Conflict of Interest Renders Trustee Liable For Losses

In 1992, Ann Mark created two irrevocable trusts for the benefit of her three children. An attorney, Jared Scharf, assumed the role of trustee of these trusts in 1997. In 2008, Scharf established three separate trusts – one for each child – from assets held by one of these trusts.

In April 2010, Scharf invested $450,000 from these individual trusts in a hedge fund established by his son, Adam, and two other individuals although Adam was an attorney with no formal training or license relating to securities. It was agreed that Adam’s group would receive a 2% management fee plus 20% of all profits generated.

After an initial gain in 2010, Scharf increased the investments from these trusts to $2,200,000, notifying the trust beneficiaries of his intent in February 2011. Unfortunately, the hedge fund in which they were invested lost $869,702. Ironically, over the four year period in which a portion of the trusts were in the hedge fund, the overall value of the trusts increased from $20,260,499 to $36,127,538.

Notwithstanding, Ann Mark and her three children filed an action in the Superior Court of New Jersey seeking the removal of Scharf and requesting that he be held liable for the losses incurred by the trust investments in the hedge fund.

Although the trial court dismissed the relief sought, the Appellate Division reversed and held Scharf liable, stating there was a clear conflict of interest in his investments of trust assets with his son. The Appellate Division noted that he could have avoided liability if there was exculpatory language in the trusts. As same was absent, Scharf was deemed liable for the losses.

This case, in the Matter of May 1, 1992 Mark Family Trust, No. A-4056-14, 2016 N.J. Super. Unpub. LEXIS 1848 (App. Div. Aug. 5, 2016) highlights the importance of careful trustee selection as well as thorough trust drafting. Although it appears that Scharf may have done a commendable job in the overall investments, the trust beneficiaries and their mother were clearly dissatisfied with his strategy. Prior to selecting a trustee, an individual who wishes to establish a trust should vet any potential trustee to make sure that his or her investment strategy is acceptable. In addition, the powers of the trustee should be thoughtfully set forth to insure proper authority, but prudent limitations as well.

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