Trusts are an increasingly popular estate planning tool; depending on the type of trust, they offer benefits ranging from probate avoidance to asset protection to tax advantages. The administration of a trust is carried out by the trustee, who is a fiduciary obligated to act in the best interests of the trust's beneficiaries. But what happens when a trustee breaches their fiduciary duty and acts improperly?
Fortunately for beneficiaries, there is recourse if a trustee fails to fulfill their duties, intentionally or otherwise. Let’s take a look at what constitutes an actionable breach of fiduciary duty in trust administration, and what options may exist for beneficiaries whose rights have been affected.
What is a breach of fiduciary duty?
Michigan, like most states, takes trustee misconduct very seriously. But not every situation in which a beneficiary is unhappy with a trustee’s actions constitutes misconduct. For example, a beneficiary may want a distribution from the trust when that would not be appropriate under the terms of the trust document. The trustee would not be guilty of “failing to act in the beneficiary’s best interest” simply for abiding by the terms of the trust.
Other actions (or failures to act), however, are clear breaches of duty, including:
Misappropriation or Embezzlement
Obviously, misappropriation or embezzlement of trust assets is a serious breach of fiduciary duty. Embezzlement may look like “borrowing” funds from trust accounts, even with the intention to repay it; using trust funds to pay the trustee’s personal expenses; or outright stealing trust assets, to name a few examples.
Conflict of Interest
A conflict of interest arises when a trustee's personal interests are at odds with those of the trust's beneficiaries. An example would be if the trustee owned a real estate management company that was bidding to provide services to properties owned by the trust. Having a conflict of interest is not misconduct itself, but creates the potential for trustee misconduct such as self-dealing.
A conflict of interest may be permissible so long as it is disclosed to the beneficiaries and managed properly, such as by having an independent third party award the contract for property management in the example above.
Self-Dealing
Self-dealing occurs when a trustee acts in their own interest rather than in the best interest of the trust’s beneficiaries. The trustee takes advantage of their position for personal gain, typically to the detriment of the beneficiaries.
An example would be a trustee selling a piece of land owned by the trust, with a fair market value of $200,000, to their spouse for $50,000. The trust document does not authorize such a transaction, and the trustee acted without getting permission from beneficiaries or seeking other offers. The trustee’s action violates their duty of loyalty to the beneficiaries.
Failure to Follow Trust Terms
The trustee’s role is to give effect to the trust creator’s (grantor’s) wishes as expressed in the trust document. Failure to do that may call for taking action against the trustee. For instance, if the trust calls for the trustee to make annual distributions to the beneficiaries, the beneficiaries may ask the court to compel the trustee to act in accordance with the terms of the trust.
In general, any action that violates the trustee’s basic duties could be considered improper action. These duties include the duty of loyalty; the duty of prudence; the duty to act impartially; and the duty to keep beneficiaries informed, providing regular trust accountings and reports.
Secrecy
One of the most common complaints occurs when a trustee fails to keep beneficiaries fully informed, such as annual reports of financial activity such as receipts, disbursements, and fees incurred. Often, trustees fail to even report a listing of trust assets to beneficiaries, which is usually required at the start of trust administration. Secrecy is often a red flag for larger problems, or sometimes is an indication of a trustee who is not aware of his or her fiduciary obligations.
What recourse is there for a breach of trust?
When a trustee has acted improperly, or is believed to have done so, the first thing to do is to consult a trust attorney to discuss whether there has been an actionable breach and, if so, what options exist to address it.
The appropriate response to a breach by a trustee depends on the nature of the breach. Some available remedies include:
Compelling Performance
If the issue is the trustee’s failure to take a certain action, like providing beneficiaries with accountings and reports of trust information, the court may order the trustee to do what is required of them—in other words, to compel them to perform their duties.
Injunction
If the trustee has taken an action that they should not have, the court may enjoin them from committing similar breaches in the future. If they violate the court’s injunction, stronger consequences may be called for.
Payment of Damages
If the trustee’s improper action resulted in a loss to the trust or beneficiaries, the trustee could be ordered to pay damages, restoring the trust’s value and/or disgorging any profit the trustee realized as a result of their misconduct. For example, Barron, Rosenberg, Mayoras & Mayoras recently won a $2 million damages award on behalf of a trust beneficiary.
Removal of Trustee
If the trustee’s misconduct was especially serious or makes them unfit to continue serving in their role, they can be removed from their position and replaced with another trustee.
Depending on the circumstances, multiple remedies could be imposed, such as removal of a trustee who embezzled and ordering them to pay damages restoring the trust’s value.
Work with an Experienced Estate and Trust Attorney
The knowledgeable estate and trust administration attorneys at Barron, Rosenberg, Mayoras & Mayoras advise trust beneficiaries concerned about potential trustee misconduct, as well as trustees who have been accused of misconduct.
Schedule a consultation today by calling (248) 641-7070 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.