How fiduciary conflicts and related party transactions work

Minnesota conflicted trust property transactions

In Minnesota, for example, the avoidance rule covers sales, encumbrances and other investment or management transactions involving trust property, entered into for the trustee's personal account or otherwise affected by conflicting fiduciary and personal interests.

Protected third party rights apply. The statutory exceptions are:

• The trust terms authorized the transaction.
• The court approved the transaction.
• The beneficiary did not begin a judicial proceeding within the statutory time allowed.
• The beneficiary consented, ratified the transaction or released the trustee in compliance with the statutory consent and release rule.
• The transaction involves a contract entered into or a claim acquired before the trustee became trustee.

The statute also preserves the following transactions if fair to beneficiaries:

• An agreement between trustee and beneficiary about trustee appointment or compensation.
• Payment of reasonable trustee compensation.
• A transaction with another trust, decedent's estate or conservatorship in which the trustee is a fiduciary or a beneficiary has an interest.
• A deposit of trust money in a regulated financial service institution operated by the trustee.
• A trustee's advance of money to protect the trust.

The court may appoint a special fiduciary to decide a proposed transaction that might violate this loyalty provision if the trustee entered into it. Other states differ.

In Minnesota, for example, while a trust is revocable, beneficiary rights remain subject to the settlor's control and trustee duties are owed exclusively to the settlor. Other states differ.

Relatives and affiliated entities

In Colorado, investment or management transactions involving trust property are presumed conflicted when the trustee transacts with any of these connected parties:

• The trustee's spouse.
• The trustee's descendants, siblings or parents, or their spouses.
• The trustee's agent or attorney.
• An enterprise in which the trustee, or a significant owner of the trustee, has an interest that might affect the trustee's judgment.

This presumption alone does not establish automatic invalidity or a complete rule for avoiding the transaction.

Transaction conditions and burdens by state

Oregon and New Jersey assign different burdens for certain personal transactions between a trustee and beneficiary that do not concern trust property.

Oregon trustee fairness burden

In Oregon, the beneficiary may avoid a transaction unless the trustee establishes fairness when all four conditions apply:

• The transaction does not concern trust property.
• The trustee obtains an advantage.
• The transaction is outside the ordinary course of the trustee's business or offers substantially less favorable terms than those offered to similarly situated customers.
• The transaction occurs during the trust or while the trustee retains significant influence over the beneficiary.

New Jersey beneficiary unfairness burden

In New Jersey, the beneficiary must establish unfairness to avoid a qualifying transaction. It must satisfy all three conditions:

• The transaction does not concern trust property.
• It occurs during the trust or while the trustee retains significant influence over the beneficiary.
• The trustee obtains an advantage attributable to the trust's existence.

The New Jersey provision does not include Oregon's additional ordinary business or customer terms condition.

Beneficiary consent and release

In Minnesota, for example, a beneficiary's consent, release or ratification concerning trustee conduct is binding unless either statutory exception applies:

• The trustee's improper conduct induced it.
• The beneficiary did not know their rights or material facts relating to the conduct, and the trustee knew the material facts.

These exceptions concern the beneficiary and conduct covered by the consent, release or ratification. Other states differ.

Business control held in trust

In Virginia, a trustee voting shares or exercising control over similar enterprise interests must put beneficiaries' interests first. If the trust solely owns the enterprise, the trustee must select directors or managers who will manage for beneficiaries' interests.

In New Jersey, the trustee must put beneficiaries' interests first when voting shares or exercising comparable enterprise control and must vote to select directors or managers who will manage for beneficiaries' interests.

The New Jersey manager selection provision does not state Virginia's sole ownership condition.

Estate representatives and related parties

In South Carolina, specified personal representative transactions are voidable by an interested person, except one who consented after fair disclosure, unless a statutory authorization exception applies.

The covered transactions include a sale or encumbrance to the representative, spouse, agent or attorney, or to a corporation or trust in which the representative has a substantial beneficial interest.

The rule also covers any transaction affected by a substantial conflict on the representative's part. The authorization exceptions are:

• The will or a contract entered into by the decedent expressly authorized the transaction.
• The court approved the transaction after notice to interested persons.

In New York's Matter of Rothko, an estate coexecutor also served as director, secretary and treasurer of the gallery receiving estate art on consignment. The court considered fairness and found the estate agreements unfair and contrary to estate interests.

The decision also addressed an executor who knew of coexecutor breaches, failed to try to prevent them and acceded to them. That executor was accountable despite acting on counsel's advice.

This was a judicial example involving particular facts, rather than an automatic prohibition on every outside business role.

Two related terms

Duty of loyalty: In Minnesota, for example, this duty means a trustee must not place personal interests above beneficiary interests, subject to the transaction conditions and exceptions described above. Other states differ.

Duty of impartiality: In Minnesota, for example, a trustee administering a trust for two or more beneficiaries must give due regard to their respective interests. Other states differ.

A perspective on working relationships

"It's like any other relationship, right? Whether you're dating somebody and things are rosy and great, something will go wrong at some point in time and things will get rocky. So, you've got to have people that are, you know, have an understanding and, you know, some form of a bond there"

Common questions