November 1, 2013
Authored by: Luke Lantta
Originally posted on bryancavefiduciarylitigation.com
Individual trustees who must administer real property often attempt to save the trust money by personally making certain improvements, repairs, or maintenance to the property. They then charge the trust for the work they performed. As the Nebraska Court of Appeals points out in In re Estate of Robb, however, these acts – however well-intentioned – may be self-dealing and can put the trustee in a position of a conflict of interest, which can warrant removal from that fiduciary position.
When Mason D. Robb died, his son, Theodore, became the personal representative of his estate and the trustee of the inter vivos Mason D. Robb Revocable Living Trust. The trust contained three pieces of real estate.
Under the terms of the trust, the trustee was to hold and use the trust property to pay administrative costs and the debts of the settlor and for the benefit of the Mason D. Robb QTIP Family Trust. The trust directed the trustee to separate the funds in the family trust into two equal shares: one for Theodore’s benefit and one for the benefit of his sister, Linda. Theodore’s share was to be delivered to him outright while Linda’s share was to be held in trust. Linda was also entitled to income distributions from her share of the family trust.
Linda and her son, Shawn, sought to remove Theodore as personal representative and as trustee.
Removal As Personal Representative
Theodore received a $50,000 “death-bed transfer” from Mason, which Theodore admitted should be treated as an estate asset. Theodore, however, did not deposit it in the estate account by the time of the trial, and did not include it in either the inventory or the amended inventory filed with the court.
Theodore also sold several items of Mason’s personal property, but did not include the proceeds of the sales in any accounting filed with the court. He did, however, deposit the funds from the sales in the estate account.
In addition, Theodore was untimely in his filing of the original inventory and accounting. Despite a court order, Theodore failed to file an amended inventory or accounting that included funds and assets through June 15, 2012. Instead the amended filings were current only through 2011.
The appellate court identified three separate acts that demonstrated Theodore’s failure to impartially perform his duties as personal representative, which, in turn, warranted his removal:
(1) He failed to account for the $50,000 deathbed transfer. Despite acknowledging that this money should be considered estate property, during the two and half years between Mason Robb’s death and the trial, Theodore still had not deposited this $50,000 into the estate account.
(2) He sold items of personal property belonging to Mason Robb without notification to the remaining heirs and had not accounted for the income.
(3) He did not timely file his original inventory and accounting, nor was it complete.
Under these circumstances, allowing Theodore to continue as personal representative was not in the best interests of the estate.
Removal As Trustee
Like many individual trustees, Theodore undertook efforts to improve the trust properties. The efforts to improve the properties were substantial. He compensated himself and others he hired for their efforts in improving the property. Theodore compensated himself by, at times, using the property, determining a rental price to charge himself for that use, and offsetting the rent he owed the trust against the compensation the trust allegedly owed him for improving the property.
While Theodore performed much of the work himself, he also hired others to help. One person he hired received a flat rate of $2,500 per month, either in cash or check written on Theodore’s personal checking account. This person testified that he sometimes worked on Theodore’s property in addition to the trust property and that his compensation covered work on both properties.
In addition to the real estate, Theodore also received a $50,000 “death-bed transfer” from his father’s account. Theodore agreed that this money should be deposited into the trust account, but it had not yet been deposited by the time of trial. At the time of trial, Theodore claimed that the trust still owed him over $100,000 and, as a result, Linda had not yet received any distributions from the family trust.
Nebraska’s trustee removal statute (Neb. Rev. Stat. § 30-3862) is identical to Uniform Trust Code § 706, which permits removal of a trustee where the trustee commits a “serious breach of trust.” A trustee commits a breach of trust if he violates any of the duties he owes the beneficiaries. Among the duties that a trustee owes the beneficiaries is the duty of loyalty. The duty of loyalty, in turn, requires a trustee to administer the trust solely in the interests of the beneficiaries. Transactions involving the investment or management of trust property entered into by the trustee for the trustee’s own personal account or which is otherwise affected by a conflict between the trustee’s fiduciary and personal interests are voidable unless they are authorized, approved, or entered into before the trustee contemplated become trustee.
Trustees can violate this duty of loyalty by commingling personal property with trust property. Here, Theodore committed a breach of trust by commingling his personal property with that of the trust and by engaging in self-dealing by renting the property to himself at favorable rates. The self-dealing brought his personal interest in a favorable rental price into conflict with the beneficiaries’ interest in profiting from the trust property.
Theodore also engaged in self-dealing by compensating himself for improvements made to the trust property. Although the trust may well have benefited from the improvements Theodore made, by collecting compensation from the trust for his actions, it is unclear whether Theodore was acting solely for the benefit of the trust beneficiaries.
Under these circumstances, the Court held that it was proper to remove Theodore as trustee of the trust.
If you have been named as Personal Representative and/or Trustee of someone’s estate or trust and are unsure of what your duties are, you should consult with your attorney for guidance so that you don’t inadvertently run afoul of these fiduciary duties.