Trustee and Beneficiary Conflict of Interest

How to Avoid a Trustee and Beneficiary Conflict of Interest

When writing this overview, we define what constitutes a conflict of interest and how to avoid it. Next, the steps should you, as a trustee, receive a letter for trustee removal. As a beneficiary, seek counsel to stay reasonable with your approach yet active in your desire to seek fairness and equitable distribution.

What is a Beneficiary – Trustee Conflict of Interest?

A Trustee and beneficiary conflict of interest occurs when the Trustee mixes personal and financial accounts with the trust accounts, which does not benefit the beneficiaries. A trustee must seek counsel “early” and not think the beneficiary is making noise. Counsel up!

Additionally, as a trustee, there are various times when the beneficiary acts solely on emotion and states unsubstantiated facts, yet they seek counsel. 

Examples of potential conflicts that could arise for trustees include:

1. Trust funds must not be invested in the Trustee’s business or that of a related party.
2. Selling trust assets to themselves or another related party at an inflated or deflated price.
3. Receiving commissions or fees that are unreasonable or not disclosed
4. Failing to disclose potential conflicts of interest to beneficiaries.
5. Favoring one beneficiary over another without a valid reason

As can be seen, here are just a few examples, but proving the breach of fiduciary duty takes time, patience, and money. Yet, protecting the wishes of the trustor and your rights is paramount. 

To prove a conflict of interest claim takes facts. Both Trustee and beneficiary will lawyer up as the outcome could be litigation. There are steps before litigation, like mediation and arbitration, and litigation is the most costly. 

Both beneficiaries must demonstrate that the Trustee breached their duty of loyalty by engaging in self-dealing or neglecting to disclose material facts that could affect the trust administration.

How to Avert Conflicts of Interest?

As a trustee, your best defense against conflicts is adopting practices that promote transparency, accountability, and independence. Here are some tips for avoiding such matters:

• Create a conflict of interest policy that spells out the prohibited transactions, disclosure requirements, and remedial steps in case of violation.
• Before proceeding with any transaction affecting the beneficiaries’ interests, disclose any potential conflicts of interest in writing and obtain informed consent.
• Also, appoint an independent trustee or advisor to review and approve any transaction that could create a conflict of interest or raise questions about impartiality.
• Maintain accurate and up-to-date records of all transactions and decisions that could pose a conflict of interest, including the reasoning behind the choice, other options considered, and potential risks and rewards to the trust and its beneficiaries.

What to Do if You Face a Claim of Conflict of Interest?

As a trustee, you must take any potential conflict of interest claim seriously and seek legal counsel immediately. Here are some steps you can take in response to such an allegation:

1. Review your trust agreement, applicable law, and fiduciary duties to assess the claim’s validity and potential liabilities.
2. Gather all pertinent facts and evidence to back up your defense, such as any disclosure documents, minutes of trustee meetings, and communications with beneficiaries or other interested parties.
3. Consider negotiating a settlement or compromise that is equitable and reasonable to all parties, thus avoiding costly and time-consuming litigation.

If necessary, vigorously defend your position in court or arbitration with experienced legal counsel and expert witnesses.

Trustee not communicating with beneficiaries.

Suppose a trustee fails to notify a beneficiary or heir of a decedent’s Will or may breach their fiduciary duty to stay transparent; in that case, the beneficiary may contest the Will with the help of a lawyer and evaluate if there are sufficient grounds to revoke the Will’s admission to probate. Now if the Trustee has notified the beneficiaries but is no longer communitive, and after many attempts to contact them, it is essential to contact a probate litigation attorney.

Suppose there is an issue with the Trustee not communicating with the Beneficiaries. In that case, you may have a legal ground to contest the Will based on the Trustee’s fiduciary duties. Trustees have a legal obligation to the testator to complete the wishes within the Will, which generally states their fiduciary duty to the beneficiaries. If communication breaks down, you, as a beneficiary, may have the legal right to know what’s going on.

What are my responsibilities as a Beneficiary?

As a beneficiary, first and foremost, you must show “reasonable” actions based on how you interface with the Trustee of a will. Understanding the probate process will help.

That said, you want to ensure that incompetence or misconduct does not influence the testator’s wishes. Every state has its reasons on what constitutes the removal process of a trustee, but the probate court will remove trustees who don’t complete the following:

Over their heads and can carry out the Trustee’s duties: Many times, one of the Beneficiaries is the Trustee of the Will. For example, the Trustee’s ability to manage proper bookkeeping is one of the highest actions of importance. Sometimes, the Trustee doesn’t realize they have to deal with tax-related issues, creditors, and beneficiary rights to information. If the Trustee fails to communicate transparently, it can give rise to the beneficiaries’ petition to the courts to remove the Trustee. It’s a balancing act.

Not complying with a court order: Once given a ruling, if the Trustee does not meet the verdict, it will be considered suspicious and may result in removal as the Trustee.

Uses the estate funds for personal gain: The fiduciary duty, first and foremost, is to the testator’s wishes, which include taking care of their heirs and beneficiaries. If the co-mingling of funds occurs, this can become a civil matter.

Once again, you will want to gather your information and consult counsel to ensure you are on the right side of the law.

What is the responsibility of the Trustee?

So as a beneficiary, understanding the probate and trust administration process is key to getting along with the Trustee.

It summed up in a simple process as the following:

1. Protect the estate of the testator/grantor: Determine all properties, debts, etc.
2. Probate the Will: liquidate, i.e., sell assets and obtain tax clearance.
3. Pay heirs and beneficiaries: Once paying creditors, then and only then can distribution to beneficiaries and heirs take place. Any sooner can create civil matters for the Trustee!

The point of contention arises when there are real estate properties to be sold. Beneficiaries believe they have positional power to influence the Trustee on exactly how and when to sell properties.

Now, if there is a will or, in some cases, where there is no will, the latitude of the trustee/administrator can vary greatly. When the legal instrument, i.e., the Will, does not explicitly state the handling of real estate properties, the Trustee should faithfully act and has great latitude.

In an example of selling a property, when the fair market value is determined, the Trustee can sell the property without consenting to the beneficiaries. Note: If the Trustee is showing good faith, i.e., getting proper appraisals, etc., then courts will shun from removing the Trustee simply because a beneficiary did not agree to the sale.

A lack of communication from a trustee on an estate matter may not be deemed breaching the contract merely because they are not reporting pitch-by-pitch what is occurring. The courts will interpret what constitutes “a timely manner.”

Therefore, beneficiaries should recognize signs of conflict of interest and not merely react without legal grounds.

Is there a time limit for a Beneficiary to Act if a Breach of Fiduciary duty occurs?

When it comes to probate, it can take ten months upward to pay the heirs and beneficiaries finally. It can often go up to 2+ years, depending on several factors.

So before any payout takes place, the Trustee, to maintain their fiduciary duty, should complete the following:

1. The Trustee should notify each beneficiary and heir they are included in the Will early in the process. Allows for contesting the Will, which is a legal right.
2. To be transparent about the value of the inheritance. Remember, depending on paying creditors and taxes will determine the actual inheritance, which can take months to years.

If you feel the updates received from the Trustee do not correspond to what’s expected from a trustee, contact an estate planning attorney immediately.

Conclusion

Conflict of interest claims is a severe matter for trustees, and it’s essential to take proactive measures to prevent them and respond effectively if they arise. By abiding by best practices, disclosing all potential conflicts of interest, and seeking legal counsel when needed, you can fulfill your fiduciary duties while safeguarding the trust and its beneficiaries from harm.

Protect Your Rights! For over 30 years, Hess-Verdon & Associates have experience in estate planning, business, and probate litigation, allowing us to gear up more quickly and handle your case more efficiently. You receive answers to substantive law questions and recommendations for settlement or litigation strategy sooner and with less research time. Our firm can make a difference in your case!