One of the most common offenses we deal with in our trust litigation practice is that of trustee self dealing. Trustees have very broad powers of discretion in managing trust assets, and they sometimes make transactions that benefit themselves instead of the trust beneficiaries. This is when a claim for breach of fiduciary duty for a trustee’s self dealing may need to be filed in civil court.
Our experience on both sides of the aisle has taught us that trustee self dealing is a surprisingly frequent, often misunderstood, and almost certainly underreported offense. We have seen many cases where a trustee genuinely didn’t know they were engaging in a self dealing transaction. And other cases where a trustee is accused of self dealing even when their actions proved to be in the best interest of the beneficiaries.
Read on below for more on self dealing in a trust. You also may want to see our articles on family trust embezzlement and stealing and what to do if a sibling is stealing from an estate.
What is self dealing in a trust?
Self dealing in a trust happens when a trustee leverages assets in his or her own favor, usually to the detriment or potential detriment of the trust beneficiaries. The golden rule of being a trustee is to never let your personal interests enter into any decision about managing trust funds and property. The reality is that when you agree to serve in a trustee capacity, you agree to subordinate your needs and desires to those of the beneficiary in every sense and situation. To that end, trustees must be extremely careful to disclose and eliminate any conflicts of interest — even seemingly tangential ones. And unless a trustee has obtained special approvals, they must not sell trust assets to themselves, make loans to themselves, make gifts, or otherwise divert trust assets for personally enriching purposes.
Self Dealing Definition
In the context of a trust, self dealing occurs when a trustee benefits from the sale or purchase of trust assets, either directly or indirectly. Anytime a trustee’s own interests run contrary to the interests of beneficiaries, the stage is set for self dealing. As a fiduciary, a trustee has a legal duty of loyalty to the beneficiaries of the trust. This means that the trustee is obligated to place the interests of beneficiaries above his or her personal interests at all times.
It is often the case that a trustee is also a beneficiary of the trust. In such a case, the trustee is naturally motivated to preserve and enhance the value of trust assets hor him/herself as beneficiary. Benefitting from a transaction as a beneficiary does not necessarily mean the trustee has engaged in self dealing. For it to qualify as self-dealing, the trustee must have benefitted more than the other beneficiaries, or otherwise taken an action that was advantageous to themselves but not to their co-beneficiaries.
Can a trustee self deal? Is self dealing illegal?
Under California law, self dealing is illegal, and a trustee must never engage in it. A claim of self dealing is a civil claim, meaning that unless the plaintiff also wants to press criminal charges for offenses like theft, embezzlement, or fraud, a self dealing trustee will generally not go to jail or have anything on their criminal record. This is one of the first things we tell our clients when in an initial consultation, because often a trustee is a family member or loved one. A beneficiary may take issue with a trustee’s actions, but they almost never want to press criminal charges.
The ideal outcome, which we achieve for clients every day at RMO, is to negotiate a settlement out of court. An expert trust litigation attorney can save you a fortune, and loads of time and stress, by wrapping things up in mediation. In most situations, the plaintiff and defendant don’t even need to see each other during this process. Their respective lawyers can confer on their behalves, and the retired judge mediator can go between the parties, preventing any upsetting interactions. Settlement is almost always the most efficient, cost-effective, and painless way of resolving these disputes, which is why the quality of your counsel is so important.
What is the self dealing rule for trustees?
The basic rule on self dealing is that a trustee must never place himself in a position where he gains any benefit to the detriment of a beneficiary. This is obviously a very broad directive, leaving lots of grey area in terms of defining what is and isn’t self-dealing.
Is trustee self dealing common?
Trustee self dealing claims are on the rise. So much so that in recent years, California law added a fiduciary duty banning self dealing specifically. It was formerly couched in the duty to avoid conflicts of interest. The addition of self dealing as an independent fiduciary duty suggests that courts are seeing more of — and more different kinds of — these very complex cases and took affirmative action to try and prevent them.
That being said, courts do recognize certain exceptions to the general ban on self-dealing, which are discussed in more detail below.
What is a breach of fiduciary duty self dealing?
Self dealing is a type of breach of fiduciary duty. When you claim that a trustee has engaged in self dealing, you are claiming that he has breached his fiduciary duty to the trust’s beneficiaries. For more on fiduciary duty, and how it applies to a trustee or executor more specifically, see our guide to breach of fiduciary duty.
Is self dealing a conflict of interest?
A conflict of interest can often lead to self dealing, though self dealing comes in many other forms. Conflicts of interest are often at the root of self-dealing transactions. For example, a trustee selling trust assets to himself is caught up in a fundamental conflict of interest, because the trustee is acting as both the buyer and the seller in the transaction. By nature, buyers and sellers must have opposing interests and engage in an arms-length transaction for a sale to be considered fair. So trustees must never attempt to unilaterally play both roles. If any trust property is to be personally acquired by the trustee, beneficiaries minimally should be given proper notice. In most cases, beneficiaries must explicitly agree to the transaction and the terms of sale before a trustee can legally proceed with the sale.
It is vital that trustees consult with an experienced trust lawyer before initiating any transaction that might involve a conflict of interest. It’s possible that a transaction is entirely lawful and defensible, but a trustee must get formalized agreements or court approval before taking action.
Even if a trustee has already made a potentially self-serving loan, gift, sale or purchase from a trust, there are many winning legal arguments to be made in their defense. A trust litigator with experience in defending self dealing claims can protect a trustee from personal liability and removal from their position.
Forms of Self Dealing Transactions and Examples
Some common examples of self dealing are when a trustee:
- Makes gifts to themselves from the trust
- Makes loans to themselves from the trust
- Sells trust assets to themselves, or buys assets from themselves for the trust
- Uses a third party or a separate account to divert funds to personal accounts
- Makes risky or ill-advised investments that benefit themselves and not other beneficiaries
- Overcompensates themselves for services rendered as trustee
- Sells real property despite co-beneficiaries’ desire to retain it to earn fees
- Receives “kickbacks” or indirect income from any party compensated by estate funds
Self Dealing Laws in California
In California, trustee self dealing is prohibited by law under California State Probate Code § 16004(a), which provides that:
“The trustee has a duty not to use or deal with trust property for the trustee’s own profit or for any other purpose unconnected with the trust, nor to take part in any transaction in which the trustee has an interest adverse to the beneficiary.”
Several exceptions to the ban on self-dealing have been recognized by the Uniform Trust Code and the courts, including when:
- The transaction was authorized by the trust instrument
- The transaction was approved by the court
- The beneficiaries consented to the trustee’s conduct, ratified the transaction, or gave a release to the trustee; and
- The beneficiary did not commence a judicial proceeding challenging the transaction within the time limits allowed by law.
What if there’s a claim of self dealing against a deceased trustee?
If you suspect a deceased former trustee of engaging in self dealing, first make sure your claim isn’t barred by the applicable statute of limitations. If your claim is still actionable, and you proceed with your case, you will be suing the estate of the deceased, which will be defended by the deceased’s appointed representative, as indicated in the trust document. Most often, it is the successor trustee who is charged with defending the estate on behalf of the decedent trustee.
What do I do if I suspect the trustee is self dealing or attempting to self deal?
The first step is to find the best possible counsel. At RMO, as with most reputable trust litigation firms, the initial consultation is free. We can’t stress enough how important it is to act sooner rather than later, when there may be no trust fund left to protect. We recommend finding an experienced trust litigation lawyer familiar with self dealing cases in the county civil court where the offense or breach occurred. For example, if the grantor lives in Miami, Florida, yet the trust is being administered in Los Angeles, California, we recommend working with a trust litigation attorney in Los Angeles. A Los Angeles probate lawyer will generally be more familiar with the Los Angeles Superior Court Probate Division, versus an out of state attorney.
Have questions? Contact us any time.
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About RMO Lawyers
RMO LLP serves clients in Los Angeles, Santa Monica, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri and Kansas. Our founder, Scott E. Rahn has been named “Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call (424) 320-9444 or visit: https://rmolawyers.com