When a California trust becomes irrevocable, a trustee generally takes control of property and manages the property on someone else’s behalf. The trustee can sell assets, pay expenses, invest funds, and in some cases decide when distributions happen. These powers exists for one reason: to carry out the trust terms for the benefit of beneficiaries. Self-dealing and conflicts of interest may arise when trustees uses that power to benefit themselves or to advance a personal agenda. These claims are at the center of many trust disputes, in cases where one or more beneficiaries allege that they have been harmed by the trustee’s actions.
This article describes: what self-dealing looks like; how conflicts may arise even without obvious theft; what rules California courts apply and what remedies may be available to beneficiaries.
The Duty of Loyalty
Trustees are fiduciaries. Under California Probate Code section 16002, a trustee must administer the trust solely in the interest of beneficiaries. The trustee must avoid using trust property for personal gain and must stay out of transactions where his or her personal interests compete with the trust’s interests. Section 16004 goes further by creating a presumption: if a trustee enters a transaction with the trust or uses trust property in a way that gives the trustee an advantage, the deal is presumed to be a breach of duty unless the trustee proves otherwise.
That presumption matters. Once beneficiaries show that a trustee benefitted from a trust transaction, the burden shifts to the trustee to justify it. Good intentions are not enough.
What Counts As Self-Dealing?
Self-dealing is direct. It usually involves trustees taking or using trust assets to benefit themselves or their inner circle. Common examples include:
- paying themselves “reimbursements” or extra fees without records
- using trust accounts for personal expenses
- selling real estate or a business interest of the trust to themselves, or to a spouse or close associate, at a bargain price
- borrowing trust funds for personal use
- steering trust investments into a business the trustee owns or controls
- hiring their own company, or a family member’s company, as a vendor without disclosure or competitive pricing
Some trust documents allow limited conflict transactions, such as discretionary distributions to a trustee who is also a beneficiary. Even then, the trustee must act in good faith, disclose material facts, and keep their own benefit within the trust’s boundaries. A clause that permits a conflict does not erase the duty of loyalty.
Conflicts Without A Cash Grab
Conflicts of interest are defined more broadly than self-dealing. A trustee can create unacceptable risk even if no money has been stolen. We often see conflicts in settings like these:
- Trustees who are also beneficiaries delay distributions to other beneficiaries while paying themselves early.
- A trustee controls a family business owned by the trust and sets his or her own salary or perks from that business.
- A trustee keeps a trust-owned home for personal use, delaying a sale that would fund distributions.
- A trustee aligns with one sibling and uses trust funds to finance a dispute against another sibling or siblings.
These moves can shift value in subtle ways. They may reduce the residue available to everyone, distort the timing of distributions, or create tax consequences that fall unevenly on one beneficiary or set of beneficiaries. California courts treat such conduct seriously because it violates the fiduciary requirement of impartiality.
When A Trustee Can Proceed With A Conflict
There are only a few safe paths for a trustee who wants to engage in a conflicted transaction.
1. Clear authorization in the trust. The document must specifically permit the transaction or class of transactions.
2. Informed consent from all affected beneficiaries. Consent must follow full disclosure, including the trustee’s interest in the deal, the terms, and the risks. Pressure or partial disclosure defeats consent.
3. Prior court approval. Trustees can file a petition for instructions before the transaction. A court order gives protection that is hard to recreate later.
If none of these paths is present, the trustee is exposed to potential liability.
How Courts Judge Fairness
When conflict cases reach probate court, judges focus on two things: process and outcome.
Process questions include whether the trustee disclosed the conflict before acting, provided documents like appraisals or bids, gave beneficiaries a real chance to object, and sought instructions when the risk was clear.
Outcome questions include whether the trust received fair market value, whether the terms matched what a neutral third party would accept, whether the trustee’s personal benefit outweighed any benefit to the trust, and whether the deal harmed liquidity or increased taxes for the trust.
A trustee who cannot show a fair process and fair result will struggle to rebut the presumption of breach.
Remedies Courts Use
California courts have strong tools to fix self-dealing and conflicts.
First, the court can unwind a transaction. If a trustee bought trust property or transferred assets to themselves, the court can void the deal and return the asset to the trust.
Second, the court can surcharge the trustee. That means personal repayment of losses, including lost value, improper profits, and interest.
Third, the court can order disgorgement. Even if the trust did not suffer a direct loss, the trustee may have to give up what they gained.
Fourth, the court can remove the trustee under Probate Code section 15642. A proven conflict or self-dealing pattern is a classic ground for removal.
Fifth, the court can reduce or deny trustee compensation and may order the trustee to pay attorney fees personally when bad faith is shown.
These remedies are meant to restore value and send a message that fiduciary power is not personal property.
Why Early Action Matters
Beneficiaries often suspect self-dealing long before they can prove it. Trustees control the records, and delay helps the person in control. California law gives beneficiaries the right to information and accountings. If a trustee stalls or refuses, beneficiaries can file a petition to compel an accounting. Once the accounting is produced, unexplained transfers or insider deals usually become clearer.
Discovery can then broaden the record through subpoenas to banks and brokers, escrow and title files, business records, and depositions. In urgent cases, beneficiaries can request temporary court orders to freeze accounts or block sales while the dispute is pending.
A Common Fact Pattern
Imagine a trust that owns a rental property. The trustee, who is also a beneficiary, sells the property to a company owned by their spouse for a price below recent comparable sales. The trustee does not tell other beneficiaries until the deed is recorded. After the sale, the trustee uses trust funds to pay for renovations on the property, calling the expenses “administration costs.”
This is classic self-dealing: the trustee is on both sides of the sale, the price is suspect, and the trust pays expenses that benefit the trustee’s family. In court, the trustee faces the presumption of breach. If fairness cannot be proven, the sale can be voided, the trustee surcharged, and a new trustee appointed.
How Trust Law Partners helps
Self-dealing cases require a tight factual record. We start with the trust terms, then examine every major transaction against fiduciary duties. We demand full accountings and supporting documents, trace fund flows, and identify relationships between the trustee and counterparties. Where needed, we bring in forensic accountants, appraisers, and valuation experts. Once the evidence is clear, we push for recovery through mediation or trial, and we seek removal when the trustee has shown they cannot be trusted with the role.
Practical steps for beneficiaries
If you believe a trustee is acting for themselves, take action early. Request a written accounting and the documents behind major transactions. Ask for appraisals and proof of market pricing on any asset sale. Track payments to insiders and any fee increases. Keep copies of communications. Then speak with a trust litigation lawyer about whether a court petition is needed. You do not need perfect proof to start that conversation. Red flags are enough to justify a review.
One more point beneficiaries should know is how these cases often resolve early on. Many trustees agree to step down or unwind a deal once a petition lays out records and highlights the risk of personal liability. Mediation is common. A settlement may include a new trustee, a corrected accounting, and repayment of disputed charges. Judges usually approve settlements that return value to the trust and respect the settlor’s plan. When a lawsuit increases trust value for everyone, the court may allow some fees to be paid from the trust.
Closing thoughts
The duty of loyalty is the backbone of California trust law. When trustees self-deal or allow conflicts to distort administration, courts step in with remedies that restore value and impose personal consequences. Beneficiaries who move early, demand records, and build evidence can stop or prevent misconduct and protect their inheritance.
Trust Law Partners represents beneficiaries in serious California trust disputes involving self-dealing, conflicts of interest, missing assets, and unfair administrations. If you have concerns about a trustee’s conduct, call today for a free consultation at 833-982-2079.