WANT TO GET IN TOUCH? CALL US AT 916-400-4516 OR SEND US A QUICK MESSAGE HERE.

What to Do When a Trustee is Mismanaging a Trust

What can you do when a trustee is mismanaging a family trust?

All living trusts require the designation of a successor trustee to assume control over the assets in the trust when the trust’s creator dies or is no longer able to manage the trust. In fact, this is the entire point of a trust: to bypass probate by instead directly appointing someone to manage the estate owner’s assets.

Trustees should be trustworthy and competent. And most are. But occasionally, trustees intentionally or mistakenly make decisions that are not in the best interests of a trust’s beneficiaries. Mismanagement of a trust can result in beneficiaries losing some, most, or even all of their intended inheritance. So when mismanagement is noticed, it’s important to act quickly. But what counts as mismanagement, and what should you do if you believe a trust is being mismanaged?

What constitutes mismanagement of a trust?

As noted above, a trustee needs to be trustworthy (and thus, honest), and competent. So any actions by the trustee that indicates that either of these qualities is lacking can constitute mismanagement. Thus, if the trustee intentionally does something that goes against the interests of the beneficiaries, or erroneously does something that shows they simply do not have the judgment necessary to administer the trust, then an allegation of mismanagement can be made.

Some examples of mismanagement include:

  • Transferring money to non-beneficiaries. Some real-life instances of this occurring include trustees who have used trust money to support relatives or significant others not named in the trust, or using trust funds to pay their own debts.
  • Making decisions that favor persons not named as beneficiaries of the trust.
  • ‘Borrowing’ the money for any purpose, including investment, without the permission of beneficiaries.
  • Reaping financial benefits from trust funds without informing the beneficiaries.
  • Making decisions based upon personal interests, instead of the interests of the beneficiaries as a whole.
  • Making decisions that disproportionately favor one or more beneficiaries, compared to the group as a whole.
  • Failing to act to protect the trust and the beneficiaries of the trust.

Trustees are legally obligated to keep records of all transactions involving the trust, so when the above occurs, there will either be (a) evidence that they have acted duplicitously or erroneously, or (b) a conspicuous lack of evidence that will on its own indicate to the courts that something is awry.

How to remove a trustee who has been mismanaging a trust.

Once you have evidence that you believe indicates that a trustee is mismanaging a trust, through intentional malfeasance or lack of capacity, your immediate goal needs to be to prevent any further damage to the trust and the interests of the trust’s beneficiaries.

Before you do anything, it may be advisable to directly approach the trustee about your concerns, especially if you believe their actions are due to intentional malfeasance. It may well be that they are simply overwhelmed by their responsibilities, or have other life events going on that are impacting their ability to fulfill their obligations. In this case, they may be amicable to surrendering their role as trustee to someone else.

If this doesn’t resolve the issue, take the time to carefully read over the entirety of the trust document. Some trusts include provisions that allow beneficiaries to remove and replace trustees. If this is the case, then the trustee can be removed and replaced without a court’s intervention.

If both these avenues fail, then legal action will be necessary. It should be noted that only trust beneficiaries have the necessary standing to file a trustee removal petition. At this point, it will be necessary to hire an experienced estate attorney, as the legal process of having a trustee forcibly removed can be a complicated and time-consuming one, especially in situations where multiple family members are involved and have opposing views.

If you would like more information on what to do in cases of trust mismanagement, or would like to schedule a consultation with us, you can contact us through our site’s contact page, or call us directly at (916) 400-4516.