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When can I sue for the mismanagement of a trust?

by Russell Aldrich | December 23, 2019

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 breach of fiduciary duty?

Having a fiduciary duty obliges the trustee to manage trust assets with a certain amount of competence, along with honesty and integrity. Often, a lawsuit alleging mismanagement or “malfeasance” alleges that the trustee fails to make regular distributions of the trust assets. There might not be anything sinister going on: if a non-professional is tasked with paying creditors, taxes, and distributing assets in retirement accounts, stocks and real estate, it is easy to get overwhelmed. While good intentions go a long way, a trustee must still be able to handle the assigned duties given by the trust. If not, the person or entity named the trustee can be removed.

In some cases, a trustee may also illegally dispose or divert assets in the trust, for selfish reasons. Trustees can also be removed if there is a conflict of interest or undue influence has occurred.

How do I know mismanagement is occurring?

In some cases, it can be difficult to spot when a trustee is not following his or her prescribed duties under the trust. For example, a trustee may wish to prolong certain legal actions in order to recover more of a fee under the terms of a trust. However, beneficiaries are entitled to a full accounting of actions, and if a trustee attempts to hide actions, it is a good warning sign that all is not as it should be.

Delays, incomplete accounting, and vague answers to basic questions can all be warning signs that a trust is being mismanaged.

What does a lawsuit accomplish?

When dealing with a breach of fiduciary duty by a trustee, often family members can find themselves on opposing sides. This difficult situation can make one question if pursuing legal action is worth it. As with many issues in the law, whether or not legal action is beneficial depends on individual circumstances and the goals of the person bringing the claim.

Legal action by the beneficiaries may result in several outcomes, depending on the circumstances surrounding the litigation. A beneficiary may:

• Remove the trustee(s)

• Replace the trustee(s)

• Obtain a proper distribution of the trust

• Terminate the trust

Only an experienced estate administration attorney can help determine if legal action is appropriate under the circumstances.

An experienced attorney can help

The information in this article is only a brief introduction to trustee duties. Contact the Aldrich Law, PLLC, for further information and to discuss your circumstances and various legal options.

Keywords: Trusts, trust mismanagement, breach of fiduciary duty, diverting assets, removing a trustee.