The Trustee’s Guide to Conflict of Interest Claims

A conflict of interest for a trustee occurs when the trustee’s personal interests potentially conflict with their responsibilities to the trust beneficiaries. 

What qualifies as a conflict of interest for a trustee?

Trustees owe what is called a “fiduciary duty” to the trust and its beneficiaries. This means that the trustee must manage the trust in the best interests of the trust and place the interests of its beneficiaries above their own interests.

Some types of conflicts of interest are referred to as “self-dealing.” This occurs when the trustee conducts transactions on behalf of the trust that benefit themselves rather than the beneficiaries’ best interests. A trustee cannot use trust property in financial transactions that serve their own interests more than the trust’s interest.

Some common examples of conflicts of interest and self-dealing include:

  • Investing trust assets in a personal business venture.
  • Using funds from the trust to pay personal obligations.
  • Selling trust property to themselves, a business entity they own, or another trust they manage for less than fair market value.
  • Using trust funds to purchase property from themselves for more than market value.
  • Hiring the trustee’s business to perform services for the trust.
  • Charging excessive trustee fees.
  • Gaining a business advantage through a financial transaction with a beneficiary.
  • Making investment decisions that benefit the trustee and not the beneficiaries.

How do you prove conflicts of interest?

To prove a conflict of interest, you will need to prove that the trustee has interests that are adverse to the trust’s best interests, and that the trustee is acting to benefit those interests rather than the trust and its beneficiaries.

California Probate Code § 16004(a) prohibits trustee self-dealing. It reads:

“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.”

However, there are several recognized exceptions to this rule, including:

  • When the trust instrument specifically allows the transaction
  • When the probate court approves the transaction
  • When the beneficiaries consent to the transaction
  • When the beneficiaries fail to challenge the transaction within legal time limits

You prove conflict of interest claim by showing that the trust violated California Probate Code § 16004(a) and that none of the exceptions apply.

How can a trustee avoid conflicts of interest?

The best way for a trustee to avoid conflicts of interest is to be completely transparent about the transactions they conduct on behalf of the trust. 

Trustees are not prohibited from conducting transactions that benefit themselves, as long as the transaction also and primarily benefits the trust. If you take the right steps, including obtaining pre-approval from the court or beneficiaries, you can legally complete a mutually-beneficial financial transaction with the trust. However, if you don’t follow the proper process or keep the beneficiaries informed, even well-intentioned transactions that benefit the trust can be illegal conflicts of interest.

Because a trustee has a fiduciary duty to the trust and its beneficiaries, trustees must do the following:

  • Always put the beneficiary’s interests above all other considerations.
  • Always act in good faith when managing the trust.
  • Take reasonable and fair actions when administering the trust.
  • Be honest and transparent about all information pertaining to the trust.
  •  Treat beneficiaries with respect and kindness.

If a trustee sticks to these rules, they can avoid a conflict of interest, or even the appearance of one. Also where practical, it is best practice to make sure that you have reasonable and documented explanations for all of the decisions you make and the actions you take regarding the trust.

Can you sue a trustee for conflict of interest?

Yes, you can sue a trustee for a conflict of interest if you believe they breached their fiduciary duty and engaged in self dealing.

To prove a breach of fiduciary duty claim under California law, you must prove all of the following:

  • That a fiduciary relationship existed (This will automatically be true in trustee-beneficiary relationships)
  • That the trustee breached their fiduciary duties
  • That the breach of duty caused you damages 

Some examples of breach of fiduciary duty for which a trustee can be sued include:

  • Embezzling or otherwise misappropriating trust property 
  • Self-dealing or self-serving transactions
  • Causing loss or harm through a wrongful act or omission
  • Acquiring funds through fraud, deceit, or undue influence
  • Commingling trust assets with their personal assets

Even if a trustee discloses a conflict of interest, they may be sued if they conduct a self-dealing transaction without receiving proper approvals or if the trustee misrepresented the consequences of the transaction.  

When should a trustee contact a trust litigation lawyer?

A trustee should contact a trust litigation lawyer as soon as possible if they’ve been accused of a conflict of interest. It’s also a good idea to hire an estate attorney as soon as you are appointed as a trustee, especially if it’s your first time serving in the role. A trust administration attorney can explain the relevant laws on self-dealing and conflicts of interest and help you avoid liability for any potential breaches of your fiduciary duty. If you have recently been appointed to administer a trust, you should consult with an experienced trust lawyer as soon as you can.

Retaining a lawyer when you are first appointed as a trustee can help you avoid conflicts of interest. However, if you’re already being sued for a breach of fiduciary duty, or you have been accused of self-dealing, you should seek counsel from a knowledgeable trust litigation rather than attempt to deal with the matter on your own.

 

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The Fiduciary’s Guide to Conflict of Interest Claims

About RMO, LLP

RMO LLP serves clients in Los Angeles, Santa Monica, Ventura, Santa Barbara, San Francisco, 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.