How to Avoid Conflicts of Interest in Estate Planning

From deciding on your beneficiaries to appointing an administrator, and even thinking about tax implications, there’s a lot to think about when it comes to estate planning. It’s important to slow down and take the time to thoughtfully plan, so you’ll have peace of mind and avoid future conflicts. When you do, you might remember one important area that you didn’t think of right away: Conflicts of interest in estate planning.

What Is a Conflict of Interest?

A conflict of interest is when someone has competing interests or loyalties that could potentially influence their decision-making. A conflict of interest in estate planning is when someone’s personal interests compromise their ability to be neutral. This could be personal, financial, or other interests that affect their ability to act impartially and in the best interest of the estate’s beneficiaries.

Common Conflicts of Interest in Estate Planning

In estate planning, conflicts of interest can arise when the person drafting the will or managing the estate has a personal stake in the distribution of assets. The three most common conflicts of interest in this area of the law are as follows:

A Lawyer Represents Multiple Beneficiaries

If a lawyer represents multiple beneficiaries of the same estate, there is an obvious conflict of interest. After all, how can they represent everyone’s best interests if they conflict with each other? Here are a few examples of how this type of conflict of interest could cause problems:

• Differing Interpretations of a Will: Wills are rarely as detailed as they need to be. Its beneficiaries might have different interpretations, and the lawyer would face a conflict in advocating for an interpretation that benefits one client over the other.
• Unequal Benefits: Sometimes wills include a clause that allows one beneficiary to buy out another’s share of a particular asset at a pre-set price. If the current market value of the asset has increased significantly, the seller might feel cheated. A lawyer representing both parties would have a conflict of interest because what benefits one party would harm the other.

A Trustee Is a Beneficiary

Another common conflict of interest in estate planning is when the administrator of a trust, called the trustee, is also a beneficiary. They might be tempted to make decisions that disproportionately benefit themselves, which undermines the legal requirement of “fiduciary duty,” or fairness to all beneficiaries. Here are a few examples:

• Unfair Distributions: The trustee might make larger or more frequent distributions to themselves or allocate more valuable assets to themselves and less valuable assets to the other beneficiaries.
• Investment Choices: The trustee could invest the trust’s assets in a venture that they personally benefit from, but isn’t the best for the trust’s financial stability. Or, they could loan themselves assets with favorable terms.
• Unequal Access to Information: The trustee has access to information they can use to their advantage. They could liquidate certain assets at a good time or use information to optimize their own taxes while putting higher liabilities on the trust.

An Estate Executor Is a Beneficiary

Finally, if the executor of an estate or will is also a beneficiary, that’s also a conflict of interest in estate planning. The executor is responsible for administering the estate, which includes distributing assets according to the will, paying off debts, and handling any legal issues. That could lead to issues like:

• Property Sales: The executor could sell estate property, but then purchase it themselves at a below-market price.
• Payment of Debts and Expenses: The executor could prioritize paying off debts or expenses that benefit them personally, such as settling a debt they owed to the deceased.
• Timing of Distributions: The executor might delay distributions to other beneficiaries to retain control of the assets and potentially use them for their own benefit.
• Tax Decisions: The executor could reduce their own tax liability while increasing the tax burden on the estate or other beneficiaries.

Benefits of Avoiding Conflicts of Interest in Estate Planning

The examples above should give you a good idea of the main advantage of avoiding conflicts of interest in estate planning: avoiding family arguments. Unhappy beneficiaries can seek removal of the trustee, estate executor, or personal representative and even seek restitution, or repayment for improper dealings. Here are some other benefits of avoiding these types of conflicts:

Build Trust

When administrators act fairly, it builds trust among all parties that the estate is being managed and distributed according to the owner’s true intentions.

Reduce Legal Risks

Conflicts of interest can lead to legal disputes, challenges to the will or trust, and potentially even expensive lawsuits.

Ensure Compliance

Estate and trust administration must follow legal and ethical standards. Avoiding conflicts of interest can help protect beneficiaries from legal consequences.

Ultimately, avoiding conflicts of interest in estate planning helps prevent feelings of favoritism or unfair treatment—and that’s its most important benefit.

How to Avoid Conflicts of Interest

Addressing conflicts of interest in estate planning is important so the final wishes of the person creating the will or trust are honored and all beneficiaries are treated fairly. Here’s how to do it.

Have Detailed Documentation

The first step to avoid conflicts of interest is to make sure the estate or trust documents are clear, detailed, and specific to help prevent misunderstandings and differing interpretations. You should also document how decisions are made. This way if your decisions are questioned, you’ll be able to show you have a process for making them fairly.

Regularly Review the Estate

The administrator is responsible for making sure the estate plan or trust stays relevant and fair to all beneficiaries. Regularly review the estate plan or trust document and update it to reflect any changes in family dynamics, financial situations, or legal frameworks. Then, make sure you notify everyone involved so you can maintain transparency, build trust, and proactively address any potential conflicts.

Appoint an Independent Administrator

One of the best ways to prevent conflicts of interest in estate planning is to assign an independent administrator for the trust or estate. A neutral third party with no personal stake in the estate can help make sure the estate is administered objectively—and most of all, make the other beneficiaries feel that the process is fair.

If you’re the one creating a will or trust, you can appoint a neutral third party to administer it. If you’re a beneficiary, you can hire a lawyer to represent your interests. And if you’ve been appointed as the administrator of a will or trust, and you’re also a beneficiary, it may be smart to hire a lawyer to represent you in each role: One to administer the estate, and another to represent your interests as a beneficiary.

Find a Trusted Advisor to Guide Your Estate Planning

If you’ve been appointed as an administrator, beneficiary, or both, hiring your own representative can help prevent conflicts of interest in estate planning. A third-party representative advocates solely for your interests, so your concerns are addressed and your rights are protected. If you’re thinking about creating your own will or trust, a professional can help guide you on how to reduce future conflicts of interest.

Plan Ahead Legal can help you with both of these areas of estate planning, plus much more. Contact us today to create a plan that avoids conflicts of interest and keeps the whole family in harmony.