Private Trustees: A Note of Guidance and Caution

By Dennis McAndrews, Esq., and Lesley Mehalick, J.D., LL.M.

 

Our Estates and Trusts Department creates hundreds, if not thousands, of various types of trusts every year. These trusts include special needs trusts, minors trusts, support trusts, settlement protection trusts, “pot trusts” for benefit of one or more generations, life insurance trusts, pet trusts and many other unique, individualized trusts for families and individuals. In many cases, the client wishes to designate an individual to serve as a private trustee who is charged with the job to accept the relevant assets, manage investments, and make distributions on behalf of the trust beneficiary. This private trustee is often a family member, close friend, or business associate of the trust settlor. These private trustees can serve a valuable function, offer a personal connection to the trust beneficiary, while also often saving costs and possessing valuable historical and personal knowledge regarding the circumstances surrounding the family and the creation of the trust.

 

Private trustees, just like corporate trustees (such as banks or trust companies) have a legally mandated “fiduciary obligation” to manage the trust solely for the best interests of the beneficiaries. Trustees are prohibited from self-dealing to benefit themselves or to use trust assets for any benefit beyond the interests of the beneficiaries as proscribed by the trust. Where a trustee does not adhere to this fiduciary responsibility and uses trust funds for his own personal benefit, the private trustee can be surcharged and required to pay funds into the trust from personal assets. A recent decision of the Pennsylvania Superior Court emphasized the full extent of this fiduciary obligation.

 

The case of In Re: Credit Trust Under the Will of William R. Cameron Jr., Deceased involved a situation where the private trustee used trust assets as collateral for a personal line of credit from a reputable financial institution which the trustee then used to make improvements on a store he owned and to provide startup funding for a marijuana business created by his stepdaughter. The line of credit was also used to pay the trustee’s personal federal/state income taxes and to pay college tuition for the trustee’s son. (Exactly why a reputable financial institution would provide a line of credit based on private trust assets is perhaps another story…)

 

Thankfully, the line of credit was paid off and the trust assets used as collateral were never touched and there was no loss to the trust. However, the trial court in Bucks County, and the Pennsylvania Superior Court on appeal, nonetheless surcharged the trustee for using trust funds for his personal benefit. The court was unswayed by the fact that there was no financial loss to the trust, and concluded its opinion by dating that the questions of benefit to the trustee or loss to the trust “are outweighed by the need for punitive mechanisms to guard against the temptation for trustees to engage in self dealing”.

 

The lesson of this case is clear. Courts take very seriously the fiduciary obligations of trustees to act solely for the benefit of beneficiaries and to avoid self dealing. When our Estates and Trusts Department draft trusts involving private trustees, we are always careful to inform the private trustee of the importance of these fiduciary duties.

 

We welcome the opportunity to serve you and your family in the development of your estate plan, whether it involves a simple or complex matter. We look forward to hearing from you.