One must be very careful when acting as an Executor of an estate or a Trustee of a Trust, exercising utmost caution and avoiding all instances of impropriety. Any appearance of self-dealing may trigger court inquiry and result in very unpleasant consequences.

In a recent case In Re Smith (2018), the Surrogate Court examined whether the Executor of the estate engaged in self-dealing and what the penalty should be for this behavior. Decedent died, leaving a 90% interest in closely held company Quailman Investors Inc. Respondent owned the remaining 10%. Decedent left a Will, leaving 70% of his interest in a Company to be held in Trust for various beneficiaries, leaving 15% to respondent and 5% to another party. Respondent was appointed as Executor and Trustee.

Subsequently, while acting as Executor of the estate and therefore controlling the entire Company, respondent paid to himself $725,453 for salary and deferred compensation. Subsequently, the respondent was removed as an Executor of the estate and Public Administrator was appointed as temporary administrator.

The court observed that one of the most sacred duties of a fiduciary is to avoid self-dealing. Once self-dealing is disclosed, the “no further inquiry rule” is triggered, which will result in the transaction being set aside, regardless of its fairness. As a result, the court set aside the payments and directed the respondent to restore $725,453 to the estate.

In addition, the respondent also paid himself a personal claim he had against the estate, without prior court approval. As in the case of self-dealing, when a fiduciary pays himself a claim without permission from the court, he subjects himself to a surcharge, which can include costs, attorney’s fees, and interest. Here, the court found that based on respondent’s conduct an award of attorney’s fees, to be paid by respondent personally, was warranted.

Please contact Sverdlov Law PLLC at 212-709-8112 or if you need guidance about fulfilling your fiduciary duties.