Many times, a Trustee will get themselves into trouble because they will take some action that is a conflict of interest. A Trustee is a fiduciary of the Trust. That means that they owe a duty to the Trust and to the Trust beneficiaries to treat them fairly, to do the right thing. And one of the things a Trustee cannot do is enter into financial transactions as between the Trust and themselves personally. So if a Trustee wants to buy an asset out of the Trust, it doesn’t matter if this Trustee is also a Trust beneficiary, the fact they’re a Trustee puts them in a conflict of interest position.
This type of conflict usually occurs with individual Trustees, unfortunately, where they want to buy something out of the Trust and so they just do it. They just go ahead and do the financial transaction. They buy the asset. They take it out of the Trust. That automatically is a conflict of interest, period.
It doesn’t matter what the Trustee says, they’ve taken an action that’s put them in a compromising position because they can’t be in charge of the Trust selling an asset to themselves individually and expect that it’s going to be a fair transaction.
How a Trustee can do a Successful Financial Transaction
There are ways in which a Trustee can successfully do a financial transaction with the Trust, but the Trustee must take the right steps. So, typically, you either need an order from the Court where everybody gets proper notice, everybody gets full disclosure of what the transaction is, and everybody has an opportunity to appear in court and object, if they choose to do so. You can take actions outside of court, too, but that’s more risky because you have to fully and fairly inform all the beneficiaries and give them a chance to weigh in on the issue. And if a beneficiary disagrees with the transaction, then the Trustee simply shouldn’t do it, because it is a conflict of interest.
Conflicts of interest are probably one of the most common areas where Trustees breach their duties of Trust to the Trust beneficiaries. And it’s something that, as a Trust beneficiary, you should really be on the lookout for because the minute you see the Trustee trying to do a financial transaction with the Trust, you know that there’s trouble in store for you as a beneficiary.