Trustee And Beneficiary Conflict of Interest

What is a Conflict of Interest for a Trustee?

Many trustees are also beneficiaries of the trust. Whenever this occurs, there exists a potential conflict of interest for the trustee.

Why does this common situation create a possible conflict of interest? The situation revolves around the trustee, who is tasked with all of the managerial decisions on behalf of the trust.

However, when the trustee is also a beneficiary, the decisions they make directly impact the other beneficiaries and themselves.

For example, if the trustee decides to sell a specific asset, that financial choice directly affects the beneficiaries, and the decision may even impact their collection of assets.

One of the trustee’s responsibilities is to treat all beneficiaries equally. However, a situation could arise where the trustee desires a specific outcome, and the beneficiaries desire a different outcome. Or, the other beneficiaries could accuse the trustee of making decisions not for the trust’s good but for the trustee’s good.

For example, in some situations, the trustee-beneficiary thinks it makes good business sense to purchase a certain asset on behalf of the trust. However, the beneficiaries may not agree with this decision.

These differences in opinion regarding trust management can create significant problems and lead to conflicts of interest that can ultimately damage the trust, the beneficiaries’ faith in the trustee, and vice-versa. In addition, conflicts of interest within trusts can lead to breach of trust lawsuits.

Please contact our business attorney in California go over how conflicts of interest can disrupt the relationship between trustees and beneficiaries and discuss what both parties can do to stop conflicts of interest from occurring.

How Can Trustees Avoid Conflicts of Interest?

If trustees who also act as beneficiaries are common, then how can trustees avoid a conflict of interest? After all, beneficiaries can sue trustees for breach of trust and other violations.

There is no black-and-white answer to how trustees can avoid conflicts of interest, but they need to be careful in their management of the trust and very aware of the impact of their actions.

Trustees must be cognizant of their duties, as outlined by the laws of California. If a trustee violates these duties, even accidentally, the beneficiaries or other parties can sue them.

Trustees also must be aware of their fiduciary duties. As trustees, they agree to behave ethically and place the interests of the beneficiaries, and the trust, above their interests.

When a trustee is also a beneficiary, they do not have to worry about their “beneficiary duties” since not many exist. Instead, the focus is on the trustee and how their actions benefit and uphold the trust.

Many trustees-beneficiaries, aware of their critical but precarious situations, employ two lawyers.

The first attorney helps advise the trustee on the trust affairs. The second attorney helps to advise the trustee on their interests as a beneficiary. This idea makes sense because it creates two sources of independent advice. If legal action does occur, then the trustee-beneficiary should be able to prove that legal representatives from both sides approved the course of all their actions in an impartial manner. Based on this, the trustee can ideally show that they did not violate their fiduciary duties or allegiance to the trust.

Some trustee-beneficiaries also decide to use separate offices for the different duties and separate accounts. This decision keeps communication between the attorneys to a minimum and limits the chances of commingling.

What Happens When a Trustee Fails to Act Appropriately?

Trustees can confuse the beneficiaries and even anger them when they do not maintain their legal and fiduciary obligations. Trustees take on a lot of power and authority, and when they act defiantly or suspiciously, beneficiaries go on alert. Trusts are important to beneficiaries, and when someone’s inheritance is in jeopardy, they want to know why it happened and what they can do about it.

Many issues can cause a trustee to forfeit their obligations or behave dishonestly. For example, some trustees do not have the beneficiaries’ interests in mind, and others seek to profit or engage in self-dealing. Whatever the cause, when a trustee violates their duties, the beneficiaries must identify the cause and nature of the problem and take sufficient action to stop it.

What Can Individuals Do When Trustees Have a Conflict of Interest?

When a trustee has a conflict of interest, the beneficiaries have options.

First, a beneficiary can file a damages order, also known as a surcharge, against the trustee. This surcharge means the beneficiary asks the court to order the trustee to pay back the trust. Suppose the trustee’s conflict of interest, for example, forced them to misappropriate money from the trust. In that case, the damages order, if approved, requires the trustee to put that specific amount of money back into the trust.

Second, the beneficiary can ask the court to suspend the trustee’s power and remove the trustee from their position. This option removes the trustee from their position of power temporarily or permanently, depending on the offense and the ruling.

When a trustee shows through their actions that they do not have the best interests of the trust or the beneficiaries in mind, the beneficiary should remove them from their position. If the trustee is not removed, they could create further, lasting damage.

When Should Individuals Hire a Trust Attorney?

Many trustees behave responsibly and reasonably and honor the trust they are in charge of. However, conflicts of interest do occur among trustees and beneficiaries, especially when a trustee is asked to play both roles.

Beneficiaries contact attorneys for many reasons, but when it comes to trustee conflicts of interest, they do so predominantly because:

• The trustee violated their fiduciary duty
• The trustee acted in their self-interest
• The trustee violated the trust’s terms

When these conflicts occur, it is vital that you contact an experienced trust lawyer immediately. At Nakase Wade, our California trust attorneys are ready to answer all your questions and deal directly with untrustworthy trustees.

We know how important trusts are to individuals and families, and our goal remains to protect the interests of our clients. Contact us for a free consultation today.