A trustee owes a duty of loyalty to the beneficiaries of the trusts it administers. The Tennessee Trust Code succinctly describes this duty as follows:

A trustee shall administer the trust solely in the interests of the beneficiaries.

Generally, a trustee violates this duty if, with respect to trust property, it engages in a transaction in which the potential exists for a conflict between the trustee’s fiduciary and personal interests.  A blatant example is when the trustee enters into a transaction for its own account. Such transactions are irrebuttably presumed to be affected by a conflict between personal and fiduciary interests, regardless of whether the trustee acted in good faith or acted fairly. No further proof is necessary. In such cases, the transaction is voidable by the beneficiaries. 

In addition, transactions involving trust property are presumed to pose a conflict of interest if they involve the trustee and certain parties. These are:

  • The trustee’s spouse;
  • The trustee’s descendants, siblings, parents, or their spouses;
  • An agent or attorney of the trustee; or
  • A corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee’s best judgment.

Such transactions are voidable by the beneficiaries as well.

A conflict between the trustee’s fiduciary duties and personal interests may also exist even if trust property is not involved. One example is when a trustee seizes for itself an opportunity that belongs to the trust. Another is when the trustee enters into a transaction with a beneficiary while the trust still exists or at a time when the trustee retains significant influence over the beneficiary. The first example is voidable by the beneficiary unless the trustee establishes the transaction was fair to the beneficiary. The second example is voidable in any event.

However, the Trust Code provides several exceptions to the general duty of loyalty. Certain transactions involving trustees and beneficiaries will be permissible, provided they are fair to the beneficiaries. This includes:

A transaction between a trust and another trust, decedent’s estate, or conservatorship of which the trustee is a fiduciary or in which a beneficiary has an interest.

Therefore, notwithstanding the general duty of loyalty, Tennessee law specifically authorizes a purchase and sale transaction between two trusts having the same trustee so long as it is fair to the beneficiaries of each.

Source: Tenn. Code Ann. § 35-15-802

Posted by Joel D. Roettger, JD, LLM, EPLS