Client Q&A: I am the beneficiary of a trust, and I’m afraid the Trustee is taking advantage of me. What can I do about it?
I am the beneficiary of a trust, and I’m afraid the Trustee is taking advantage of me. What can I do about it?
Disputes between trustees and beneficiaries are sadly common, and have been happening since trusts were first invented thousands of years ago.
As far as we know, trust law was first formalized in ancient Rome, and the "modern" common-law trust developed in medieval England. Trusts have in common that the trustee, not the beneficiaries, "owns" the property held in trust, but over time many different protections—both judge-created equitable rules (which go all the way back to the Middle Ages), and more recent statutes—have been put in place to prevent abuses. Because of this long history, what follows can only be an overview of a very complicated and sometimes inconsistent field of law.
Duties of a Trustee.
As a general matter a trustee owes a "duty of utmost loyalty and full disclosure" to beneficiaries. This standard requires a trustee to act only in the interests of the beneficiaries and to do everything reasonably possible to advance their interests with regard to the trust. These duties include the following:
- The duty to take possession of the trust's assets, and to pursue claims against third parties who may have misused assets intended for the trust. (This can arise if the trustee of a trust created by will suspects the executor of mismanaging funds, for example.) The trustee must also segregate trust assets, ensure they are maintained properly (in the case of valuable specific items like works of art, buildings, etc.) and defend lawsuits against the trust.
- The duty to take only reasonable compensation for work performed. A trustee may not engage in self-dealing or benefit in any other way from his or her control over the trust. Self-dealing includes transactions with the trustee's family members or other associates.
- The duty to treat beneficiaries impartially. This can arise if the trust has more than one beneficiary with different needs or different future expectations, such as where one beneficiary has a much longer life expectation than another.
- The duty not to delegate responsibility for the trust to others.
- The duty to maintain accounts and respond to beneficiaries' reasonable requests for information. The trust should have its own TIN and pay taxes as a separate entity.
- The duty to manage investments pursuant to a prudent investor standard. (A fiduciary such as a bank or trust company is held to an even higher standard.) This rule can allow a trustee to disregard the directions of the trust's creator if it appears to be in the beneficiary's interest, such as by diversifying assets or changing the amount of distributions to protect the trust fund.
Remedies Against a Trustee.
Beneficiaries who suspect that a trustee has engaged in misconduct have a variety of possible remedies available to them. Actions at law—such as negligence in performance of duties—can almost never be brought against a trustee, but common-law equitable causes of action and statutory causes of action are more than adequate to fill the gap.
The initial remedy that can be pursued against a trustee is an action for an accounting—if the trustee has failed to make a satisfactory accounting of his or her management and disposal of trust assets or has not responded to reasonable demands for information, a beneficiary can bring an action to compel an accounting. This can provide information necessary to assert other causes of action.
Beneficiaries can also bring suit to remove a trustee from his or her position. In theory, this remedy can be obtained for any misconduct by the trustee, or even if hostility between the trustee and the beneficiaries impedes the functioning of the trust, but proof of some wrongdoing by the trustee is usually required—a strictly personal conflict is not enough to justify removal.
Trustees are also subject to actions for breach of fiduciary duty. This action can be brought to hold trustees liable for financial injuries to the trust arising from his breach of the duties set forth above. Beneficiaries can receive a number of different remedies, including return of misappropriated property to the trust, lost profits for the trust and even punitive damages for gross breaches of duty.
Finally, in many situations statutory remedies—such as payment of attorneys' fees—can be available against a trustee in breach of his or her duty.
Other Issues Arising in Disputes with Trustees.
In New York, the statute of limitations against trustees is generally three years (for breach of fiduciary duty) but the statute of limitations is often tolled, or does not begin to run at all, while the trustee is in office. This means that a beneficiary can assert claims for wrongdoing that happened many years ago.
As well as proceeding against the trustee, beneficiaries may also be able to sue third parties who aided or abetted the trustee in his or her breach of fiduciary duty. This cause of action is often asserted against the trustee's lawyers or financial advisers, as well as third parties who may have profited from the trustee's self-dealing or other misconduct. If the trustee's attorneys were paid by the trust, they can sometimes be sued for malpractice by the beneficiaries, on the theory that the beneficiaries are the "real" owners of the trust and hence were the attorney's "real" clients.
In addition to the general duties of a testamentary trustee set forth above, there are many other kinds of trustees—corporate trustees, court-appointed trustees for incompetent persons, etc.—and many different kinds of trusts.
Because of the complexity of trust law, and the many rules and provisions applicable to different kinds of trusts in different jurisdictions, it is very important for a beneficiary who has serious concerns about a trustee's management or honesty to consult an experienced lawyer. Schlam Stone & Dolan has litigated many breach of fiduciary duty and other claims against trustees, and can provide more specific information about the law applicable to a particular dispute with a trustee.