When Can I Sue for the Mismanagement of a Trust?

This article provides a primer on lawsuits regarding the mismanagement of trust funds.

A trustee has significant authority over the management of a trust’s assets. Accordingly, the trustee has numerous legal duties and obligations. The law places a fiduciary duty on the trustee, meaning the trustee must place the interests of trust beneficiaries first when making decisions regarding the management of a trust. A trustee cannot commit fraud, fail to account for actions taken on behalf of the trust, and otherwise hide assets, inhibit distributions, or negligently manage trust assets.

Of course, a trustee cannot necessarily predict the market or future financial performance of assets. In addition, a trustee does have some leeway to make judgment calls regarding the distribution of trust assets. Still, a fiduciary duty is a high standard – the highest burden the law places on an individual – and a failure to act as a fiduciary can lead to legal action.

What Constitutes Mismanagement or a Breach of Fiduciary Duty?

Having a fiduciary duty obligates a trustee to administer the trust with an appropriate level of competence, care, honesty, and loyalty. A trustee is not merely holding property for someone else; the trustee has been entrusted with legal authority over assets that ultimately exist for the benefit of the trust’s beneficiaries. With that authority comes an obligation to understand the terms of the trust, safeguard trust property, keep appropriate records, pay legitimate expenses and obligations, make required distributions, and otherwise administer the trust in accordance with its terms.

Not every breach of fiduciary duty involves theft, fraud, or intentional wrongdoing. In many cases, a lawsuit alleging mismanagement or “malfeasance” arises because a trustee simply fails to perform the duties required of them. For example, a trustee may repeatedly fail to make required distributions, neglect to pay taxes or creditors, leave substantial amounts of money sitting uninvested, fail to maintain real estate owned by the trust, or allow months or years to pass without meaningfully administering the trust.

This type of mismanagement can be particularly common when a family member or other non-professional is appointed as trustee. Administering a trust can involve considerably more work than the person anticipated. A trustee may be responsible for managing investment and retirement accounts, maintaining or selling real estate, paying taxes and expenses, dealing with creditors, keeping detailed financial records, communicating with beneficiaries, and determining when and how distributions should be made. A well-intentioned trustee can quickly become overwhelmed by these responsibilities.

Good intentions, however, do not excuse a trustee from performing the duties imposed by the trust and Texas law. A trustee who lacks the time, knowledge, ability, or willingness to properly administer a trust can cause substantial harm even without intending to do so. Trust property may decline in value, taxes and other obligations may go unpaid, beneficiaries may be deprived of distributions to which they are entitled, and unnecessary expenses may accumulate. When a trustee’s inability to properly administer the trust threatens the interests of the beneficiaries, removal and replacement of the trustee may become necessary.

Other cases involve considerably more serious misconduct. A trustee may intentionally use trust property for personal purposes, transfer trust assets to themselves or family members, make unauthorized loans, sell property for less than its fair value, conceal assets or transactions from beneficiaries, or otherwise divert trust property for their own benefit. Conduct of this nature may constitute self-dealing or a breach of the trustee’s duty of loyalty and can expose the trustee to personal liability in addition to removal from office.

Conflicts of interest can also create grounds for court intervention. A trustee’s personal interests should not interfere with their obligation to administer the trust for the benefit of its beneficiaries. Problems can arise, for example, when a trustee participates on both sides of a transaction, purchases trust property personally, uses trust assets to benefit a business in which the trustee has an interest, or favors one beneficiary because doing so provides some personal advantage to the trustee.

In particularly serious cases, questions may also arise concerning whether the trustee obtained their position or exercised their authority as a result of fraud, coercion, or undue influence. These circumstances may justify not only removal of the trustee but additional claims seeking the return of improperly transferred property, recovery of financial losses, an accounting of trust assets, or other relief necessary to protect the trust and its beneficiaries.

Ultimately, removal of a trustee is intended to protect the trust rather than punish the person serving in that position. Whether the trustee is dishonest or simply incapable of performing the job, beneficiaries should not be required to watch trust assets disappear or deteriorate while an unsuitable trustee remains in control. When the trustee’s conduct materially interferes with the proper administration of the trust, beneficiaries may seek court intervention to remove the trustee, appoint an appropriate successor, and pursue any additional remedies necessary to protect or recover trust property.

How do I Know Mismanagement is Occurring?

n some cases, it can be difficult for beneficiaries to determine whether a trustee is properly performing the duties imposed by the trust. Unlike the trustee, beneficiaries generally do not have direct access to trust bank accounts, investment accounts, tax returns, contracts, or other financial records. As a result, beneficiaries may know that something does not seem right without having enough information to determine whether the trustee has actually breached a fiduciary duty.

Mismanagement does not always involve an obvious act such as stealing money from the trust. It may instead consist of unreasonable delays, poor investment decisions, excessive expenses, failure to preserve trust property, inadequate recordkeeping, or a failure to make distributions required by the trust. A trustee might also unnecessarily prolong the administration of a trust or engage in unnecessary transactions that increase the compensation or fees the trustee receives.

Certain warning signs should cause beneficiaries to look more closely at the trustee’s conduct. These may include unexplained delays in distributions, repeated refusals to answer reasonable questions, unusually large payments to the trustee, unexplained withdrawals or transfers, substantial declines in the value of trust property, transactions involving the trustee or the trustee’s family members, missing financial records, or explanations concerning trust finances that simply do not add up.

A lack of transparency can be particularly concerning. Trustees have obligations to keep appropriate records and provide beneficiaries with information concerning the administration of the trust under circumstances required by Texas law. A trustee who refuses to disclose basic information about trust property, provides incomplete or inconsistent financial information, or attempts to conceal transactions may give beneficiaries good reason to investigate further. Although poor communication alone does not necessarily establish misconduct, secrecy combined with unexplained financial activity can be an important warning sign.

A statutory accounting can often provide the information necessary to determine what has actually occurred. Depending upon the circumstances, an accounting may disclose the assets held by the trust, income received, expenses paid, distributions made, trustee compensation, property sold or transferred, and other transactions undertaken during the trustee’s administration. The supporting bank statements, investment records, receipts, invoices, and similar documents can then be examined to determine whether the trustee’s explanations are consistent with the trust’s actual financial activity.

Importantly, beneficiaries do not necessarily need to prove that a trustee is stealing before they begin asking questions. The purpose of obtaining information is often to determine whether misconduct has occurred in the first place. If a trustee refuses to provide information to which a beneficiary is legally entitled, or if the records reveal unexplained transactions or other irregularities, a trust litigation attorney can evaluate the trustee’s conduct and determine whether an accounting, removal proceeding, breach of fiduciary duty claim, or other legal action is appropriate.

What can I do if a Trustee is Mismanaging my Trust?

Legal action by trust beneficiaries may result in several outcomes, depending on the circumstances surrounding the litigation and the nature of the trustee’s misconduct.

Beneficiaries have multiple legal remedies in cases where a trustee is mismanaging a trust, including:

• Remove the Trustee. If a trustee has breached their fiduciary duties, mismanaged trust property, engaged in self-dealing, refused to provide required information, or otherwise demonstrated an inability or unwillingness to properly administer the trust, a beneficiary may ask the court to remove the trustee from office.
• Replace the Trustee. Removing a trustee does not necessarily end the trust. The court may appoint a successor trustee, or a successor may take office pursuant to the terms of the trust instrument. The new trustee can then assume control of the trust property and administer it in accordance with the trust’s terms and applicable Texas law.
• Obtain a Proper Distribution of the Trust. A trustee may improperly withhold or delay distributions that a beneficiary is entitled to receive. Through trust litigation, a beneficiary may seek an order compelling the trustee to make required distributions of money, real estate, investments, or other trust property.
• Recover Improperly Transferred or Misappropriated Trust Property. If a trustee has wrongfully transferred, spent, or taken trust assets, beneficiaries may seek recovery of the property or its value. Depending on the circumstances, the court may also impose equitable remedies designed to trace and recover property obtained through a breach of trust.
• Recover Damages Caused by the Trustee. A trustee whose misconduct causes financial losses to the trust may be held personally liable for those losses. For example, a trustee may be required to reimburse the trust for money lost through self-dealing, improper expenditures, unauthorized transfers, or other breaches of fiduciary duty.
• Demand an Accounting. Beneficiaries who do not have sufficient information concerning the trust’s assets or administration may seek an accounting showing the property held by the trust, income received, expenses paid, distributions made, and other transactions undertaken by the trustee.
• Terminate the Trust. In appropriate circumstances, a beneficiary may seek judicial termination of the trust and distribution of the remaining trust property. Whether termination is available will depend upon the terms and purposes of the trust, the circumstances surrounding its administration, and applicable Texas law.

The appropriate remedy will depend upon the nature and severity of the trustee’s conduct. In some trust disputes, obtaining information or compelling a distribution may resolve the problem. In more serious cases involving self-dealing, misappropriation, or substantial breaches of fiduciary duty, beneficiaries may seek several remedies simultaneously, including removal of the trustee, recovery of trust property, and an award of damages.

What does a Lawsuit Accomplish?

When dealing with a breach of fiduciary duty by a trustee, family members often find themselves on opposing sides of the dispute. A parent may have appointed one child to serve as trustee for the benefit of their siblings, or a surviving spouse may serve as trustee of a trust created for children from a prior marriage. When disagreements arise over distributions, investments, accountings, or the management of trust property, what begins as a financial dispute can quickly become a deeply personal family conflict.

These circumstances understandably cause many beneficiaries to question whether pursuing legal action is worth the financial and emotional cost. As with many issues in the law, there is no universal answer. Whether trust litigation is advisable depends upon the seriousness of the trustee’s conduct, the amount of money or property at stake, the strength of the available evidence, the likelihood of recovery, and the beneficiary’s ultimate goals.

Not every disagreement with a trustee justifies a lawsuit. A delayed distribution, poor communication, or disagreement over an investment decision may sometimes be resolved through a demand for information, a formal accounting, negotiation, or mediation. Litigation may be more appropriate, however, when there is evidence that a trustee has engaged in self-dealing, misappropriated trust assets, refused to make required distributions, concealed financial information, favored certain beneficiaries over others, or otherwise placed their own interests ahead of those of the trust and its beneficiaries.

The potential harm caused by doing nothing should also be considered. Trust assets can be spent, transferred, sold, or substantially diminished while beneficiaries wait for a family dispute to resolve itself. In serious cases, delaying legal action can make it considerably more difficult to trace transactions, preserve evidence, recover property, or obtain meaningful relief from the court. Protecting one’s rights under a trust does not necessarily mean that every dispute must proceed through trial, but beneficiaries should understand their legal options before deciding not to act.

An experienced trust litigation attorney can evaluate the trustee’s conduct, review the trust documents and available financial records, and help determine whether legal action is appropriate under the circumstances. The attorney can also identify potential alternatives to litigation and, when court intervention is necessary, recommend remedies designed to protect the beneficiary’s interests while taking into account the financial and personal consequences of a dispute among family members.

An Experienced Trust Litigation Attorney Can Help

If you are a victim of trust mismanagement, please contact us today to set up a time to review your case and go over your legal options.