When you create a trust, you appoint a third party called a trustee to manage the assets in the trust on behalf of your designated beneficiary. Your appointed trustee must abide by the rules of the trust and act in the best interest of the beneficiaries.
Fiduciary duty requires the trustee to manage assets in the trust, complete tax returns and administer payments, as well. But what happens when the trustee breaches their fiduciary duty?
What is a breach of trust?
A breach of trust occurs when the trustee acts in a manner that causes harm to the trust’s assets or its beneficiaries. A trustee has many duties under the law, and failing to live up to these duties can compel the beneficiary to file a lawsuit against the trustee.
You can file a petition for a trustee’s removal if they have mismanaged a trust. However, the method for recovering any losses resulting from their breach of trust depends entirely on the circumstances of the case. Sometimes, the court may simply direct the trustee to return the assets to the trust. However, if the trustee spent trust funds on nonmaterial purchases like vacation trips, the judge may order them to pay back the funds in question using their personal assets.
Recovering damages after trust mismanagement
Here are three possible ways to recover damages resulting from a breach of trust:
- Constructive Trusts: When misappropriated trust funds are traced back to a property, the court may order a constructive trust to recover such assets.
- Surcharge: The court may direct a reduction in the amount of the trustee’s share of the inheritance or fees from the trust. This is usually meant to compensate for the amount lost due to their mismanagement.
- Money Judgments: When funds or actual assets cannot be recovered from the trustee, the court may issue a judgment against them. In this case, the trustee will be compelled to use personal assets to compensate the trust.
When a trustee violates the terms of a trust document, or when they fail to act as stipulated by the terms of the trust, legal action may be unavoidable.