Selecting the right individual to serve as Trustee of a trust you create is one of the most critical decisions in estate planning. Drafting the trust agreement properly is only part of the process. The person you appoint will hold a fiduciary position and exercise significant authority over how the trust is managed. When a Trustee fails to uphold that fiduciary duty, the results can be devastating for both the trust and the beneficiaries it is meant to protect. The Indianapolis attorneys at Frank & Kraft discuss what constitutes self-dealing by a Trustee and why it can undermine the integrity of your trust.
The Fiduciary Role of a Trustee
A fiduciary is someone entrusted to act in the best interests of another person or group. Within the framework of estate planning, the Trustee is perhaps the clearest example of a fiduciary. Once a trust is created, the Trustee is legally obligated to manage its assets and carry out its terms for the benefit of the beneficiaries. The duty of loyalty is one of the Trustee’s most important responsibilities. This duty requires the Trustee to put the interests of the beneficiaries above all else, including his or her own personal interests. Most Trustees carry out this responsibility with diligence, honesty, and fairness. Still, there are situations where a Trustee abuses the position. One of the most concerning breaches of fiduciary duty is an act known as self-dealing.
Understanding Self-Dealing
Self-dealing occurs when a Trustee places personal financial gain above the beneficiaries’ interests. Because the Trustee controls trust property, this type of conduct creates an inherent conflict of interest. The very nature of the fiduciary role means that even the appearance of a conflict should be avoided. Self-dealing can be blatant, such as transferring money from the trust into a personal account, or it can take a more discreet form that still results in personal benefit for the Trustee.
For instance, a Trustee might gradually move funds between accounts under the pretense of reorganizing investments until assets ultimately land in an account that benefits the Trustee. Even if the Trustee believes that no harm has been done to the beneficiaries, the mere fact that the Trustee gained personally from trust transactions raises questions of misconduct. Fiduciaries are permitted to receive reasonable compensation for their services, but any financial gain beyond an approved fee risks being viewed as self-dealing.
Examples of Self-Dealing
Self-dealing can appear in many ways, ranging from minor indiscretions to outright theft. The underlying issue, however, is that the Trustee has placed personal advantage above the well-being of the beneficiaries. Some common examples include:
- Personal Purchases Using Trust Assets: If a Trustee uses trust funds to purchase items for personal use, even if only occasionally, that conduct would likely be classified as self-dealing.
- Investments That Benefit the Trustee: A Trustee who invests trust assets into a business venture in which the Trustee holds an ownership interest creates a conflict of interest, even if the investment appears sound on paper.
- Charging Excessive Fees: Trustees are entitled to compensation for the time and effort spent administering a trust. Yet if those fees are unreasonable, the charges may be considered self-dealing. For example, a Trustee who submits large bills for minimal tasks, such as merely driving past a property owned by the trust, would be crossing the line.
- Loans to the Trustee or Relatives: Borrowing from the trust, or authorizing loans to close family members, is a direct violation of the duty of loyalty.
The Consequences of Self-Dealing
When a Trustee engages in self-dealing, beneficiaries and other interested parties have legal remedies. Indiana courts can order the Trustee to return misappropriated funds, unwind improper transactions, or repay excessive fees. In severe cases, the Trustee may be removed from the position entirely. Civil lawsuits against the Trustee may also result in additional financial liability. While remedies do exist, addressing self-dealing after it occurs can be costly, time-consuming, and emotionally draining for beneficiaries. Preventing misconduct from happening in the first place is always the better option.
Preventing Self-Dealing in Indiana Trusts
Although no estate plan can guarantee that self-dealing will never occur, there are steps you can take to reduce the risk. The most important of those steps is to carefully evaluate who you appoint as Trustee. Think not only about a person’s financial skills but also about his or her character, judgment, and ability to put others’ needs first. It may be tempting to name a close relative simply because of the personal relationship, yet professional Trustees or corporate fiduciaries can often provide a higher level of neutrality and oversight.
Discussing your choice with an experienced Indiana trust attorney is also wise. Your attorney can explain the duties of a Trustee, outline possible conflicts, and help draft provisions in the trust agreement that impose clear restrictions on a Trustee’s authority. In addition, your attorney may recommend strategies such as appointing co-Trustees or requiring periodic accountings to beneficiaries to add an extra layer of accountability.
Are You Concerned about Self-Dealing by a Trustee?
For more information, please join us for an upcoming FREE seminar. If you have questions or concerns about self-dealing by a Trustee in Indiana, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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