Trustees: Self Dealing (Memo 1)
Trusts and Trustees
Where a trustee, who has an unbridled power to amend, modifies the trust to permit self-dealing and then gives a deed to himself, this is a serious issue. Even where the trust instrument initially gives the trustee the broadest discretion in dealing with the trust property, he is nonetheless bound to act in good faith. Fratcher, Scott on Trusts, Little Brown and Company (Fourth Edition, 1987), §170.9. If such be the case, how can the trustee inject the awesome power of self-dealing by his own amendment, sell to himself, and still observe the requirements of good faith? The conclusion that a deed from a trustee who has the power to amend would be free of objection is likewise, in my mind, questionable. The prohibition against self-dealing is so strong, I can not see straight to ignore it based on technicalities. It seems that such a power must be in the original trust or added by amendment by a party other than the trustee (e.g., settlor).
Self-dealing is so contrary to fidelity and good faith. See Fratcher, Scott on Trusts, Little Brown and Company (Fourth Edition, 1987), §190.10. that the courts have said that even if the trustee purchases the trust property for himself at a sum greater than its value, the transaction can still be attacked and undone by the beneficiaries, the theory being that the courts don't even want the trustee to be in a position to deal with himself, even if the transaction could be financially beneficial to the trust. Self dealing is permitted only if the beneficiaries consent, are competent to do so and have done so after full and complete disclosure.
Self dealing has also been specifically denounced with respect to powers of attorney. See Gagnon v. Coombs, 39 Mass. App. Ct. 144, 654 N.E.2d 54 (1995). In that case, where an attorney in fact had conveyed property to herself the court said this:
Such self-dealing by an agent, in the absence (as here) of distinct authority from the principal expressly granted in the empowering instrument, has been continuously and uniformly denounced as one of the most profound breaches of fiduciary duty, irrespective of the agent's good faith and however indirect or circuitous the accomplishment of the benefit to the agent. (Citations omitted.)
The sedulous application and uncompromising rigidity of the prohibition against unauthorized fiduciary self-dealing do not flow merely from the interpretive principle that powers of attorney are to be strictly construed to require explicit, and not inferential, grants of "dangerous" agency authority the exercise of which is potentially destructive of the principal's interests. (Citations omitted.)
REBA's title standard 23 addresses self-dealing and provides that the title is not defective on that account if the trust does not contain a spendthrift clause and either (1) all beneficiaries are legally competent and asset or ratify the conveyance or (2) there is no prohibition in the trust against self-dealing and the trust provides recites that third parties may rely without inquiry. The lack of a spendthrift clause is pivotal: if the beneficiaries cannot alienate or deal with their interests then they would be unable to give their consent, and a statement by the trustee that they did would not be credible. After this hurdle is scaled then a consent or ratification by them can be given or a statement by the trustee that the beneficiaries gave such consent or ratification could be relied upon.
1 If the trustee is also the settlor, and the settlor has retained either a power to revoke or to amend (the power to amend includes the power to revoke), he would then be permitted to revoke the trust and revest himself with title, thus accomplishing the desired result. [Back to Text]