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Trust Law/Level II · Do you need one?/2.3 Choosing the people/Lesson 7

When trustees fail: removal and remedies

What happens when a trustee breaks their promises, and how beneficiaries can fix it

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Ask the trustee in writing for the report current beneficiaries are generally owed at least annually (UTC §813); it costs nothing and often settles the question. Catch: if refused, a court can order an accounting (§1001).
  2. Check the document for a removal power held by a protector or the beneficiaries, then replace the trustee without court; interested persons can also agree terms by nonjudicial settlement agreement (UTC §111). Catch: the agreement must not violate a material purpose.
  3. Try mediation before litigation: cheaper than court and more likely to preserve family relationships. Catch: it may not suit suspected fraud, and deadlines keep running during talks unless the parties agree otherwise in writing.
  4. If court is needed, UTC §706 allows removal for serious breach, unfitness or persistent failure, and §1001 lets the court surcharge losses or reduce or deny pay. Catch: model §1005 gives one year after an adequately disclosing report, otherwise five years (Maine: six).

MaterialsA copy of your trust documentThe Uniform Trust Code, sections 706, 1001 and 1005 (free on the Uniform Law Commission website), or your own state’s versionA list of all assets currently in the trust

Wonder

  1. What exactly counts as a ‘serious breach’?
  2. How long do I have to complain before it is too late?
  3. Can a trustee be replaced without going to court?

Explore

  1. A trustee holds legal title to assets for the beneficiaries. When a trustee fails, beneficiaries in US states that follow the Uniform Trust Code (UTC) have several remedies. One is information: under UTC §813, current beneficiaries are generally entitled to a report at least annually showing trust property, receipts, payments and the trustee’s pay, and under UTC §1001 a court can order a trustee to account. An accounting is a detailed record of what came in, what went out and what the trust now holds. States vary, so check your own statute.
  2. Self-dealing is when a trustee deals with trust property for their own benefit, such as selling trust land to themselves. Under UTC §802, such a transaction is voidable by an affected beneficiary unless, for example, the trust terms authorized it, a court approved it, or the beneficiary consented after being told the material facts. A court can set it aside, or make the trustee give back the property or the profit. Transactions with the trustee’s spouse, children, siblings or parents are presumed to involve a conflict.
  3. If a trustee’s breach causes a loss, a court can order the trustee to repay it personally, often called a surcharge (UTC §1001 speaks of redressing a breach by paying money or restoring property). A trustee is not liable simply because investments fell in value; the question is whether the trustee acted imprudently or broke the trust’s terms. For example, a trustee who leaves almost everything in one risky asset without good reason, against the duty to diversify, may be liable for the resulting loss. Records of the trustee’s decisions are key evidence.
  4. Trustees are often paid. Under UTC §1001, a court can reduce or deny a trustee’s compensation as a remedy for breach of trust. It can also suspend the trustee, appoint a special fiduciary to take over the trust property, stop a threatened breach with an injunction, or order the trustee to carry out duties they have neglected. If you think fees are too high, compare them with what the trust document and the trustee’s fee schedule allow; a court decides whether pay is reasonable.
  5. Removal is the most drastic step. Under UTC §706, the settlor, a co-trustee or a beneficiary may ask a court to remove a trustee. The grounds are a serious breach of trust; lack of cooperation among co-trustees that substantially impairs administration; unfitness, unwillingness or persistent failure to administer effectively; or a substantial change of circumstances or a request by all qualified beneficiaries, if removal serves all beneficiaries and a suitable successor is available. Some trust documents also let a named person remove a trustee without court. Court cases can be slow and costly.
  6. Claims have deadlines. Under model UTC §1005, if a beneficiary was sent a report that adequately disclosed a possible breach and the time limit, they have one year to sue. Otherwise the limit is five years after the trustee leaves or dies, the beneficiary’s interest ends, or the trust ends, whichever is first. States change these periods; Maine, for example, uses six years. Mediation, where a neutral person helps the parties reach agreement, is often cheaper than court and can preserve relationships, though it may not suit every case, such as suspected fraud.

Key facts

  • Under Uniform Trust Code §706, a court may remove a trustee for serious breach, co-trustee non-cooperation, unfitness or persistent failure to administer effectively, or a substantial change of circumstances or request of all qualified beneficiaries.
  • Surcharge means a court orders a trustee to pay personally for losses caused by a breach of trust; a fall in value alone is not a breach.
  • Under Uniform Trust Code §802, a self-dealing transaction is voidable by an affected beneficiary unless, for example, the trust terms authorized it, a court approved it or the beneficiary consented.
  • Under model Uniform Trust Code §1005, a claim must be brought within one year of an adequately disclosing report, otherwise within five years of set events; states vary (Maine: six years).
  • Under Uniform Trust Code §1001, a court can order a trustee to account; §813 entitles current beneficiaries to a report at least annually unless the terms or state law provide otherwise.
  • Under Uniform Trust Code §1001, a court can reduce or deny a trustee’s compensation as a remedy for breach of trust.

Exercise nine, six, three, one

9CollectList up to 9 ways a trustee might fail, whether from your own experience, a family story or imagined examples, such as missing reports, poor investment choices, paying themselves too much or not answering questions.
6ClusterSort these 9 instances into 6 categories: financial loss, lack of transparency, conflict of interest, administrative neglect, interpersonal friction, and legal violations.
3DistillReduce the 6 categories to 3 core problems that would most harm the beneficiaries if left unaddressed.
1CrystallizeWrite 1 sentence matching each of those 3 problems to the remedy from this lesson that best fits it.

Fact check

Dates, figures and claims checked against the published sources listed below.

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