If you are a beneficiary of a trust it can be frustrating when the successor trustee (the person who took over after the original trustees, likely your parents), is not doing his or her job. You may be left wondering whether you are being ripped off. Your frustration may lead to serious questions about what a trustee can do and what a trustee cannot do. As a trust attorney for over 10 years, I have witnessed countless instances of trustee misbehavior. This post will help you understand some of the more important things a trustee must never do, so you can take appropriate action if you are being ripped off.
A trustee cannot breach a fiduciary duty and cannot ignore the terms of the trust. Sounds simple, right? Well it is a little more complicated.
A trustee’s main job is to read the trust document and do what it says. In accomplishing this task the trustee acts as a fiduciary for the beneficiaries of the trust. This means that he or she has special obligations (known as fiduciary duties) owed to the beneficiaries of the trust. This post will not cover all of the fiduciary duties, but you can check out a previous article I wrote on the topic to learn more about the fiduciary duties of a trustee. So if you are dissatisfied with how a trustee is acting, and wonder: can he/she do that? The answer is (1) what does the trust say?; and (2) is the trustee violating any fiduciary duty owed to a beneficiary? If the answer to either question is, “yes,” then the trustee cannot do it.
How a Trust Works.
To understand what a trustee cannot do, you need to understand how a trust works. A living trust is created by one or more people (usually a married couple). The person or people who create the trust is/are called the “settlor” or the “settlors” or the “grantor” or “grantors.” In most living trusts, the settlors are also the initial trustees. The trust will name someone called a “successor trustee” to manage the trust after all of the settlors die. If there is only one successor trustee, he or she is the “sole trustee” and if there are several joint trustees they are called “co-trustees.” As mentioned above, the successor trustee’s job is to manage the trust and do what it says. If the trust says to sell all real property and divide the assets, then the trustee must sell all of the trust property and divide the trust assets. Any person who receives a trust asset is known as trust beneficiary. There are several kinds of trust beneficiaries. Which kind you are, will determine your rights.
Primary beneficiaries are the class of beneficiaries the trust was made to serve. In a revocable living trust, the primary beneficiaries are usually the settlors themselves. A remainder beneficiary is a beneficiary whop receives a percentage of the trust estate after all debts and specific gifts are made. Usually, a married couple’s children are the reminder beneficiaries of their trust. An income beneficiary is a person named in an irrevocable trust (or a revocable living trust that has become irrevocable on death) who has the right to receive any income generated by the trust. A contingent beneficiary is a beneficiary but only if a certain set of conditions are met. For example, if your parents named you as the reminder beneficiary, but named your Aunts and Uncles as contingent beneficiaries, then your Aunts and Uncles would have no right to inherit any of the trust assets unless you died before your parents died.
What constitutes mismanagement or breach of fiduciary duty?
There are a lot of fiduciary duties a trustee must follow. The main ones are the duties of loyalty, impartiality, and prudent investment. Although all trustees are held to the same fiduciary duties, whether a particular trustee has violated these duties or not really depends on the facts of each case and the type of successor trustee at issue. For example, if the successor trustee is relatively unskilled and inexperienced, then he or she will be held to a lower standard than a highly skilled or very experienced trustee. A corporate trustee would be held to the highest standard because it is acting as a professional fiduciary and so its skill is presumed to be of the highest degree.
Despite the leeway given to different types of trustees and their relative skill sets, there are some really common ways a trustee engages in mismanagement or breach of fiduciary duty. Failing to properly invest trust funds, engaging in self-dealing, and preferring one beneficiary over the other beneficiaries are the more frequent ways a trustee mismanages a trust or breaches his or her fiduciary duty. Here are some red flags:
- The trustee hires his wife’s accounting firm at a higher rate than other accounting firms.
- The trustee uses his or her real estate company to sell trust property and charges his or her usual commission.
- The trustee gives money to some beneficiaries and not others.
- The trustee refuses to rent a vacant condo owned by the trust.
- The trustee refuses to invest cash assets for significant periods of time.
- The trustee makes unnecessary repairs to a home owned by the trust.
- The trustee refused to obtain proper appraisals prior to selling real property.
- The trustee keeps some beneficiaries in the dark and not others; or refuses to provide any information at all to anyone.
If you are reading these examples and think: Oh, my God, I am being ripped off. Push the pause button. As I stated previously everything regarding trust mismanagement or breach of fiduciary duty is based on particular facts. So not every case or example will result in the same outcomes. For example, I recently has a call in my office with a potential client who assured me that he was being ripped off. He said that the trustee was regularly paying his brothers and sisters chunks of money but refusing to pay him. On its face, I said “It could be a breach of fiduciary duty, but I will need to read the trust first.” When I read the trust I discovered why. The trust said that the brothers and sisters could receive their inheritance outright and immediately. But said that my potential client’s share would be held in trust and distributed as the trustee saw fit. Apparently the potential client had a prior drug problem and his parents did not want him to get his inheritance outright, so the trustee was holding onto it to be sure he was not relapsing.
What happens if a trustee does not obey the trust instrument?
If a trustee does not obey the trust document then he or she is in breach of trust and can be sued. If the trust says “Give Tom $100” and the trustee refused to give Tom $100, or gives Tom $1,000, then the trustee is liable for a breach of trust. But it is a little more nuanced. Sometimes a trust is not clearly written, which is why when engaging in the estate planning process you need to be sure to hire an experienced attorney. If a trust is not clear as to what the trustee should or should not do, then it is possible that the trustee is not engaging in any kind of breach of the trust. Luckily, there is a process in the probate court to settle such ambiguities. If a trust is unclear, then the trustee should file a petition for instruction (which is a petition for he probate court to authoritatively interpret the trust document and tell the trustee what it means or what he or she should do).
Evaluating a breach of trust takes a little care and the setting aside of personal feelings. If you think that a trustee is ripping you off because he or she is not obeying the trust, then consider a few things.
Mandatory vs Discretionary Provisions
Every trust has mandatory and discretionary provisions. Mandatory provisions are things that trustee must do. If the trustee does not do that thing then it is a breach of trust. You can tell if a provision is mandatory or not if words like “shall” or “must” appear in the language. Take the example above, if the trust says: “The trustee shall give Tom $100.” Then the trustee has no choice, it is a mandatory provision and the trustee must give Tom $100. If the Trustee refuses to give Tom $100 or overpays Tom and gives $1,000 then it would be a breach of trust.
Discretionary provisions are terms in the trust that the trustee can do, but does not have to do. You can tell if a provision is discretionary if words like “may” or “can” appear in the language. In the example above, if the trust says: “The trustee can give Tom $100.” Then the trustee can give Tom $100 but does not have to. So, if the Trustee refused to give Tom $100 or gives Tom $100 then it is perfectly fine, because it is discretionary, totally up to the trustee.
Sometimes a beneficiary thinks that just because they are named in the trust they get something. Not true. The trustee is only obligated to perform the mandatory provisions of the trust, everything else is discretionary.
Sometimes a trust is ambiguous as to what the trustee must do. If you think that the trustee is not following the terms of the trust, ask yourself whether the terms are actually as clear as you think they are. If a trust says: “The trustee can give Tom $100” we already know that the trustee has discretion to give Tom $100. But what if the Trustee gives Tom $50 and not $100? Is that a breach? On the one had the trust appears to give a binary option: either give Tom $100 or don’t give him anything. On the other hand, the trust could be read to give the trustee authority to give Tom up to $100 so anything $100 and below is fair game, but anything over $100 is a breach. So how do you know for sure? Well, aside from the fact that fighting over $50 would be silly, a beneficiary or a trustee can file a petition for instruction to the probate court, a discussed above, and let the court decide what the proper interpretation is.
Dealing with a breach of Trust.
Once you have examined the trust, you know that the provision you are concerned about is mandatory, and not ambiguous, and you know that the trustee did not do the thing required in the trust, then what do you do? Well, you can try to resolve the issue, which is almost always going to be your best option. Or you can file a petition in the probate court for a breach of trust and ask the court to order the trustee to do the thing that the trust says to do, or else pay you damages. If you are going to file a lawsuit, talk to an experienced trust attorney and figure out what your rights are and how you and protect them.
What happens if a trustee refuses to give a beneficiary money?
If a trustee refuses to give a beneficiary money then you need to look at the terms of the trust. Whether a particular beneficiary is entitled to a distribution or not depends on the terms of the trust and the type of beneficiary at issue. If the beneficiary is merely a contingent beneficiary, then he or she is not entitled to any distribution until the contingency is satisfied. If it is not satisfied, then the beneficiary is never entitled to a distribution. If the beneficiary is a specific beneficiary, then he or she is only entitled to the specific thing identified in the trust (either cash of a particular piece of property) and (usually) only after all debts of the estate are paid. If the beneficiary is a remainder beneficiary, then that beneficiary is not entitled to a distribution until the debts are paid and the specific gifts are made, and only after the final accounting is completed. If the beneficiary is an income beneficiary, then that beneficiary only gets a distribution when the trust produced income. If the trust produced no income, then the trustee is not obligated to distribute anything to the income beneficiary. So there are a lot of things to consider just on the type of beneficiary at issue.
Here are some other considerations. Are the terms of distribution mandatory or discretionary? Is the beneficiary entitled to an outright distribution, or does the trust say to hold onto the money until a certain age or event? For example, let’s take a look at our friend Tom. Suppose the trust says: Give Tom $100 on his 25th Birthday.” Well if Tom is 24, then he does not get anything until he turns 25.
Now, if you are sure that the trust says that you are entitled to a distribution and the trustee still refuses to distribute the trust funds to you, then it is a breach of trust and you can sue the trustee.
What if the trustee won’t tell me what is going on?
One of the duties of a trustee is to keep the beneficiaries informed about what is going on. How the trustee does that, and how detailed really depend on the circumstances and the terms of the trust. Some trusts do away with formal accountings so a trustee may not be obligated to provide you with nay formal information. But even in situations where there an accounting is waived by the trust, a trustee must keep the beneficiaries reasonably informed. That does not mean you should expect a report from the trustee every day, or even every quarter. At a minimum the trustee should inform the beneficiaries about any major occurrences in the trust. Sales or property, terms of sales, expenses of the trust, whether the trustee is taking compensation, etc., are all things a beneficiary could be entitled to. If you are not getting the type of information you expect then you can try to file a petition for an accounting, which will require the trustee to provide the court (and you) with information about what is going on.
Can a trustee sell estate property without all beneficiaries approving?
Generally, a trustee is allowed to sell trust assets without beneficiary permission, unless the trust says otherwise. Unless the trust itself restricts the sale of a property owned by the trust, then the trustee is allowed to sell it consistent with his or her fiduciary duties. That means so long as the sale is not a breach of the trustee’s duty of loyalty, prudent investment, impartiality, and is not self-dealing in any way, the trustee can sell trust property without the beneficiary’s consent.
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Disclaimer: Nothing in this post is intended to be legal advice to you or for a particular situation. Nothing in this post creates any kind of lawyer-client relationship. All legal cases are different and typically hinge on a complex set of varied factors. Therefore, if you think that your legal rights have been violated or that you need an attorney, please do not rely solely on this post for your legal advice. Consult with a lawyer immediately, or call Atlantis Law at (951) 228-9979 to see if we can represent you.