When most people think of a conflict of interest, they think of financial self-dealing.
Self-dealing is a breach of fiduciary duty where a person in a position of trust, such as a corporate director, trustee or adviser, uses his role to benefit himself personally rather than acting in the best interest of the organization, clients, or beneficiaries.
When there is a trust, generally after the grantor (creator) of the trust dies, some examples of financial self-dealing by trustees could include investing trust assets in their own company, loaning themselves money from the trust or purchasing trust property at a price below market value.
Self-dealing is the most recognizable type of conflict because the trustee directly profits from decisions he/she is supposed to make solely by following the trust instructions.
Although financial self-dealing is a serious conflict of interest, in my experience working with trustees on hundreds of trust administrations, the more common conflicts of interest are those in which the trustee acted out of compassion, efficiency or to keep the peace.
The trustees who get into trouble are often honest and well intentioned. They are human. They get tired. They want to help. They want the fighting to stop.
And somewhere along the way, their personal interests pull them away from their role as trustee, and they breach their fiduciary duty. At some point, they stopped following the trust document, which should be the road map and guiding star for all trustees.
It makes you feel better
When trustees do not follow the trust’s instructions in order to do something they believe is positive or helpful, they may be surprised to learn they are breaching their fiduciary duty.
The most common version of this we see is when the trustee responds to a family member making an emotional case for something he/she wants. A grandchild needs funds for school or for a car, and you think the decedent would have wanted to help. A relative is going through a difficult time, and it feels wrong to say no when the money is sitting right there. So you help them. The problem is that the trust did not instruct you to do it.
I have also seen trustees make unauthorized charitable contributions because they believed the decedent would have approved. It feels like you are honoring their memory and doing something good. But if the trust does not authorize it, you are giving away assets that belong to the beneficiaries.
Your job is to follow the trust and not to guess what the decedent might have wanted beyond what was put in writing. When you give away trust assets because it makes you feel better about a situation, you are letting your emotions guide a decision that the trust should be guiding. Because it benefits you rather than the trust, it is a form of self-dealing.
It saves time
Trust administrations can take months or years. It is a tedious, thankless job, and if you are also a beneficiary, you have a financial incentive to finalize it.
We find that some trustees want to sell assets quickly and at below-market prices because they need their distributions fast and want the trust administration completed, often due to conflicts with siblings. The trustee is not trying to cheat anyone. He’s just fatigued and wants it over with. But the desire to be done with the process is influencing how the trustee manages the trust assets, and the beneficiaries will be the ones who pay for it.
Making distributions to beneficiaries prematurely is another version of this. It feels like progress, but it can leave the trust cash-poor, and the trustee may sometimes need to request or “claw back” funds from the beneficiaries to pay taxes or debts.
We also see trustees try to do everything themselves or hire unqualified people they know well, because it seems easier than hiring new professionals. It is not easier. It just feels that way until something goes wrong and the trustee finds out they are personally liable because they let their nephew, who just graduated from law school, act as their attorney, or they hire a friend who is good with figures to prepare the trust accounting and taxes. Cutting corners to save time or effort benefits you, not the trust. It is another form of self-dealing.
You want to avoid a fight
Appeasing beneficiaries might be the most common conflict of all, and it is the hardest to see because it feels like you are keeping the peace.
The surviving spouse is grieving, and you feel terrible for the person. So you favor the person’s interests at the expense of the remainder beneficiaries who are entitled to the corpus. I see this regularly. The trustee feels so much sympathy for the surviving spouse that the children who are supposed to receive the principal eventually are shortchanged.
The opposite happens, too. The trustee is closer to the children and does not adequately provide for the surviving spouse as the trust requires. Maybe the trustee thinks the surviving spouse has enough money of his/her own, or maybe the trustee does not like that person. Either way, the trust directs the trustee to take care of the surviving spouse, and the trustee is not doing so.
In some cases, one beneficiary is louder and more demanding than the others, and the trustee can start bending toward the person because it is easier than fighting. The trustee might make a side deal with a family member to keep the peace. The trustee treats beneficiaries differently based on their relationship with the trustee rather than following the trust.
When your personal preferences or desire to avoid discomfort change how you follow the trust, that is a conflict of interest.
How to protect yourself
If you are the trustee, you can protect yourself from these and other pitfalls by hiring independent professionals. An estate attorney, a trust CPA, appraisers and a money manager if the assets require it. Make sure they are your professionals, not the family’s existing advisers.
They will guide you, and when a decision is questioned later, you can show that you relied on credentialed, independent advice.
Follow the trust document. Read it until you understand it. When a situation is not clear, ask your attorney. If it is truly gray, petition the court for instructions. Do not guess.
Document everything. Every request from a beneficiary, every decision you make and the reasoning behind it. If someone challenges you later, your records are your protection.
If you are a beneficiary and believe your trustee has a conflict of interest, consult a trust litigation attorney who can ask for clarification or push back on the trustee’s actions.
I tell my trustee clients that I am lucky because I generally get to work with the responsible child. Parents often pick that child as their successor trustee. If you are reading this, you are probably that person. Keep out of trouble by staying close to the trust document, don’t be in a hurry, don’t bend to the will of others and hire competent, independent professionals. Then, hopefully, one day, the trust will be settled, and you will have kept your integrity. Then you can celebrate a job well done.
Michelle C. Herting is a CPA, accredited in business valuations, and an accredited estate planner specializing in succession planning and estate, gift and trust taxation.