Litigation Against a Trustee & Legal Options
Beneficiaries and other interested parties who object to a trustee’s actions, their accountings, or their fees may be entitled to bring suit against the trustee. A court may have the authority to order the trustee to remedy the contested action or compensate the trust for losses caused by the trustee’s bad acts. In many instances, a court may also remove a trustee from their position.
Breach of Fiduciary Duty
A trustee has a fiduciary duty to act in the best interest of the trust. This means that a trustee has a duty of loyalty to the interests of the beneficiaries. A trustee has a duty to keep beneficiaries informed of the status and activity of the trust. Clear and frequent communication between the trustee and beneficiaries may also alleviate tensions, such as a beneficiary’s impatience to receive trust assets. Trustees also should keep thorough records of trust activity and their decisions regarding the trust in case litigation arises. Records of a beneficiary’s consent to a trustee’s decision may be relevant if the beneficiary later sues the trustee. Trustees must treat beneficiaries fairly (but not necessarily equally) and must adhere to the terms of the trust. A trustee should never favor their own interests above the trust and should manage trust assets in good faith. A trustee should never commingle their own assets with trust assets.
A large part of a trustee’s responsibility is prudently investing the trust funds. Most state laws contain prudent investment standards for trustees. The trust document may also provide rules as to how a trustee should invest and manage trust funds. If a trustee does not adhere to applicable prudent investment standards as set out in the trust and by law, they may be in danger of breaching their fiduciary duty.
Objections to Accountings
A trustee has a duty to prepare and distribute accountings, which are reports concerning the trust’s assets and debts. Accountings illustrate the flow of money in and out of the trust and the subsequent changes to trust assets. Most states require trustees to prepare accountings annually, although a trustee’s responsibilities under state law and the terms of the trust may differ. Beneficiaries are also entitled to make reasonable requests for accountings or object to accountings. A beneficiary or another interested party may object to an accounting if they believe that it is inaccurate or misleading, or does not meet state law or the trust’s requirements. State law or the trust document may also impose a deadline to object. Objections to accountings may reveal a breach of the trustee’s fiduciary duty, such as by exposing the mismanagement of trust assets.
Trustee Fee Disputes
Trustees are entitled to a reasonable fee for their work. State law or the trust document may define what a "reasonable" fee might be. If state law or the trust does not specify a trustee’s fee or gives the trustee some discretion, a trustee may base their fee on the time that they spend administering the trust. If the trustee is a professional (such as a lawyer or accountant) and uses their skills to administer the trust, they may be able to justify a higher fee.
If a beneficiary or another interested party believes that a trustee’s fee is unreasonable, they may be entitled to dispute the fee in court. Evidence that a trustee’s fee is unreasonable may include evidence that the trustee did not spend much time managing the trust in proportion to the fee, that the trust administration was not complicated, or that the trustee does not possess any special skills that benefit the trust. A trustee should keep detailed records of the time and effort spent managing the trust to help them defend against any fee disputes.
Removing a Trustee
If the trust document allows, beneficiaries may have the power to remove a trustee and appoint someone else. Depending on the language of the clause granting authority to the beneficiaries to remove a trustee, they may be able to remove the trustee without cause.
Some state laws allow beneficiaries to agree to remove a trustee for reasons unrelated to a trustee’s bad acts. However, most states allow beneficiaries or other interested parties to ask a court to remove a trustee for bad acts such as gross negligence, bad faith, or a breach of their fiduciary duty. In addition to removal, a court may order a trustee to remedy the breach or compensate the trust for losses that resulted from the breach.
