Trustee Self-Dealing: A Trap for the Unwary

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By Alastair Liddiard, Senior Solicitor specialising in Wills, Trusts, Probate and Powers of Attorney

A recent case has highlighted the dangers associated with trustees who purchase assets belonging to the trust they administer.  In the case, the trustee’s purchase of trust assets was set aside by the Court following an application by the trust’s beneficiaries.  This type of transaction is known as “self-dealing”. The general rule is that if a trustee or trustees sell trust assets to themselves, the entire sale is voidable by any beneficiary, however fair the transaction, unless the trustee can show that the transaction was entered into with the fully informed consent of the trust’s beneficiaries.

The reasoning behind this is that trustees are under a strict fiduciary duty that at all times their duties as a trustee should not conflict with their personal interests to the extent that they must put the trust’s interests before their own. Clearly, purchasing assets from a trust over which you exercise control as the legal owner puts the trustees in a position to profit and can even lead to allegations of dishonesty.

Generally, self-dealing is done with the best of intentions by the trustee and no foul play is alleged but without the proper consent in place the trustee still places themselves in the position of breaching their duties.  This may seem harsh but due to the nature of trusts and the position of power each trustee has over the assets (and in many cases the means of distribution of said assets to the beneficiaries), as well as deciding on the investment of trust assets, they must be held to a high standard of accountability at all times.

In order to successfully raise the defence of fully informed consent by the beneficiaries to self-dealing, the trustee must make a full disclosure of the material facts surrounding the transaction and its outcome for the trust and the trustee personally.  The material nature of the facts are largely determined by their effect on the consent; in other words, if a beneficiary had full knowledge of all of the circumstances surrounding the sale, would they have given such consent if it placed them at a disadvantage?

In terms of which beneficiaries must consent, all beneficiaries named in the trust documentation must to do so, but it is also important to note that where there is a class of beneficiaries defined by a description, such as “my grandchildren”, the consent of anyone who answers to that description must be sought.

This rule is doubly important where a trustee is also a beneficiary as this raises even more barriers to such a transaction.  Many trust deeds do authorise trustees to undertake transactions even if they have a personal interest in the outcome whether as a beneficiary but this is usually caveated with the need for an independent trustee’s consent, and this authority can never avoid the self-dealing rules.

If such a transaction is to be undertaken, it is vital that trustees receive the appropriate advice in order that they can get the appropriate consent as failure to do so will lead to the transaction being set aside and in extreme cases, the trustees may have to account for any profits they have personally made (i.e. paying funds back to the trust) and if the breach to the self-dealing rule is particularly bad, they may be removed as trustees entirely.

For information or advice about trusts contact Alastair Liddiard.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.