Surcharge of individual trustee for making interest-free loans to family members and giving trust profits to family-owned business in which trustee held an interest.
The grantor and beneficiary of a trust filed objections to the accounting of the trustee, the grantor’s cousin and childhood friend, for the period from the trust’s creation in 1993 until the trustee resigned in 1996. The trust agreement provided the grantor with income and discretionary principal for his lifetime, with the remainder passing to his son. The trust agreement also: (1) limited the trustee’s liability unless there was bad faith or fraud; (2) waived any conflicts of interest where the trustee holds an interest in property or entities in which the trust also holds an interest; and (3) authorized the trustee to engage in transactions related to the trust’s retention of interests in a familyowned business.
Three years after creation of the trust, the grantor asked the trustee to resign after a disagreement over trust distributions. The grantor also objected to the trustee’s: (1) use of trust principal to make gifts to various family members; (2) interest-free loans to the family-owned business; (3) transfer of profits from trust investment to the family-owned business rather than to the grantor; and (4) failure to keep adequate records and substantiate the trust transactions. Other of the grantor’s original 50 objections were previously dismissed.
The court dismissed the grantor’s objections to the gifts on the grounds that: (1) the grantor consented to the gifts by signing checks and gift tax returns; (2) the grantor did not complain about the gifts until several years had passed; and (3) the exoneration provisions in the trust protected the trustee because the trustee did not act in bad faith when she transferred trust funds to the grantor for the purpose of making the gifts.
The court held that the trustee did not engage in self-dealing by retaining an original interest-free loan that was part of the trust assets at inception, but held that additional interest-free loans made by the trustee to the family-owned business were inappropriate, and surcharged the trustee for income lost by the loans, on the grounds that the trustee made interest-free loans to family members with complete indifference to the fact that the grantor’s financial needs exceeded the trust income. The court also affirmed the grantor’s objection to transactions that resulted in the family-owned business receiving profits from the use of trust assets, on the grounds that the trustee was more concerned with the welfare of the family-owned business than with her obligations as trustee. The court denied the trustee commissions and disallowed payment of the trustee’s attorneys’ fees and costs out of the trust.