Individual Successor Trustee: Conflict Of Interest

Who Is an Individual Successor Trustee?

A living trust in Nevada is a popular estate planning device that allows a person to organize their assets during their lifetime and leave instructions on how the assets should be distributed or disposed of after their death. The person who executes a trust (the grantor or settlor) usually appoints a trustee to administer the trust assets according to the instructions in the trust document. 

The trustee may be a licensed trust company or a natural person, including the grantor. However, there is a concern in cases involving the latter. If a trustee dies or can no longer administer the trust, it leaves a vacuum that a successor trustee would need to fill. 

However, if the successor trustee is also an individual, conflict may arise if they have a personal interest in the trust assets. This conflict of interests, if not correctly managed, could lead to discord and lawsuits among the beneficiaries. 

Below, we explain why you need to appoint a successor trustee in your trust instrument and some proactive strategies that could help you avoid conflict of interest situations with an individual successor trustee if you’d like to create a trust.

How Is an Individual Successor Trustee Appointed? 

Every trust in Nevada must have a trustee. If a trust is without a serving trustee because the original trustee died, is incapacitated, or resigns a successor trustee, a successor trustee must be appointed to take over.

As a grantor, you can choose any person to serve as a successor trustee, including your children or spouse, as long as your choice is clearly stated in the trust document. The successor trustee will be able to do everything the original trustee was able to do according to the instructions in the trust document.

But if you fail to make the appointment and the original trustee becomes unavailable, the law requires that the current trust beneficiaries appoint a qualified successor trustee by unanimous vote. However, the beneficiary-election process could take time to conclude depending on the number of beneficiaries since they must all agree on who emerges as the successor trustee. While the process lasts, there would be no one to administer the trust. 

You can save your loved ones the stress of the election process by appointing a successor trustee in the trust instrument or at least leaving specific instructions on how one may be selected.

When Does Conflict of Interest Occur With an Individual Successor Trustee?

A successor trustee, when appointed, has a fiduciary duty to administer the trust only for the benefit of the beneficiaries and to treat all beneficiaries equally. Every action they take regarding the trust must be in furtherance of this duty.

However, depending on the person who is appointed or elected, an individual successor trustee may be faced with a conflict of interest while they try to discharge their duties. This usually happens if the successor trustee is also a trust beneficiary. If that happens, there may be instances where their interest as a beneficiary could compromise their judgment and lead them to breach their trustee duties.

In such instances, the trustee/beneficiary may; 

• Utilize trust funds for their benefit,

• Sell off trust assets to their cronies for less than the fair market value

• Carry out other acts that could jeopardize the trust and the interests of other beneficiaries

That is not to say that you should avoid appointing a beneficiary of your trust, such as one of your children, as a successor trustee.

Conflict of interest does not automatically arise just because a trustee is also one of the trust’s beneficiaries. However, when it does arise, it could negatively impact relationships and potentially put the trust in jeopardy, so you need to consider your decision carefully before you make such an appointment.

How To Avoid Potential Conflict of Interest With an Individual Successor Trustee 

Having a conflicted trustee administer your trust is risky, especially since you may no longer be around to monitor or curb their excesses. However, while you’re still here, you can take steps to guard against such conflict so that the issue does not ever arise.

Some strategies for addressing possible conflict situations include the following:

Select Another Successor Trustee

You can avoid potential conflicts of interest by changing your choice of individual successor trustee. Instead of choosing a beneficiary, you can choose a trusted person with no interest in the trust property; that way, they can focus solely on their role as trustees. 

Alternatively, instead of appointing an individual, consider appointing a trust company or corporate trustee to administer your trust as a successor trustee. These companies are established and licensed to manage trusts for a fee. They can administer your trust as successor trustees without you having to worry about conflicting interests.

If you have already created the trust, there is still time to choose a different successor trustee. You can ask skilled Revocable Living Trust Attorneys to help modify the terms in your trust so you can make the change.