The Ultimate Guide to Trustee Malfeasance

If you are the beneficiary of a trust, you already know how much power is wielded by a trustee. In many cases, trustees have privileged access to, and authority over, vast reserves of valuable assets intended to benefit the beneficiaries. In a perfect world, trustees would never abuse their position for personal gain, but it is an unfortunately an all-too-common occurrence. 

 

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What is trustee malfeasance?

Trustee malfeasance refers to any type of negligent, self-serving, erroneous, or retaliatory conduct committed by the trustee of a trust resulting in harm to trust assets or beneficiaries. Trustee malfeasance is a broad term encompassing many different types of offenses, both intentional and unintentional. Trustees have many duties under the law, and failing to live up to any of them may provide grounds for a beneficiary to file a lawsuit.

 

What is the definition of trustee?

A trustee is a person nominated by a trust document to manage assets owned by another person or their estate. A trustee must always act in the best interests of the trust beneficiaries. A trust differs from a will in that it takes effect as soon as it is legally created, rather than upon the creator’s death. The trust’s creator is sometimes called a grantor, settlor, donor, trustor, or trustmaker. A trust’s creator often appoints themselves as their own trustee during their lifetime, and names a successor trustee to take over after they have passed. 

 

What are trustee duties?

First and foremost, the trustee has a duty of loyalty. As a fiduciary, a trustee is legally bound to base all decisions regarding trust assets on what is best for the beneficiaries and in keeping with the stated or implied intentions of the trust document. 

The trustee must also avoid and disclose any conflicts of interest. A common example is when a trustee sells trust assets to themselves. The fact that the trustee is acting as both the seller and the buyer makes such a transaction inherently suspect, even (and especially) when the trustee is also a beneficiary. 

To help prevent conflicts of interest, trustees also have a duty to keep trust assets separate from personal assets. Any commingling or misappropriation of trust funds is strictly prohibited by law, though it remains alarmingly common. Trustees must always keep a detailed and transparent accounting of all transactions relating to trust assets, so if the trustee is unforthcoming with documentation, or the numbers don’t seem to add up, it may be a warning sign that a trustee is diverting funds to personal accounts or for personal expenses. 

The duty of disclosure is another responsibility of the trustee. A trustee must always keep all parties to the trust reasonably informed of any action taken with regard to trust assets. Failure to formally notify beneficiaries of any material transactions may constitute a breach by the trustee.

Furthermore, the trustee must always act with impartiality, meaning they must never favor one beneficiary over another, or make any decision that benefits one beneficiary to the detriment of another.  Violations happen most frequently when the trustee also is a beneficiary.

And while a trustee may need to employ professionals in certain circumstances, trustees generally have a duty not to delegate. This means that the trustee may not transfer their responsibilities or task someone else with performing the duties that the trust’s creator specifically intended for them to carry out personally, and if they do they will still be responsible for their agent’s acts. 

Finally, a trustee has a duty to pursue on behalf and defend claims against the trust. This basically means that the trustee must proactively work to preserve trust assets in any legal proceedings, whether that means suing someone who damaged the trust, or defending the trust against a bogus claim. 

Trustees have a lot of power and authority, and the law holds them to a very high standard, the highest standard, a fiduciary standard. It doesn’t take much for a trustee to breach their duties, either willfully or through sheer neglect and lack of understanding or ability. If you are a beneficiary who suspects a trustee of mismanaging a trust in any way, you need to consult a trust lawyer immediately to ensure your ability to redress their wrongs is not lost.

 

Is malfeasance the same as trustee fraud?

Trustee fraud is a type of trustee malfeasance, but one that involves an intentional bad act by the trustee to benefit him/herself to the detriment of the trust beneficiaries or third parties.

A classic example of trustee fraud is called a “sham trust,” in which a trust is set up only to serve the interests of the trust’s creator, with no real intention to transfer ownership of funds or property. The trust itself may be a legitimate legal document, but if the intent in creating it was somehow underhanded or self-serving, it may still qualify as trustee fraud.  Sham trusts are sometimes made to create the appearance of distributing funds which are actually being stowed away in personal accounts or otherwise hidden for illicit purposes. The trust’s creator is usually attempting to evade tax authorities, creditors, or even an ex-spouse to whom they owe alimony. If you suspect that a trust was set up for any such reason, contact a trust litigation lawyer right away. 

 

What is trustee negligence?

Trustee negligence occurs when a trustee fails to perform their fiduciary duties due to a lack of ability, attention or care. As opposed to more malicious and self-serving offenses like embezzlement or fraud, trustee negligence often happens simply because a trustee was unawre of the duties of a trustee, or got too busy or distracted to meet their obligations in a timely and appropriate fashion. Just because a trustee didn’t mean to do anything wrong doesn’t mean that beneficiaries haven’t been damaged all the same. 

A common example of trustee negligence is that of a trustee who fails to properly invest trust assets or fails to insure them. Or perhaps the trustee didn’t reinvest dividends as instructed by the trust. Maybe they failed to take appropriate legal or financial action when trust assets were threatened in some way. In all these cases, no management is as bad as mismanagement, and courts tend to agree. 

 

Can you sue a trustee?

Yes. You can sue a trustee for a wide variety of reasons, and often win, because a trustee is held to a very high legal standard of behavior and accountability. We win these cases all the time at RMO, because things like embezzlement, fraud, and commingling funds are sadly common. But also because trustees so often fail to keep full and accurate records, or simply fail to perform their administrative duties in an effective manner. Courts place a lot of trust in trustees. It’s right there in the name. So they tend to look unfavorably upon trustees who are abusing or otherwise failing to live up to the duties of their privileged position.

 

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When can I sue for trustee negligence, mismanagement, fraud, or malfeasance?

There are multiple situations that can be cause for suing a trustee:

  • When a trustee is embezzling or stealing trust assets.
  • When a trustee is personally benefiting from trust assets via fraud, forgery, or coercion.
  • When a trustee is commingling personal funds with trust funds. 
  • When a trustee is making suspicious or inappropriate gifts from the trust.
  • When a trustee is subjecting trust assets to unreasonable risk.
  • When a trustee is not complying with the trust’s accounting, investing, or distribution directives
  • When a trustee is no longer of sound enough mind or ability to perform their duties.

 

What is the penalty for trustee malfeasance?

Several outcomes are possible, depending on the circumstances of your case. But generally, the offending trustee will be removed, replaced and surcharged (or forced to pay for the losses they caused). The damaged beneficiary will then obtain a proper distribution of the trust — either out of trust funds, or in some cases, the personal funds of the losing trustee. In cases where the trust is deemed illegitimate altogether, due to the circumstances precipitating its formation, the trust may simply be terminated.

It’s worth noting that some trustees will try to delay and drag out legal proceedings in hopes of intimidating the challenging beneficiary with the threat of increased legal fees should the court order them paid by the losing party. But in our experience, trustees who engage in this behavior are just as likely to get fatigued and capitulate.

 

When should I contact a trust litigation attorney?

The simple answer is that you should contact a trust litigation attorney the moment something about a trustee, their decision-making, or their accounting just doesn’t feel right. Especially if you’ve asked to see supporting documents which they continually refuse to provide. In any case, realize that you have nothing to lose by getting a professional opinion. At RMO, our initial consultation is free.

 

Do I need a trust litigation attorney near me?

We recommend finding an experienced trust litigation attorney familiar with the county probate court in the county where the trust is being administered. For example, if the trust’s creator lived in Miami, Florida, yet the trust is being administered in Los Angeles, California, we recommend working with a trust litigation lawyer in Los Angeles. A Los Angeles probate lawyer will generally be more familiar with the Los Angeles Superior Court Probate Division, versus an out of state attorney.

 

Have questions? Schedule a free consultation.

hello@rmolawyers.com or (424) 320-9444

 

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Read More

The Guide to Family Trust Embezzlement and Stealing

The Winner’s Guide to Family Trust Contests

The Trustee’s Guide to Breach of Trust Claims

The California Guide to Removing an Executor of Estate 

The California Guide to Elder Financial Abuse

 

About RMO, LLP

RMO LLP serves clients in Los Angeles, Santa Monica, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri and Kansas. Our founder, Scott E. Rahn has been named “Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call (424) 320-9444 or visit: https://rmolawyers.com