When your loved one set up a trust and named you as a beneficiary, they undoubtedly hoped to take care of your needs and make your life easier, not create additional stress. But the reality of trusts, particularly dynasty trusts that last for multiple generations, is that sometimes a successor trustee becomes uncooperative or problematic, resulting in a heavy burden on the beneficiaries who may not know how to remedy the situation.
As a beneficiary of a trust, it's important to understand your rights, and the practical steps you can take to resolve disputes with an uncooperative trustee.
Your rights as a beneficiary come from two sources - the terms of the trust, and your state laws. Thirty-one states and the District of Columbia have adopted a model law known as the Uniform Trust Code (UTC), which delineates the duties that a trustee owes to the beneficiaries.
Under Article 8 of the UTC, a trustee is required to:
- Administer the trust in good faith.
- Administer the trust solely in the interests of the beneficiaries (also called the “duty of loyalty”). Some examples are not engaging in self-dealing or participating in transactions where the trustee has a conflict of interest.
- Make decisions that are impartial and do not favor one beneficiary over another.
- Administer the trust as a prudent person would by exercising reasonable care, skill and caution.
- Incur reasonable expenses in the process of administration.
- Use any special skills or expertise that the trustee possesses in the process of administration (for example, preparing the trust's tax returns if the trustee is a CPA).
- Exercise reasonable care in delegating the duties of the trustee to others (for example, hiring a real estate agent to list property for sale).
- Take reasonable steps to take control of and protect the trust property.
- Keep adequate records of the trust administration.
- Defend claims against the trust, and enforce claims that the trust has against others.
- Keep beneficiaries reasonably informed about the administration of the trust, and promptly respond to beneficiaries' requests for information related to trust administration, including providing a copy of the trust and periodic accountings of trust assets.
Some of the most common reasons that beneficiaries would want to remove a trustee include:
|EXAMPLES OF REASONS TO REMOVE TRUSTEE|
Change of circumstance
|Lack of communication from the trustee||Beneficiaries have moved, putting them far away from the original trustee|
|Failure to make distributions to beneficiaries||Asset allocation within the trust has become too complex for current trustee to handle|
|Mismanagement of trust assets, including unreasonable investment decisions||Individual trustee is in declining mental or physical health and is no longer able to administer the trust in the same way they could previously|
|Using trust assets for the trustee's own benefit (self-dealing)|
|Conflict of interest|
Some reasons to remove the trustee, as shown in the chart above, require a bad act (malfeasance), on the part of the trustee. When these acts occur, a trustee has breached their duty to the beneficiaries. However, sometimes conflict with the trustee can arise not because the trustee has done anything wrong, but simply because there has been a significant change of circumstances. For example, if the trustee is a bank that is acquired by another institution and becomes unable to provide the same level of service to the beneficiaries, the beneficiaries might want to replace the trustee with another institution that is able to provide better service.
Before any actions are taken, it is best if all of the trust beneficiaries are in agreement as to the problem and the potential solution. Whether there has been malfeasance by the trustee, or whether there has simply been a change of circumstances, the course of action is to talk to the trustee about the beneficiaries' concerns, propose a solution, or ask the trustee to voluntarily step aside. Of course, this may not be possible if the trustee is uncommunicative or has failed to provide the beneficiaries with a way to contact them.
If an agreement cannot be reached with the trustee, there may still be other steps the beneficiaries can take to avoid going to court, if all of the beneficiaries agree. Here are some steps that beneficiaries can take to replace the trustee and avoid litigation:
- Read the terms of the trust. The trust itself may provide a remedy for beneficiaries to remove a trustee.
- Use alternative dispute resolution. Hiring a professional mediator who will listen to all parties and help negotiate a resolution can save the time, money, and the hassle of going to court. Mediation requires the cooperation of the trustee, which may not always be possible.
- Decant the trust. If the terms of the trust allow, the beneficiaries can agree to create a new trust and “pour over” the existing trust assets into the new trust, with a new trustee. You should consult with an experienced trust attorney on whether this is allowable under the terms of your trust and under the relevant state laws.
Sometimes, despite the best efforts of the beneficiaries, litigation is unavoidable. If you find yourself in a situation where you must go to court to enforce your rights as a beneficiary or to remove an uncooperative trustee, you should consult with an attorney experienced with this type of litigation.
If you're in a jurisdiction that has adopted the UTC, you may be able to take advantage of the “no-fault” provisions to remove the trustee. A court can remove a trustee without cause if:
- There has been a “substantial change of circumstances,” OR removal of the trustee is requested by all qualified beneficiaries of the trust; and
- The court finds that removal best serves the interests of all beneficiaries and is not inconsistent with a material purpose of the trust; and
- A suitable successor trustee is available.
A beneficiary can seek to replace an uncooperative trustee at any time. However, if you are seeking monetary damages from a trustee based on malfeasance in administering trust assets, there are important time limits on how long you have to make your claim. Usually, a beneficiary has only one year to bring a claim, starting from the point at which the beneficiary knew, or should have known, about the existence of the claim.
As the saying goes, an ounce of prevention is worth a pound of cure. If you are in the process of creating a trust, work with an experienced attorney who understands how to create a trust with enough protections and flexibility to enable the beneficiaries to resolve any potential issues that may arise with future successor trustees.