"Self-dealing" clause within a trust

Dear Len & Rosie,

I’m a trustee of my parent’s trust. The trust has a self-dealing clause that allows me to buy property from the trust. I had the house appraised and I bought the property at its appraised value after my parents’ deaths. Since then, I totally restored the house with my own money. I never had the beneficiaries sign anything saying that they had knowledge of the transaction, but everyone knew about it at the time. Now they are trying to have the sale of the house canceled. They want the house back into the trust. What are my chances?

Howard

Dear Howard,

It’s always difficult to hazard a guess as to who would win any particular lawsuit. If it was easy, there wouldn’t be lawsuits. We don’t have enough information to tell you whether or not you’re going to win, but we can discuss the case.

As a trustee, you owe the trust beneficiaries a fiduciary duty, which has two components. The first is a duty of competence. You can’t go investing your parents’ life savings at the nearest casino, even if that’s what your parents used to do before you became trustee.

The second half of a fiduciary duty is the duty of loyalty. You have to manage the trust taking into account the rights of the beneficiaries instead of your own interests. Normally, self-dealing by a trustee is simply not permitted, because selling your parents’ home to yourself cannot be an arms-length transaction. It’s as if your stock broker were to sell securities out of your account to himself, without your permission, at a price he determined.

Lucky for you, your parents included a “self-dealing” clause within their trust, that specifically allows you to sell property to yourself even though you’re the trustee. So in theory at least, as long as you follow the rules provided in the self-dealing clause, then you should be OK. But the devil is in the details.

You said that you had the house appraised before you bought it. Who did the appraisal? Was it a certified appraiser or a California Probate Referee? Was it an appraisal from your friend the real estate agent who isn’t really an appraiser? Was it an “appraisal” off the Internet which isn’t much better than a wild guess? Did you capriciously reduce the purchase price by the real estate agent’s commission your parents didn’t have to pay? The circumstances surrounding your purchase of the home may not pass the smell test.

Self-dealing clauses don’t always work, because as trustee, you have to act in the interests of your parents and not yourself, even when you are authorized to self-deal. When self-dealing, the only prudent way of doing it is to have all of the beneficiaries sign off on the deal ahead of time, even if this isn’t required by the trust instrument.

Len & Rosie