Uncovering Trustee Lawbreaking: What To Look For

Trustees are legally responsible for managing a trust according to its terms. They hold a fiduciary duty to act in the best interests of the beneficiaries and manage assets accordingly. Trustees are often designated by the original owner of the assets, known as the trustor, but can also be assigned by a court. Trustees can be individuals, corporate entities, or a combination of both.

Trustees must adhere to the terms of the trust, and any breach of fiduciary duty can result in serious legal consequences. Common ways trustees fail to follow the trust include mismanagement of assets, failure to distribute assets as specified, lack of communication with beneficiaries, and conflicts of interest.

If a trustee is suspected of misconduct, mismanagement, or negligence, beneficiaries can take legal action to protect the trust's assets. This may include demanding an accounting, petitioning for trustee removal, filing a lawsuit for breach of trust, or seeking a surcharge or damages.

It is important for beneficiaries to be proactive and enforce their rights during trust administration to ensure they receive their rightful inheritance.

Misappropriation of trust funds

Examples of Misappropriation of Trust Funds

• Stealing trust funds or property
• Commingling personal assets with trust assets
• Borrowing trust funds or property for personal use
• Loaning trust assets to themselves or others
• Selling trust assets and keeping profits for themselves
• Paying themselves excessive trustee fees
• Overcharging the trust for third-party services

What to Do if You Suspect Misappropriation of Trust Funds

If you suspect a trustee is misappropriating trust funds, it is crucial to take prompt action. Here are the steps you can take:

• Speak with the trustee directly and raise your concerns.
• Gather accountings and financial documents related to the trust.
• Consult a probate or trust litigation attorney who can help you review the documents and determine if there is evidence of misconduct.
• File a petition in the probate court to address the misconduct. You may seek remedies such as removal of the trustee, recovery of lost assets, or imposition of a surcharge.
• Navigate the legal process with the help of your attorney, who can guide you through court proceedings and litigation.

Remember that taking quick action is essential to minimize damage to the trust and protect your inheritance.

Mismanagement of trust assets

• Poor investment choices
• Failure to maintain real estate
• Inappropriate use of funds
• Borrowing trust funds or property for personal use
• Selling trust assets and keeping profits for themselves
• Paying themselves excessive trustee fees
• Overcharging the trust for third-party services
• Lack of communication with beneficiaries
• Conflict of interest

If you suspect a trustee of mismanaging trust assets, it is important to take action as soon as possible. Here are some steps you can take:

• Speak with the trustee directly and raise your concerns.
• Gather accountings, financial documents, and any other relevant information.
• Consult with a probate or trust litigation attorney who can provide guidance and help you build a case.
• File a petition in probate court to address the misconduct and seek remedies such as trustee removal, recovery of losses, or imposition of a surcharge.
• If necessary, proceed with court litigation to hold the trustee accountable and protect your rights and interests.

Remember, it is crucial to act promptly and seek legal assistance to minimize damage to the trust and protect your inheritance.

Lack of communication with beneficiaries

If a trustee is not communicating with beneficiaries, there are several steps that can be taken to address the issue. Firstly, it is important to ensure that the trustee has your correct contact information and that you have communicated your request in a clear and non-hostile manner. If the trustee continues to be unresponsive, this may be a sign of negligence or an attempt to conceal misconduct.

In such cases, it is crucial to seek legal assistance. An attorney specialising in trust law can help enforce your rights as a beneficiary and compel the trustee to provide the information you are entitled to. They can also guide you through the process of initiating litigation and filing a petition with the court to force the trustee to respond.

Additionally, if the trustee's lack of communication has resulted in financial losses or other damages, your attorney may be able to hold them personally liable and seek compensation on your behalf.

To summarise, lack of communication from a trustee can be a red flag and should not be ignored. Taking prompt action, such as consulting an attorney, can help safeguard the trust, protect your inheritance, and ensure that the trustee upholds their fiduciary duties.

Conflict of interest

A conflict of interest for a trustee occurs when their personal interests conflict with their responsibilities to the trust's beneficiaries. Trustees have a fiduciary duty to manage the trust in the best interests of the beneficiaries and must place the interests of the beneficiaries above their own.

• Investing trust assets in a personal business venture
• Using trust funds to pay personal obligations or pay for their children's college tuition
• Selling trust property to themselves or a business entity they own for less than fair market value
• Using trust funds to purchase property from themselves for more than market value
• Hiring their own business to perform services for the trust
• Charging excessive trustee fees
• Gaining a business advantage through a financial transaction with a beneficiary
• Making investment decisions that benefit themselves and not the beneficiaries

To recognise a breach of a trustee's duties, look out for any actions that appear to benefit the trustee rather than the beneficiary. For example, a trustee who loans trust money to themselves for no interest or below the market rate is using the trust's property for personal gain and acting in adverse interest to the beneficiary.

If a trustee is found to have a conflict of interest, they can face legal consequences, including being sued for breach of fiduciary duty and self-dealing. Trustees may also be removed from their position and required to pay back any money they have mishandled.

To avoid conflicts of interest, trustees should be completely transparent about the transactions they conduct on behalf of the trust. While trustees are not prohibited from conducting transactions that benefit themselves, as long as the transaction also primarily benefits the trust, they must obtain pre-approval from the court or beneficiaries and keep the beneficiaries informed to ensure the transaction is legal.

Breach of fiduciary duty

A trustee has a fiduciary duty to manage the trust in the best interests of the beneficiaries. A breach of fiduciary duty can occur when a trustee fails to uphold this duty and can have serious legal consequences.

Common Breaches of Fiduciary Duty

• Misappropriation of assets: This occurs when a trustee takes or uses assets that do not belong to them, such as selling antiques from the trust and keeping the profits.
• Conflict of interest: Trustees should always put the interests of the beneficiaries first. A conflict of interest arises when a trustee puts their interests before those of the beneficiaries. For example, if a trustee chooses to invest in a startup company that they own, this would be considered self-dealing and a conflict of interest.
• Neglecting or mismanaging assets: Trustees have a duty to manage assets with a reasonable level of skill and care. Failing to do so, such as not paying property taxes or collecting rent on a house in the trust, constitutes a breach.
• Failure to distribute assets: Trustees are responsible for distributing assets according to the trust's instructions. Unjustly withholding assets or delaying distributions can negatively impact beneficiaries and is considered a breach.
• Lack of communication with beneficiaries: Trustees must keep beneficiaries informed about the status of the trust, including providing regular accountings and updates. A lack of communication can lead to mistrust and suspicion.
• Mismanagement of trust assets: Trustees are expected to act prudently and in the best interest of the beneficiaries, keeping accurate records and ensuring the preservation and responsible growth of assets. Poor investment choices or inappropriate use of funds can be considered a breach.

Consequences of Breach of Fiduciary Duty

When a trustee breaches their fiduciary duty, beneficiaries can take legal action to protect their interests. Some potential consequences for trustees include:

• Lawsuit: Beneficiaries can file a lawsuit against the trustee, seeking their removal and compensation for any losses incurred due to the breach.
• Civil and criminal penalties: Trustees may face civil penalties, such as financial restitution, and criminal penalties if their actions involve fraud, embezzlement, or other illegal activities.
• Personal liability: A trustee can be held personally liable if they act in bad faith or with gross negligence. This means they may be required to compensate beneficiaries for their losses.
• Removal: Beneficiaries can petition the court for the removal of a trustee who is not acting in their best interests.
• Surcharge or damages: Beneficiaries may seek a surcharge, a financial penalty imposed by the court to compensate for losses caused by the breach. They can also seek damages for any harm caused by the trustee's actions, including emotional distress and loss of expected inheritance.

Frequently asked questions