Any conflict of interest being both Trustee and Contingent Beneficiary?

[lyon]

What is the name of your state (only U.S. law)? Michigan

There is a Trust, established by my grandmother (died about 15 years ago), that was created to support her son, my father.

The Trust starts out defining who's who: "<MY GRANDMOTHERS NAME>, <CITY>, <COUNTY>, State of Michigan, as "Settlor" and Initial Trustee, and <THE CURRENT TRUSTEE NAME> as Successor Trustee, and <MY NAME> as Successor Trustee to her."

Later stated: "The Trustee shall pay all of the net income from this Trust for the benefit of the Settlor's son, <MY FATHERS NAME>, as the Trustee in her sole discretion shall deem to be in the best interests of the beneficiary."

However, also stated is that, at the time of my father's death, I am recipient of the assets of the trust: "Upon the death of the beneficiary herein designated, the corpus and retained interest of the Trust shall be conveyed, assigned, and transferred to the beneficiary's son, <MY NAME>, free of trust."

That said, if the current Trustee were to resign and I were to become Successor Trustee, would there be a conflict of interest in my maintaining the assets of the Trust to support my father at my "sole discretion" as to the "best interests" of him, and yet also be the recipient of those assets upon his death?

 

[justalayman]

What is the name of your state (only U.S. law)? Michigan

There is a Trust, established by my grandmother (died about 15 years ago), that was created to support her son, my father.

The Trust starts out defining who's who: "<MY GRANDMOTHERS NAME>, <CITY>, <COUNTY>, State of Michigan, as "Settlor" and Initial Trustee, and <THE CURRENT TRUSTEE NAME> as Successor Trustee, and <MY NAME> as Successor Trustee to her."

Later stated: "The Trustee shall pay all of the net income from this Trust for the benefit of the Settlor's son, <MY FATHERS NAME>, as the Trustee in her sole discretion shall deem to be in the best interests of the beneficiary."

However, also stated is that, at the time of my father's death, I am recipient of the assets of the trust: "Upon the death of the beneficiary herein designated, the corpus and retained interest of the Trust shall be conveyed, assigned, and transferred to the beneficiary's son, <MY NAME>, free of trust."

That said, if the current Trustee were to resign and I were to become Successor Trustee, would there be a conflict of interest in my maintaining the assets of the Trust to support my father at my "sole discretion" as to the "best interests" of him, and yet also be the recipient of those assets upon his death?

I have to presume your father is incapacitated in some way. Does he have a guardian or conservator?

While your placement as successor beneficiary to the trust would not preclude you from acting as trustee, it surely can be seen as a conflict of interest and as such, cause you to be scrutinized closer than if your actions could not conceivably be more of a benefit to you at the expense of your father.

Is there more to the trust document such as how the trust must be invested or such?

 

[LdiJ]

I have to presume your father is incapacitated in some way. Does he have a guardian or conservator?

While your placement as successor beneficiary to the trust would not preclude you from acting as trustee, it surely can be seen as a conflict of interest and as such, cause you to be scrutinized closer than if your actions could not conceivably be more of a benefit to you at the expense of your father.

Is there more to the trust document such as how the trust must be invested or such?

While I do not disagree with this, its clear from the wording of the trust that its net income SHALL be spent on the beneficiary. As long as he spends all of the trust's net income on his father, then he would have little to worry about from closer scrutiny.

Of course its important that the OP understands what constitutes "net income".

 

[justalayman]

While I do not disagree with this, its clear from the wording of the trust that its net income SHALL be spent on the beneficiary. As long as he spends all of the trust's net income on his father, then he would have little to worry about from closer scrutiny.

Of course its important that the OP understands what constitutes "net income".

yes, "net income"

money remaining after gross income and expenditures are tabulated.

That would mean the the OP could spend all of the gross income of the trust on enriching the trust at the expense of eliminating any net income. That means there is no money left to take care of dad but OP becomes wealthier with every action.

I see a possibility of a huge problem with the arrangement if there is no outside oversight.

 

[anteater]

That would mean the the OP could spend all of the gross income of the trust on enriching the trust at the expense of eliminating any net income. That means there is no money left to take care of dad but OP becomes wealthier with every action.

Not real sure what you mean by "spend" that enriches the trust, JAL. Reinvesting income thrown off by trust assets would not be spending.

I could certainly see that the trustee might be tempted to invest the trust assets in vehicles that offer more potential for long-term appreciation rather than current income.

If there isn't some sort of investment policy included in the trust, then you just have to trust the trustee to do the right thing.

 

[lyon]

I have to presume your father is incapacitated in some way. Does he have a guardian or conservator?

Yes, he is physically incapacitated due to a stroke, and has never fully supported himself financially to my knowledge, so the Trust was established. He does not have a guardian or conservator.

Is there more to the trust document such as how the trust must be invested or such?

There is nothing indicating how the trust must be invested. Conversely, there is specific language that seems to fairly unequivocally state that the Trustee is not restricted in any way in how the trust is invested and has complete control over those matters.

In addition, there are a couple provisions regarding the distribution of funds. The first is quoted in the original post regarding distribution of net income. Shortly following is:

In the event any income or discretionary payments of principal shall become payable to a person under legal disability, or to a person not adjudged incompetent, but who, by reason of illness or mental or physical disability, is, in the opinion of the Trustee, unable properly to administer such amounts, then the Trustee is authorized, in its absolute discretion, to retain all or part of such income, and to pay over and distribute all or part of such income or principal for the suitable support, care and maintenance of the beneficiary in such of the following ways as the Trustee shall deem best.
(a) Directly to such beneficiary,
(b) To the legally appointed guardian or conservator of such beneficiary,
(c) To some person or persons having the care of such beneficiary for his suitable support, maintenance of welfare, or
(d) By the direct application of such amounts for the suitable support, maintenance, or welfare of such beneficiary.

Currently, the trust pays for all housing expenses directly, and provides him with a weekly cash payment for his personal use. This has been at a net loss to the trust almost every year I believe, as these expenses have surpassed income most if not all years and the trust value has deteriorated (relatively small trust value to start with, then got hammered in dot com crash shortly after entering market). We continue to explore options to reduce the expenses and increase the income of the trust, but his cash flow has not been altered.

 

[justalayman]

anteater;2920303]Not real sure what you mean by "spend" that enriches the trust, JAL. Reinvesting income thrown off by trust assets would not be spending.

same difference. You would reinvest the income by using it to purchase other assets (spending it) . It's just what you spend the money on. This is more your gig so my terminology is not always the most common or accepted, even when meaning exactly the same thing.

If there isn't some sort of investment policy included in the trust, then you just have to trust the trustee to do the right thing.

that is why I asked about a guardian or conservator. That could allow for some oversight beyond the OP. Not saying he would do anything inappropriate but the fact he is here asking about the situation and stressing "sole discretion" surely makes me wonder.

 

[justalayman]

lyon;2920308]Yes, he is physically incapacitated due to a stroke, and has never fully supported himself financially to my knowledge, so the Trust was established. He does not have a guardian or conservator.

Is he fully mentally competent at this time then? If so, it would add a layer of oversight to the situation.

Currently, the trust pays for all housing expenses directly, and provides him with a weekly cash payment for his personal use. This has been at a net loss to the trust almost every year I believe, as these expenses have surpassed income most if not all years and the trust value has deteriorated (relatively small trust value to start with, then got hammered in dot com crash shortly after entering market). We continue to explore options to reduce the expenses and increase the income of the trust, but his cash flow has not been altered.

there is not necessarily anything wrong with a trust losing money. Especially in your fathers situation, as long as he is provided for, it would not concern me in the least. While it never hurts to have the trust appreciate in value, as long as the trust survives long enough to provide for your father while alive, ultimately, the only one to benefit from that appreciation would be you. To me, that would be of concern although not illegal. Especially since you mentioned the intent to limit expenses, it really makes me concerned. Of course, that could have been an innocent statement but it could just as easily have nefarious intent behind it.

 

[lyon]

Not saying he would do anything inappropriate but the fact he is here asking about the situation and stressing "sole discretion" surely makes me wonder.

(Hey, "sole discretion" was the language written in the trust! )I realize the situation could be manipulated by someone acting in bad faith. I honestly wouldn't care if every dime of the trust were spent to support my father, and have spent a good amount of my own money to help support him to relieve the expenses of the trust. There is a property held by the trust that I would very much like to pass on to my children, as would he (I think he'd basically agree to any plan if it meant we would keep that property, if it came to the point that something drastic would need to be done -- although FWIW this is an income-producing property). Perhaps a question for a separate topic about how to handle that.

Is he fully mentally competent at this time then?

I don't know whether he's undergone an evaluation to determine his mental capacity . The stroke impacted some areas of his brain, but his mind remains sharp, he lives by himself, and he regularly has appointments with the VA Medical Center where I believe they've done some assessments, but don't know the details. His living conditions are less than ideal, however, as he could aptly be described as a 'hoarder'. I actively recruit housecleaners to try and help.

Especially since you mentioned the intent to limit expenses, it really makes me concerned. Of course, that could have been an innocent statement but it could just as easily have nefarious intent behind it.

Throughout the years various projections for the trust have had it running out of current funds (without selling the properties) prior to his life expectancy, and that with only looking at current expenditures (without long term care, etc). Thus there has been great concern about the viability of the trust and efforts made to extend the life of the trust through both increased income and reduced expenses. As stated, though, neither his living conditions nor weekly cash flow has been altered in the least, and in fact has increased more than once. The limiting of expenses has primarily been through reducing administrative costs, transitioning various expenses from the trust to me or others, etc.

My reason for asking the original question is that I have been working closely with the current trustee, another family member. They have been acting in that capacity for about 13 years or so, and are exhausted and emotionally drained from doing so. We are discussing the transition of trustee to me, as written in the trust, and the topic of conflict of interest was brought up as a potential roadblock, so I thought I'd see what I could find out on the subject.

Based on the responses it seems that it would be legal, but perhaps raise some questions as well..

 

[justalayman]

Your further input puts much of my concerns to rest. I do hope you are being truthful in your statements. If so, best of luck to you. As you have discovered, it is a labor of love and if there is no love, it would be easy to take advantage of the situation.

so, as stated several times; it is not a legal roadblock for you to be trustee and successor beneficiary. It can raise red flags though and if there is anybody in a position to demand an accounting of the trust or may possibly accuse you of abuse of your position, I would make certain the actions do move in a direction to benefit your father.

The old "dot your I's and cross your T's kind of thing".