How to Protect Yourself from Claims of Self-Dealing When Serving as a Trustee

What Is self-dealing in trust administration? A trustee usually has quite a bit of discretion in their management of a trust’s accounts, money, and property. At the same time, as a fiduciary, a trustee also owes the trust’s beneficiaries a duty of loyalty, which prohibits the trustee from self-dealing.

In the simplest terms, self-dealing happens when a trustee uses the trust’s assets for their own benefit instead of for the beneficiaries’ benefit. Despite this simple definition, self-dealing can be much harder to identify in practice and is often done in ignorance, particularly when there are complicating factors such as the trustee also being a trust beneficiary.

Some common examples of self-dealing are a trustee:

• Making gifts to themselves from the trust’s assets;
• Borrowing money from the trust;
• Investing the trust’s assets in their own business;
• Investing in high-risk investments for their own benefit;
• Selling property to or buying property from the trust;
• Mixing the trust’s assets with their personal assets;
• Paying themselves more than a reasonable amount of compensation;
• When also a beneficiary, making a distribution to themselves but not to any other beneficiary or making a larger distribution to themselves than to any other beneficiary

An inexperienced trustee may not even realize that they are breaching their fiduciary duties. However, there are a few safe harbor rules that a trustee can follow to ensure that they will not be accused of self-dealing and find themselves involved in an unwanted lawsuit.

First, a trustee can seek the approval of the trust beneficiaries for any action or inaction. If, after all facts are fully disclosed, the beneficiaries consent to the trustee’s proposed course of action or later ratify it, a trustee will not be guilty of self-dealing.

Second, a trustee can seek court approval of their actions. Nevertheless, any trustee looking to protect themselves from claims of self-dealing would be wise to avoid any transaction in which they stand to benefit unless the trust instrument specifically authorizes such action or they are transparent about the transaction and the beneficiaries consent to it.

If you are or will be a trustee of a trust in the future and have questions about the best way to fulfill your trustee duties, contact us. We would be happy to sit down with you and assist you with your role.