By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Trust Law Attorney

Being a trustee assumes responsibilities to the designated beneficiaries. In today’s society persons with an economic interest in a trust often make claims against the trustee. Some of these claims have merit, some do not. To minimize the risk of beneficiary claims (notice I did not say “eliminate claims”) I’ve listed some general trustee rules of behavior.

“It is elemental that a trustee (often called a fiduciary) owes a duty of loyalty to those whose interests the fiduciary is to protect” (namely the beneficiary). The duty “not only (bars) blatant self-dealing by the trustee, but also require(es) avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those who owed a fiduciary duty.” Included in the scope of the duty “is every situation in which a trustee chooses to deal with another in such close relation with the trustee that a possible advantage of this relationship can disadvantage the trustee. The Trustee’s actions must be entirely for the benefit of the beneficiaries:

When the trustee has a selfish interest, the law does not stop to inquire whether the trustee’s action or failure to act has been unfairly influenced. It stops the inquiry when the relation is disclosed and sets aside the transaction or refuses to enforce it, and in a proper case, surcharges the trustee as for an unauthorized act. It is only by rigid adherence to these principles that all temptation can be removed from one acting as fiduciary to serve his (or her) own interest when in conflict with the obligation of his (or her) trust.

The prohibition against self-dealing includes “transactions…with a spouse, agents, employees and other persons whose interest are closely identified with those of the trustee.” Transactions involving a child, however, are not per se violations of the rule. In holding that a state of property by the Trustee, who was the husband of the decedent, to his son did not automatically have to be set aside pursuant to the “no further inquiry” rule.

“As a Fiduciary, a Trustee bears the unwavering duty of complete loyalty to the beneficiaries of the trust no matter how broad the settlor’s directions allow the trustee free rein to deal with the trust.” “The rule of undivided loyalty due from a trustee may be relaxed by a settlor by appropriate language in the trust instrument in which he (or she), either expressly or by necessary implication, recognizes that the trustee may have interests potentially in conflict with the trust”. “The language limiting the general rule is strictly construed so that the trustee’s actions will not be approved if he (or she) trespasses outside the boundaries of the powers granted.”

The trust instrument protects the trustee when he or she has taken on action, but no such protection is afforded when the trustee invests the trust’s property. Had the grantors intended to exculpate the trustee from his or her fiduciary duties when investing they would have explicitly provided for it, as evidence by the exculpatory language. The trustee “to employ persons, even if they are associated with the trustee, to advise or assist the trustee in the performance of the trustee’s duties.”

If there is no language at all in the trust’s documents insulating a trustee from liability for investing despite his or her conflict of interest, the trustee has likely breached his duty of undivided loyalty by investing in a child’s or family member’s business, hedge company, etc. A trustee’s claim that his/her investment was motived by previous successes and investments experience does not mitigate the conflict of interest.

To discuss your NJ Trust Law matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.