Trustees: Self Dealing (Memo 2)
Trusts and Trustees
Although self-dealing is prohibited under the law of trusts, the question to be addressed is the beneficiaries' remedies in the case that self-dealing has occurred. It would appear that after a transfer to a third party for valuable consideration (and a mortgage is such a transfer) the beneficiaries are limited to an accounting, unless the sale is to one other than a bona fide purchaser. See Scott on Trusts, §170.2, et. seq.
REBA's title standard (No. 23) addresses self-dealing. The standard states that self-dealing is not an issue if (i) the instrument expressly authorizes it, (ii) a court has ratified it or (iii) thirty years have passed since the self-dealing occurred with no evidence of an adverse claim having been made.
An additional factor that will dispose of a self-dealing objection under the standard is where "the trust does not contain spendthrift provisions and (i) all beneficiaries are legally competent and assent to or ratify the conveyance by the Trustee; or (ii) barring a prohibition against self-dealing, the recorded declaration recites that third parties may rely without inquiry."
If the trust contains a "spendthrift provision" – a provision that prevents the beneficiaries from assigning or anticipating their interests – then all bets are off. Neither the consent by the beneficiaries nor the declarations (certifications) by the trustee that the beneficiaries have consented will take the matter beyond the self-dealing objection.