How to Avoid a Trustee Conflict of Interest

So as we discussed in another blog (please see “Trustee Duties” here; https://myestate-

plan.com/blog/ ), one of the Trustee's duties is to avoid a conflict of interest and to avoid “self-dealing”. The California Probate Code lists the statutory duties of the Trustee in Probate Code §§16001–16015 which includes (among others) a Duty of loyalty, to deal impartially with beneficiaries, also to avoid conflicts of interest, and a duty not to undertake adverse interests.

So you may be asking yourself “what’s the big deal?” Let’s use this example because it can

come up quite often. The Settlor (usually a parent or parents) sets up an estate plan that

includes a Revocable Living Trust with their two children as beneficiaries. The oldest child is

named the Trustee because he or she is more responsible with money and is involved in the family business. Upon the occurrence that the child becomes the Trustee, what is he or she to do about the activities of the family business if it is a Trust property? If the normal duties are not addressed and properly dealt with, the Trustee will potentially be violating some of the California Probate Code statutory duties. Taking a salary, contemplating a raise, or even simply continuing the business by not selling it in order to diversify could be a breach of his or her duties as a trustee. This is not likely what the parents wanted when they established the Living Trust in the first place. Perhaps the biggest worry for the Settlor is that a Trustee can be surcharged for loss of value of trust property if there was a breach of duty by the Trustee. Therefore, a Trustee must be very careful, and the attorney must carefully draft the Living Trust to avoid potential pitfalls.

Careful drafting of the revocable trust and the asking of proper questions by a qualified

an attorney is paramount. Likewise, it is important for the client to avoid only telling the attorney what the client thinks the attorney “needs to know”. There are many things the average person thinks are unimportant with respect to estate planning. The more open a person is with their attorney, the better the result will be. For this reason and others, I feel a “document system” like certain online providers will never compete with an attorney on achieving the results you want, AND avoiding the unforeseen potential problems with answering a computer’s questions, then getting a document filled with “boilerplate language” and a lawsuit among beneficiaries down the road.

Let’s contemplate a slightly different scenario. Maybe you don’t own a business, but instead

just a home. You’d like to allow one of the beneficiaries to live in the home for a time. The

standard rules would suggest that a Trustee would be breaching a duty in not making the

property productive, or in “self-dealing” by taking advantage of trust property. The amount

of rent may be disputed, and the issue of not diversifying could also be shown pretty easily.

In a future blog, we will address the difference between the conferring of Trustee powers and the modification of Trustee duties. Care must be taken here also because sometimes the

the unwary drafter will convey power instead of properly modifying a trustee's duty.

Thanks for reading. I’m never too busy to get your estate plan in order and help address your particular situation. Please give me a call and let’s start your Estate Plan today! It is never too soon to plan.

William Daniel Powell

www.myestate-plan.com

619-980-2297

wdpowellesq@gmail.com

This document is for informational purposes only. Nothing in this is to be considered legal advice. Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship. If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction. I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information.