Potential and actual conflicts of interest are important considerations when selecting who to serve as successor trustee as they are being trusted with the authority to manage, disburse (i.e., use assets to pay expenses) and distribute (make gifts of) trust assets pursuant to the terms of the trust. Let us discuss.

A trustee’s primary duty of loyalty is to manage the trust assets strictly according to the terms of the trust for the sole benefit of the trust beneficiaries. That is a high standard. While the settlor(s) of a revocable living trust is alive, all of the trustee’s duties are owed to the settlor who may direct the trustee’s administration. Typically, however, the settlor is the trustee until they are incapacitated or die.

A conflict of interest means that the trustee, for one reason or another, has interests that are at odds with the trustee’s duty of loyalty. Conflicts of interest are either potential, meaning they might occur, or they are actual, meaning they already exist (to one degree or another). 

Conflicts should be identified and addressed within the estate planning. Existing estate planning documents, if possible, should be revised when such conflicts emerge. Ignoring conflicts and allowing them to go unaddressed can result in unintended and otherwise avoidable negative consequences that can even ruin the intended estate planning. Let us consider some illustrations. 

Consider a person who appointed his trusted friend to serve as trustee of a special needs trust in favor of the person’s special needs (disabled) sister and names his friend as death beneficiary. As trustee “the friend” had discretionary authority either to make or not make payments for the sister’s benefit. The trustee chose not to make distributions for the sister’s benefit and so preserved more trust assets for inheritance by the friend when the sister dies. 

Clearly, naming the untrustworthy friend to be both trustee and beneficiary of a discretionary trust intended for the benefit of a disabled person was very bad planning. A professional private fiduciary who is bonded and is not a trust beneficiary would have been a much better choice.

Next, a trustee with authority to value trust assets might possibly use that authority to favor themselves, family or friends, when selling assets from the trust or when distributing assets, if asset valuations are relevant. Such improper “self dealing” use of authority could be eliminated by requiring the trustee to utilize unbiased (neutral) professional valuations. 

Conflicts of interest may also arise if a representative’s spouse has an interest in the trust assets. For example, perhaps the representative sells estate assets to their own spouse on unduly favorable terms to the detriment of trust beneficiaries. This is more likely if assets are already co-owned by the representative’s spouse (e.g., a co-owned business) and the spouse wants full ownership.  

Under California’s Uniform Directed Trust Act, a trusted (neutral) advisor can be appointed as a trust director with authority (i.e., a power of direction) to direct the trustee in those aspects of the trust administration where a potential or actual conflict of interest arises. The trust director would control the trustee’s actions in such conflicts and the trustee would act pursuant to the director’s control. 

The foregoing is not legal advice.  Consult a qualified estate planning attorney for guidance.