Invests the trust’s assets in their own business
- Borrows money from the trust
- Mixes the trust’s assets with their personal assets
- Makes gifts of the trust’s assets to themselves
- Sells property to or buys property from the trust
- Invests the trust’s assets in high-risk investments for their own benefit
- Pays themselves an unreasonable compensation for managing the trust
- Receives kickbacks from a third-party who is compensated from the trust’s assets
A trustee can also be a beneficiary. Examples of self-dealing as a joint trustee and beneficiary include:
- Making distributions to themselves but not to other beneficiaries
- Making larger distributions to themselves than to other beneficiaries
Self-Dealing is Not Always Obvious and Clear
Here are some examples of potentially innocent self-dealing as a trustee.
Imagine you are the oldest of three children and your parents run a family business. You have devoted your career to running the family business and have made it even more successful. The family business supports your parents, you, and your two siblings. Your parents recognize your hard work and investment in the business and have named you as the trustee for the family trust. You and your siblings are the beneficiaries of the trust.
Your father has recently died. Before his death, he provided instructions on how your mother will receive distributions from the trust to support her throughout her lifetime. The rest of the trust money and assets is to be evenly divided among you and your siblings. You spend hours of overtime working on the family business and running the trust without taking any additional compensation. Both the trust documents and state law allow for reasonable compensation for your time.
You and your brother have the opportunity to invest in a new business. Unfortunately, you and your brother do not have enough money in your personal bank accounts to finance the new business. Therefore, you decide to make a loan to yourself and your brother using trust money. However, you did not make this same offer of a loan to your sister. Is this self-dealing?
What if you made the loan to yourself and your brother and charged interest and required security for the loan? Would this be self-dealing?
What if you and your brother plan to expand the family business and not another business? Would it be self-dealing if you made a loan to expand a family business that your sister had no ownership interest in?
Imagine you are the oldest of three siblings. You are a high-earning physician. Your two siblings both chose careers that were lower paying. You are the trustee of a family trust with you and your siblings as beneficiaries.
The trust owns a family vacation home by the beach. Each year, your family vacationed at the vacation home until your parents passed away. Since then, you and your siblings have taken your families there sporadically.
Unfortunately, the trust cannot afford to continue paying the mortgage, property taxes, insurance, and maintenance on the beach home. You have talked to your two siblings, and neither one can afford to pay one-third of these costs.
Suppose you decide to buy the home from the trust instead of selling it. You want your children to have the same memories of going to the beach home that you did as a child. If you sell the home to yourself at fair-market value, is this self-dealing? What if the real estate market crashes and you still pay the higher purchase price? Is it self-dealing?
Avoiding Accusations of self-Dealing
As these scenarios show, whether or not a trustee is self-dealing may not be as clear-cut as you would like. An inexperienced trustee may be self-dealing without even realizing it.
Here are some safe harbor rules you can follow to help protect yourself:
- Have the trust owner write instructions in the trust document that authorizes the action you plan to take, especially if some or all beneficiaries could consider it as self-dealing. Be sure all such instructions are in writing.
- Seek the approval of all trust beneficiaries before taking action to verify that none of them consider it as self-dealing.
- Seek approval of a court before taking action.
All of these safe harbor rules advise that trustees looking to protect themselves from claims of self-dealing should avoid any transaction from which they stand to benefit unless the trust documents specifically allow that transaction or they are fully transparent about their plans and all beneficiaries consent to it.
If you are a trustee and have questions about your role, please get in touch with your estate planning attorney.