When It's Time To Remove A Trustee
When It’s Time To Remove A Trustee?
Selecting a trustee is no small matter or easy choice. Make a bad selection and the results can be disastrous. While it seems obvious that the selection of a trustee is one of the most important choices a person setting up a trust will make, unfortunately most people breeze over the selection process regarding who will administer their trust when they are gone. While most people, may choose a spouse, relative, close friend, their broker or account, and everything works out, the real question is what happens if that choice turns out to be a bad one. Often beneficiaries can be left to deal with trustees who are abusing their position, breaching their fiduciary duties to the trust and otherwise, using trust assets for their own benefit. The step-mother that diverts trust assets for herself. The sibling who hoards trusts assets and uses them for their own personal use, or the accountant or broker who over charges the trust for services they didn’t perform.
If a beneficiary of a trust believes that the trustee is incompetent, hostile, dishonest or otherwise unable to fulfill the responsibilities of administering the trust according to the terms of the trust, the beneficiary should hire an attorney to petition the court to remove that trustee.
What is a Trustee?
A trustee is the person or Trust Company that the Grantor (the person who set up the trust), appoints in the trust agreement to hold legal title to property for the benefit of another person, commonly called the beneficiary. The trustee is required, according to the terms of the trust agreement to administer the assets of trust according to its terms. A Trustee has an assumed a legal duty (also called a fiduciary duty) to act in the best interests of the beneficiaries of the trust and to preserve the assets of the trust and not commit waste.
Sounds easy, but a lot can go wrong!
For example, there was the case of a family in Washington, D.C. that owned and operated a real estate business owned by their trust. The father who founded the real estate business passed away a number of years earlier. The mother, who had helped him over the years, continued running the business after her husband’s death. Over the years, the mother gradually begun to transfer control of the business to her adult children. Before the mother could transfer complete control of the business she developed dementia. At that point One of her adult sons took control of the trust. The other two children were frozen out of control.
With control of the trust, the son used the money from the trust to improve and invest in properties he would ultimately inherit under the terms of the trust. He also bought himself a house, a new car and started taking lavish cruises and vacations with his wife.
Our clients where the siblings of this trustee who engaged our firm for help. In order to put the case together the siblings first had to get evidence of the trustee’s misconduct. In this particular case, that evidence was copies of the trust’s check book which showed that the trustee was writing check from the trust directly to himself for his lavish living. This little piece of evidence gave us enough evidence to file a petition with the court to seek the trustee’s removal and have him replace with a corporate trustee. In addition, it also served as a basis for our clients to sue the trustee to recover monies that he had illegally taken from the trust.
Its important to point out that some trust agreements will contain language to provide safeguards in case of wrongdoing on the part of the trustee. That is, the trust agreement may contain examples of specific behavior that can serve as the basis for removal of a trustee. On the other hand, if your trust agreement does not specify how to remove a trustee, the courts have typically recognized three basic reasons to remove a trustee. One, if the trustee has committed a breach of their fiduciary duties of care over the assets, or loyalty to the beneficiaries, that may serve as a basis for removal of the trustee. For example if the trustee has failed to pay taxes associated with trust assets, if the trustee has stolen or misappropriated trust assets, or if the trustee has significantly deviated from the express instructions of the trust for its administration. Second, a trustee may be removed under some circumstances if the beneficiaries can show that the trustee is unfit to serve, is unwilling or persistently fails to act in the best interest of the beneficiaries and the trust. Third, a trustee may be removed if the beneficiaries can show that the circumstances surrounding the creation of the trust have significantly changed, or that all the beneficiaries desire the removal of the trustee. Under these circumstances courts will typically review the case and remove the trustee if the court determines that removal of the trustee is in the best interest of the beneficiaries and is consistent with the intent of the trust.
If you are the beneficiary of a trust, it’s important to monitor how the trustee of a trust is managing trust assets. Mismanagement of trust assets is a very common problem. Administration of trusts are typically private and it is incumbent on beneficiaries of a trust to request annual accountings of the administration of the trust and copies of the trust’s tax returns. Typically courts do not supervise the administration of a trust and there is very little oversight of the actions of the trustee to make sure that the trust is being administered properly. So it’s up to the beneficiary and their attorney to pay close attention, and make sure the trust is being administered and managed correctly.
A few final thoughts While the laws regarding removal of a trustee vary from state to state there are a couple of points that a person should cover before they seek the removal of a trustee.
- Make sure the review the entire trust agreement and any amendments thereto. In particular pay close attention to no contest provisions or other poison pill provisions that may have an affect on a beneficiaries rights under the trust agreement.
- Make sure to identify trust assets and any evidence that you believe that a trustee is mismanaging trust assets.
- Do your homework. Keep copies of trust accountings, tax returns, emails, etc that might serve as evidence in an action to remove a trustee.
- Trust your gut, if you believe that you need to remove the trustee of a trust, make sure to consult an attorney in your jurisdiction who specializes in trust litigation. Make sure your attorney reviews the materials you have complied and can give your guidance regarding the trustee’s duties under the trust agreement, the impact of any no contest provisions, and guidance on how the proper administration of the trust should look vs. your situation. Make sure to inquire of your attorney whether removal of the trustee is an appropriate next step.
For more information regarding How To Remove A Trustee From A Trust Contact Antonoplos & Associates, 202-803-5676.