Understanding the Prohibition Against Trustee Self-Dealing

A trustee who manages and administers a trust fund has many responsibilities, including specific duties imposed under the Minnesota Trust Code. Among the statutory responsibilities is the duty of loyalty, which encompasses a prohibition against self-dealing by a trustee.

The prohibition against self-dealing raises a number of questions for a trustee: What qualifies as self-dealing? How can a trustee avoid any appearance of self-dealing? What should a trustee do if a beneficiary raises a question about self-dealing?

A Trustee’s Duty of Loyalty Precludes Self-Dealing

The Minnesota Trust Code specifically provides that: “A trustee owes a duty of loyalty to the beneficiaries. A trustee shall not place the trustee's own interests above those of the beneficiaries.” This provision applies to any trust in the State of Minnesota.

The Code goes on to state that any transaction that involves management or investment of trust property cannot benefit the trustee personally or present a conflict between the fiduciary duties of the trustee and his or her own personal interests. In transactions that involve a personal benefit to the trustee or a conflict of interests for the trustee, the transaction is voidable by the beneficiary unless one of the following is true:

• Provisions of the trust authorize the transaction;
• The transaction was approved by the court;
• The action to void the transaction is not filed within the statutory time limit (discussed below);
• The transaction involves a claim acquired by the trustee or a contract entered into by the trustee before the person became trustee;
• The beneficiary consented to the trustee’s conduct, ratified the transaction, or released the trustee. A beneficiary’s consent, ratification, or release in these circumstances is subject to specific statutory requirements.

These provisions prohibit a trustee from all self-dealing, including actions such as:

• Selling the trustee’s own personal assets to the trust;
• Purchasing assets from the trust;
• Borrowing from the trust;
• Investing trust assets in the trustee’s own business.

Certain transactions are presumed to present a conflict of interests. Those transactions include any transaction entered into by the trustee with:

• The trustee’s spouse or descendants, siblings, parents, or their spouses;
• The trustee’s agent or attorney;
• A person or company in which either the trustee or a person who owns a significant interest in the trustee has an interest, if that interest might affect the trustee’s judgment.

Under the statute, the prohibition against self-dealing does not prohibit the following if “fair to the beneficiaries”:

• Payment of reasonable fee or compensation for the trustee’s fiduciary services, subject to the terms of the trust;
• An agreement between a beneficiary and a trustee regarding appointment or compensation of the trustee;
• A transaction between the trust and a different trust, estate, or conservatorship in which the beneficiary has an interest or of which the trustee is a fiduciary;
• Deposit of trust funds in a regulated financial institution operated by the trustee;
• An advance of money by the trustee for protection of the trust.

There are many different circumstances that can give rise to questions of self-dealing or conflict of interests by a trustee. Each situation presents a unique and often factually complex case.

The statute provides that the probate court has authority to appoint a special fiduciary to make a determination about any proposed transaction that may present questions about a conflict or self-dealing by a trustee. As such, in a case where questions of this nature arise, a trustee can request that the court review the transaction in advance to resolve the issues.

Probate Court Jurisdiction Over Trustee Self-Dealing

In the event a concern arises about a trustee's breach of the duty of loyalty through self-dealing, a beneficiary can petition the probate court to request that the court take action on account of the trustee’s violation of fiduciary duties. The appropriate remedy will depend entirely on the circumstances of the violation.

Under the statute, one option is for the court to void the transaction in question. Voiding the transaction can include imposing a lien or constructive trust on trust property or even recovering trust property or proceeds, subject to certain statutory limitations that protect third parties who deal with a trustee in good faith.

In cases where the trustee’s actions warrant, the probate court has broad authority to fashion an appropriate remedy that includes more than voiding the transaction. The court can even remove the trustee under certain circumstances. The court can also order other less severe remedies, such as:

• Requiring the trustee to perform his or her duties;
• Prohibiting the trustee from violating his or her duties;
• Requiring the trustee to remedy a breach of trust by paying money, restoring property, or other means;
• Ordering the trustee to provide an accounting;
• Appointing a special fiduciary to take over management of the trust;
• Suspending the trustee;
• Reducing or denying the trustee’s compensation.

Time Limitation for Bringing an Action Against a Self-Dealing Trustee

There are time limitations that apply to filing actions against a trustee for self-dealing. These time limits are referred to as statutes of limitations. After the statute of limitations expires, an action can no longer be filed — a case will be dismissed if a petition is filed too late. The time limit for filing an action against the trustee for self-dealing or a conflict or interests depends on the circumstances surrounding the trustee’s actions.

If a beneficiary received a report from the trustee that disclosed the existence of a potential claim of self-dealing, the beneficiary has three (3) years after the date the report was sent to initiate an action. A report is considered to "disclose the existence of a claim" if it contained sufficient information for the beneficiary (or his or her representative) to know of the claim or warrant inquiring into the situation.

In cases where no report was sent to the beneficiary, a court petition must be filed within six (6) years of whichever of these events occurs first:

• Removal, resignation, or death of the trustee;
• Termination of the beneficiary’s interest in the trust;
• Termination of the trust.

What Should a Trustee Do If a Beneficiary Raises a Concern About Self-Dealing?

If you are a trustee and a beneficiary raises concerns about self-dealing, your initial steps will depend in part on your relationship and past interactions with the beneficiary, as well as your relationships with any other beneficiaries. If you are comfortable talking with the beneficiary, you may choose to raise your concerns directly with them.

If, after discussion, the beneficiary does not seem satisfied — or if you are not comfortable talking with the beneficiaries — you should consult with an attorney experienced in handling trust litigation in Minnesota probate courts. The attorney will be able to analyze the situation and advise you of options available to address it and may even be able to help resolve the beneficiary's concerns. Your options may include petitioning the court to review the circumstances and make a determination in advance regarding the matter.

If a petition alleging self-dealing has been filed against you as a trustee, representation by a skilled probate litigation attorney is essential. Any court action brought against against a trustee is a very serious, complex matter. Your attorney will be able to gather all relevant evidence and discuss the circumstances with the petitioner's attorney and attempt to reach a mutually agreeable resolution.

If the court holds a hearing, your attorney will represent you in the hearing. A probate court hearing is a formal proceeding that follows the rules and practices of the court. Documentary evidence will be introduced. Witnesses will testify. Both sides will have the opportunity to cross-examine witnesses.

The evidence in any case involving a potential breach of duty by a trustee is likely to be complicated and very detailed. You need to be represented by an experienced attorney who has the skill to investigate and analyze the situation, present evidence to court, and aggressively advocate on your behalf.

Talk With a Minnesota Trust Litigation Attorney

At the Dave Burns Law Office, a focus of my practice is trust disputes and probate litigation, including allegations or claims against trustees for self-dealing or a conflict of interests in trust management. I work with trustees, family members, and beneficiaries of estates.

If you are a trustee needing assistance with a beneficiary concern about self-dealing, or you have a contested trust issue that may require litigation, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.