Roee Kaufman, partner at Keystone Law Group, discusses how to prevent problems when the trustee of a trust is also a beneficiary. Read the complete article below for more details. Click the YouTube Channel subscribe button to be notified when new videos are published.
Contrary to popular belief, a successor trustee is legally permitted to be a beneficiary of the same trust they manage — and in fact, this arrangement is quite common.
While it may seem risky for a trust creator (called a settlor, grantor or trustor) to place full control of trust assets in the hands of someone who also stands to inherit from the trust, there are legal safeguards in place to prevent misconduct. These protections enable beneficiaries to take action if a trustee and beneficiary’s conflict of interest interferes with the trustee’s duty to administer a trust fairly and impartially.
Given the complexities that can arise when the trustee is also a beneficiary, it’s understandable for beneficiaries to feel uneasy. However, the mere presence of a potential conflict of interest does not, on its own, imply any wrongdoing.
Trustees must tread carefully to ensure their personal interests never interfere with their duty of loyalty — a duty that requires them to act solely in the best interest of all the beneficiaries. At the same time, beneficiaries must remain vigilant throughout trust administration to ensure the trustee’s dual role does not compromise the fairness or integrity of the process.
What Does It Mean to Have a Conflict of Interest?
A conflict of interest can be defined as a person or entity having interests or concerns that are irreconcilable with one another. It can also mean there is potential for someone to personally benefit at the expense of someone else from a decision they are making.
As an example, if a doctor were to be compensated by a pharmaceutical company every time they prescribe one of the company’s drugs to a patient, there is inherent potential for conflicts of interest. The doctor is charged with exclusively prioritizing the best interests of their patients but instead may be motivated by their own personal interests.
That said, it’s important to note that when there is potential for conflicts of interest, it doesn’t always mean actual conflicts of interest are present that would obligate fiduciaries to refrain from acting.
What Constitutes a Trustee and Beneficiary Conflict of Interest?
When a trustee has the authority to make decisions that could personally benefit them at the expense of the trust beneficiaries, a potential conflict of interest arises.
Potential trustee and beneficiary conflicts of interest can take many forms. Here are some examples:
- Perhaps your brother is trustee of a trust that names both him and you as trust beneficiaries. Because of your longstanding rivalry with each other, you worry he will use his powers as trustee to manipulate trust distributions in his favor.
- Perhaps you are a trustee who stands to inherit a piece of real property from the trust you oversee. You are unsure whether it would be ethical — or even permissible — for you to access trust funds to improve or repair the property.
- Perhaps you’re a beneficiary who is set to inherit a grandparent’s home alongside your mother, who also happens to be the trustee. She’s been living in the home rent-free while delaying its sale. You are concerned the trust’s overall value is being harmed by her actions and believe you have a right to the fair market rent that would have accrued if she had been fulfilling her fiduciary obligations.
- Perhaps you are a trustee who is responsible for keeping trust assets productive. To accomplish this, you plan to invest assets into your own business endeavor, which you anticipate will become profitable in the near future. You’re uncertain whether your investment could be regarded as imprudent.
- Perhaps you are contesting a trust as an adult child of the decedent because there is compelling evidence to suggest the decedent’s cohabitating partner exerted undue influence on them to be left the entirety of their trust, even though the decedent had always expressed an intent to leave a large share to their children. Now that the partner is defending the trust contest, you worry her involvement is unethical, since she directly benefits from the trust remaining intact.
While these situations create the opportunity for self-serving actions, it doesn’t necessarily mean the trustee will act improperly. A conflict of interest becomes problematic only if the trustee uses their powers to favor themselves over the other beneficiaries.
If this occurs, legal action may be necessary to hold the trustee accountable to their fiduciary duties — which obligate them to act fairly and in the best interests of all the beneficiaries.
How to Effectively Navigate Trustee and Beneficiary Conflicts of Interest
When a trustee also stands to benefit from the trust, a potential conflict of interest arises that could threaten the trust’s fair and impartial administration. It’s, therefore, crucial to take proactive steps to prevent potential conflicts from becoming actual ones.
For trustees, allowing a conflict of interest to interfere with your fiduciary duties not only can jeopardize your role, but it can expose you to personal liability as well.
For beneficiaries, overlooking signs of a conflict of interest in a trustee’s actions could put your inheritance at risk.
Both trustees and beneficiaries should strongly consider enlisting the help of experienced legal counsel. A probate attorney can monitor a trustee’s decisions to ensure they serve the beneficiaries’ best interests. Likewise, they can assist beneficiaries by carefully reviewing financial records — such as trust inventories and trust accountings — provided by the trustee to detect any suspicious activity, such as the trustee improperly profiting at the expense of those they represent.
Keep reading to learn key considerations for both trustees and beneficiaries when a trustee is also a beneficiary, and how to navigate this delicate situation effectively.
Key Considerations for Trustees
Sometimes, trustees unintentionally allow a potential conflict of interest — arising from their dual role as a beneficiary — to become a real problem. For example, if a trustee is set to inherit a home along with other family members but urgently needs cash to pay bills, they might sell the property below its fair market value. While this might help the trustee in the short term, it can unfairly harm the other beneficiaries.
This scenario underscores the importance of a trustee having a probate attorney to guide them through key decisions on behalf of the trust. If the other family members discover the below-market-value sale, they could take legal action against the trustee for breaching their fiduciary duty to act in the best interests of all the beneficiaries — not just their own. Such a breach could lead to the trustee’s removal or even financial penalties, known as surcharges.
Trustees must be honest with themselves about any potential conflicts of interest and their ability to prevent those conflicts from compromising their fiduciary responsibilities. If they have doubts about managing the trust fairly and impartially due to their trustee-beneficiary role, they should seriously consider declining the appointment or petitioning to resign. In many cases, stepping down is the most responsible and ethical choice.
Key Considerations for Beneficiaries
It’s important for beneficiaries to understand that a trustee’s attorney represents only the trustee, not them. If beneficiaries need assistance to safeguard their rights during trust administration and monitor potential conflicts of interest, they must retain their own legal counsel. Alternatively, beneficiaries can join forces to hire a shared attorney who represents their collective interests.
This becomes especially critical when a conflict of interest threatens to undermine the fair and impartial administration of a trust, jeopardizing beneficiaries’ inheritances. A probate attorney can closely oversee the trustee’s activities to ensure they align with the best interests of all the beneficiaries and take swift legal action if a potential conflict escalates into an actual breach that places beneficiaries’ inheritances at risk.
Beneficiaries need to remain actively involved in the trust administration process. This means maintaining regular communication with the trustee, requesting information as needed and carefully reviewing all documents provided by the trustee. By staying vigilant, beneficiaries are much more likely to detect trustee misconduct early and take timely steps to protect their inheritance before lasting harm occurs.
Trustee-Beneficiary FAQs
If you still have concerns about a trustee-beneficiary conflict of interest, have a look at the frequently asked questions below for additional clarity. For personalized guidance, you are welcome to reach out to our law firm directly.
Who can be a trustee?
In California, there are very few requirements surrounding who can be a trustee. The requirements are:
- You must be 18 years of age or older.
- You must be a U.S. citizen (to avoid adverse tax consequences).
- You must be of sound mind.
While most people who are named successor trustee likely meet these requirements, it doesn’t necessarily mean they’re equipped to serve. For instance, if you have a demanding job or numerous family obligations, managing a trust may be difficult — if not impossible — for you.
Before accepting appointment, it’s recommended you research what a trustee’s responsibilities are and be honest with yourself about whether you have the ability to take them on.
Can a trustee be a beneficiary of an irrevocable trust?
Yes, a trustee can be a beneficiary of an irrevocable trust, but they must be careful to not allow potential conflicts of interest from compromising their ability to fairly and impartially manage the trust.
It’s worth noting that most trusts become irrevocable by default upon the settlor’s incapacity or death. When a trust becomes irrevocable, it means it can no longer be altered or revoked.
Can a trustee be a beneficiary of a discretionary trust?
The short answer is yes. A trustee can be a beneficiary of a discretionary trust, but they usually will not have the power to make unilateral decisions. Rather, there typically will be someone acting as co-trustee who will be required to sign off on discretionary decisions surrounding the trust.
A discretionary trust is one in which the trustee is able to exercise discretion in determining when and to whom to make trust fund distributions.
Can you be the trustee of your own trust?
Yes, you can designate yourself as the trustee of your own trust for your lifetime, but you should still designate someone else as successor trustee to take over management of the trust once you lose capacity or pass away.
Can a trustee be the sole beneficiary of a trust?
Yes, a trustee can be the sole beneficiary of a trust — which essentially means the trustee will be managing the trust for their own benefit.
In such a circumstance, there isn’t much potential, if any, for conflicts of interest to arise, since the only person with a financial interest in the trust is the trustee.
Can a trust be a beneficiary of another trust?
Yes, while it is permitted for a trust to be a beneficiary of another trust, the situation can give rise to legal complexities and conflicts of interest that can be tricky to navigate.
As an example, when a trust is a beneficiary of another trust, the trustee of the primary trust not only will owe fiduciary duties to the beneficiaries of the trust they manage, but they may owe them to the beneficiaries of the secondary trust as well.
For this reason, if you are trustee of a trust that either names another trust as a beneficiary or is a beneficiary of another trust, enlisting the help of a skilled probate attorney to navigate the legal complexities of the situation is recommended.
What might a power of attorney and trustee conflict of interest entail?
If a decedent’s power of attorney is also appointed as successor trustee of their trust, there is potential for conflicts of interests to arise.
Suppose an agent for an incapacitated principal was siphoning money from the principal’s bank accounts. Such misdeeds are typically discovered by the trustee or executor during administration when they inventory the decedent’s assets, but if the trustee was the agent who was wrongfully taking from the decedent, they would have no incentive to recover the funds for the trust due to their conflict of interest.
That said, a decedent’s power of attorney and trustee being the same person isn’t inherently problematic; it’s only an issue if the dual role leads to unfairness during the administration process.
Is naming a lawyer as trustee a conflict of interest?
Yes, naming a lawyer as trustee can present a conflict of interest.
For example, if a settlor names their estate planner as the successor trustee of their trust, the conflict of interest stems from the fact the estate planner probably drafted their trust. They could have drafted it in such a way as to provide themselves with higher trustee fees than what is standard.
Another example of a potential conflict of interest arising from naming a lawyer as trustee is if the lawyer has to litigate claims on behalf of the trust, which could lead to substantial compensation for the lawyer. In such an instance, the lawyer may be motivated to pursue claims, even if they are unfounded.
If you were the settlor’s lawyer and are named trustee of their trust, you may wish to consider hiring a third-party lawyer to assist with your role as trustee. Your lawyer can help protect you against personal liability should potential conflicts of interest emerge that negatively impact your ability to fairly and impartially administer the trust.
Can a financial adviser be a trustee?
Yes, a decedent’s financial adviser can serve as successor trustee of their trust; however, just like estate planning attorneys who serve as trustee, financial advisers must be careful to not allow potential conflicts of interest to compromise their ability to manage the trust fairly and impartially.
It’s worth noting that financial institutions often don’t permit financial advisers to serve as trustee of a client's trust due to the potential for conflicts of interest.
Still have questions about trustee and beneficiary conflicts of interest?
Navigating trust administration can be challenging when the trustee is also a beneficiary. Keystone’s experienced probate lawyers can provide beneficiaries and trustees with the guidance and support they need to ensure a trust is administered fairly despite conflicts of interest. Call our firm today to learn how we can help.
