Trustees are given great responsibility under the law. As we discussed in our last post, trustees are held to a very high standard of care in exercising their duties and acting in the best interests of the beneficiaries. They must take care that they don’t breach their fiduciary duties. Below are some of the most common areas to result in liability.
Conflicts of interest
Where potential liability often arises is when a trustee has multiple roles. Common examples of this include someone who is both a trustee and a beneficiary of the trust or a beneficiary of the estate. Risks can also arise when someone is both a trustee and has some other involvement with the trust asset or beneficiaries. For example, perhaps a trustee holds shares of a decedent’s business in trust for others and is also an employee, officer or shareholder of the decedent’s business.
The reason that serving multiple roles can create problems is the potential for a conflict of interest – that is, the interests of a trustee wearing one hat (for example, as trustee) may not align with the interests of a trustee wearing the other hat (for example, as a beneficiary). Although such conflicts are not impermissible, trustees as fiduciaries must be aware of them and take steps to properly manage them. There are some common situations trustees should look out for as giving rise to a possible conflict of interest:
- Distributing funds to yourself, but not others. If you are a trustee and beneficiary, you can’t only make a discretionary distribution to yourself as beneficiary, but not to the other beneficiary who has also requested a distribution. If the trustee is a present income beneficiary and other individuals are the remaindermen (beneficiaries who get whatever assets are left over from the trust after a certain event), you must as trustee also consider the long-term impact of your decision on the remaindermen.
- Commingling funds. Trustees must always keep their roles – and trust assets – separate. For example, if you’re both an executor and a trustee, make sure you don’t commingle funds. If you are paying trust-related expenses, they should be paid out of the trust account, not the estate account.
- No joint decisions. Perhaps you are a trustee of two distinct trusts created under the will with different terms and purposes, but share some of the same beneficiaries. You must keep the two trusts separate financially as well as in your decision-making.
- Self-dealing. Self-dealing transactions are prohibited in New York even if they are in the best interest of the beneficiaries. A trustee can’t hire his/her own business to work for the trust or engage in any business transactions with the trust. It doesn’t matter if the terms of the transaction are fair. However, there is an exception if the self-dealing relationship is created by the grantor of the trust (as an example, by naming the same individual as trustee and manager of the real property held in trust).
Potential conflicts aren’t the only time that trustees may need help navigating their duties. For example, if the trust permits discretionary distributions of income or principal, how do you make and explain your decisions? If beneficiaries are inquiring as to status of certain proceedings or transactions, what’s the best way to keep them informed?
Importantly, trustees shouldn’t ignore or avoid providing information. Although keeping beneficiaries apprised of your actions is not required, it is a good practice to maintain a cordial and open relationship and avoid possible negative inferences.
Problem avoidance and getting help
Sometimes, steps can be taken early on to avoid conflicts by drafting a clear and suitable trust document. For example, if the grantor (creator) of the trust designated multiple trustees and there is a conflict with one trustee, the other can make the decision. The trust may also provide a clear standard which a trustee must apply in order to determine whether to make a distribution to himself/herself or others. If the trust is not helpful in providing guidance in handling potential conflicts, then the trustee should get legal advice in order to minimize the risk of liability.
Read more about how we help trustees with trust administration or contact us for a consultation.
This post does not constitute legal advice or establish an attorney-client relationship.