The Idaho Supreme Court recently explored the complicated world of real estate transactions involving conflicted trustees. The case revolved around a property sale orchestrated by a trustee with vested interests in both the selling and buying parties.
The importance of this case is best illustrated by an example: Parents set up a trust and appoint their daughter as trustee. The trust owns an apartment building. Parents may anticipate that their daughter may want to purchase the apartment building from the trust. To do so, she must get court approval unless the trust states that the daughter does not need to get court approval.
Parents may wish to avoid forcing their daughter to go to court to get approval; after all, court approval is a public process that costs money. Therefore, they may state in the trust that no court approval is required even if the daughter has a conflict of interest. That is, she is acting as the buyer and seller of the apartment building.
Read on to learn how the Idaho Supreme Court ruled in the case of White vs. White. The big takeaway for us is that not all trustee conflict-of-interest transactions are fodder for litigation. But, they must be set up correctly.
White vs. White
Ms. White was 12 years old when the trustee of her trust sold her interest in a commercial property for $95,000. The sale proceeds were deposited into Ms. White’s trust. The issue at hand was the trustee’s dual role—he acted as both the seller in his capacity as trustee and the buyer as a partner in the company acquiring the property. Importantly, the property was sold for $650,000, notably less than its assessed value of $807,261.
When Ms. White later learned of this transaction, she took legal action against the trustee, Mr. White. Her objective was to invalidate the transaction and establish a constructive trust over the property, based on Idaho Code section 68-108(b), which stipulates that if a trustee involved in a real estate sale has a conflict of interest, court approval is a prerequisite.
In response, Mr. White contended that Idaho Code section 68-111 allowed the settlor (the individual establishing the trust) to exempt the requirement for court approval. In this particular case, the trust’s terms explicitly gave authority to the trustee to engage in any transaction he deemed prudent, provided it did not infringe upon his fiduciary duties.
Ms. White countered that while Idaho Code section 68-111 might grant the settlor the power to bypass the entire Act, it shouldn’t supersede specific provisions within the Uniform Trustees’ Powers Act (Idaho Code section 68-101 et seq.).
The Court’s Verdict
The Idaho Supreme Court ruled that a settlor had the discretion to eliminate specific Act requirements rather than opting to reject the Act in its entirety. In other words, settlors have the flexibility to waive the statutory mandate of court approval in transactions involving conflicted trustees.
The trust imposed a condition that the trustee was obligated to thoroughly assess all relevant factors and make a decision that upheld the standards of being both wise and in line with his fiduciary duties, and the Idaho Supreme Court agreed with the District Court’s determination that the trustee had conducted a comprehensive evaluation and made a prudent decision. (Notably, the property required significant renovations that necessitated securing a new loan.)
In a dissenting opinion, Justice Zahn disputed the notion that Idaho Code section 68-108(b) would be “reactivated” if a breach of fiduciary duty occurred. Justice Zahn contended that the trust had clearly invoked the exemption provided by Idaho Code section 68-111.
Trust litigation is difficult for three reasons:
- First, the cost of the litigation will often drain assets from the trust because the trustee’s attorney fees and costs are often paid from money in the trust.
- Second, it is a public process that often airs disputes between family members.
- Last, the interpretation of a trust often takes place after the people who set up the trust have passed away. This requires a Court to figure out what was intended from the language of the trust. If the language is not clear, it can lead to a result the person who set up the trust would not have wanted.
White v. White decisively establishes that a settlor can waive court approval for transactions involving trustees with conflicts of interest. However, when such provisions contain conditions on the trustee’s authority, such as the obligation to make decisions that do not breach fiduciary duties, the court’s approval requirement may be reinstated.