Conflict of Interest: A Guide for Trustees
As a Trustee, you must both recognise and avoid situations where your own interests conflict with:
- The best interests of the Trust,
- The best interests of the beneficiaries
- The purpose of the Trust
You must also be careful to ensure that your behaviour in relation to conflicts of interest does not jeopardise your duty of managerial care.
You need to be conscious of both direct and indirect conflicts of interest. An example of a direct conflict would be if the Trust is considering buying land from you, or perhaps hiring a construction company you own to repair a house owned by the trust. An example of an indirect interest would be if the Trust is considering buying land which is owned by your cousin.
This is a very important issue for Trustees because the courts in other trust countries take a very strict approach to the extent that in some countries decisions involving a conflict of interest are absolutely prohibited. We don’t expect the Czech courts will take such a strict approach, but it is still best to ensure that you deal with these issues very carefully.
Declaring your interest in a Proposed Transaction
Once you have sent your declaration, it must be discussed as part of the next trustees meeting and also before the transaction is entered into. It is very important, for your own protection, that a full record of the declaration and the discussion is noted in the minutes of the meeting.
When you prepare the declaration, you should explain why you think you may be conflicted, and explain both the nature and extent of your interest.
A declaration is not required when:
- You are not aware that there is a potential conflict of interest
- You are not aware of the transaction
- All the other Trustees are already aware of the conflict of interest
The last point partly covers you if you are a family trustee – as of course the other Trustees already know about your relationship with the beneficiaries. However, this applies only in relation to those relationships and not to other possible conflicts of interest that your co-trustees don’t know about.
We recommend that you always err on the side of caution, because failure to disclose a conflict of interest can expose you to personal liability and in some cases could even be a criminal offence. So if you are in doubt, it is better to make a declaration even if you feel the possibility of a conflict is small.
What to Do When a Fellow Trustee has a Conflict of Interest
When you become aware that one of your co-trustees has a potential conflict, you must take all reasonable steps to ensure that the decision that is ultimately made is beyond reproach.
This means you should discuss the issue with the other Trustees, take a vote and make sure the whole discussion is included in the minutes.
If the decision to be made in ‘momentous’ – which means an important one, then it is essential that you physically meet with the other Trustees.
When discussing the conflict, it is often appropriate for the conflicted trustee to remove him or herself from the discussion. How this happens depends on you, but the best idea is probably for the conflicted Trustee to leave the room where the meeting is taking place and have the exit formally noted in the minutes.
The remaining Trustees then decide whether or not the conflict should be authorised. The discussion should focus on what is in the best interests of the trust, the beneficiaries and the purpose of the Trust. The discussion should conclude with a formal vote on the matter.
The minutes of the meeting should include at least the following information:
- Which trustee or trustees are affected
- Type of conflict of interest (direct or indirect)
- If the conflict was previously known to the other trustees
- An outline of the discussion
- If anyone withdrew from the discussion and if they stayed in or left the room
- How the remaining trustees made the decision in the Trust’s best interests
If the conflicted trustee prepared a written declaration, a copy of this should be kept with the minutes.
Trusts with a Sole Trustee
If you are the sole trustee of a trust you should prepare a written declaration as explained above, and place it in the Trust minute book. You should also consider very carefully whether it is a good idea to proceed with the proposed transaction. However, if you are absolutely confident that it is in the best interest of the Trust and the beneficiaries and consistent with the purpose of the Trust, then you can go ahead. Even so, it is very important that the record of your decision fully sets out the potential conflict and your justification for making the decision.
Depending on the kind of Trust, you can also consider the possibility of seeking the opinion of the beneficiaries. Generally speaking, if all the beneficiaries are in agreement with what you plan to do, you should be protected.
Any Questions?
We have the Czech Republic’s leading Trust administrators and we have many years of experience in dealing with issues such as this. Please contact us if you require assistance on 2112 245 872 or at info@trusty.cz
