Jerry owned a beautiful lake house on Lake Erie. He had five children who enjoyed using the lake house during different weeks in the summer. Unfortunately, Jerry’s children did not get along. They barely spoke to each other. 

Jerry transferred title to the lake house to a revocable living trust in order to keep the peace among his children at his death.  He nominated his son Bobby to serve as successor trustee when he died. The trust directed Bobby to divide the assets of the trust equally among the five children. 

When Jerry passed away, Bobby took over administration of the trust. Bobby knew the lake house had to be sold since the five children could not amicably own it together. However, Bobby really wanted to keep the beach house for himself. He offered to purchase the lake house from the trust for a value far greater than its current fair market value. His siblings did not agree with his proposal, mostly out of spite. Is Bobby permitted to purchase the house from the trust anyway? The answer is probably not.

Ohio law imposes strict duties upon trustees when they are administering trust assets for others. Probably the most important are the duties of loyalty and avoiding conflicts of interests. Trustees must act solely in the interests of the beneficiaries and follow the terms of a trust. They must always act with disinterested and independent judgment. Their personal interests may not conflict with their role as trustee.  Ohio law provides that trustees may not personally use funds or property belonging to the trust. 

Likewise, trustees are not allowed to purchase property from a trust unless:

(1) the transaction is authorized by the terms of the trust;

(2)  the transaction is approved by a court; or

(3)  the beneficiaries consent to the transaction.

The trust beneficiaries must have full knowledge of all the material facts of a transaction to give valid consent.  It is the trustee’s duty to make sure that the beneficiaries fully understand the terms of the proposed purchase.

Can Bobby avoid the conflict of interest by selling the beach house to his spouse or son? The answer is no. Ohio law states that a conflict of interest still exists if a trustee enters into an agreement with one of the following:

(1)  the trustee's spouse;

(2)  the trustee's descendant, sibling, or parent, or the spouse of a trustee's descendant, sibling, or   parent; or,

(3) an agent or attorney of the trustee.

When administering a trust, it is important to consult with a trusted attorney to understand all of the duties and requirements involved. Laribee Law, LLP is here to assist. That way, the trustee will avoid prohibited conflicts of interest. 

Michael Laribee is a partner in the Medina law firm of Laribee Law, LLP. This article is intended to provide general information about the law. It is not intended to give legal advice. Readers are urged to seek advice from an attorney regarding their specific issues and rights.