Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Should a beneficiary blindly trust the trustee?

SEFA, fedearl funding, government accountingIn a word – NO. But let’s look a little bit at the role of a trustee and the rights of a beneficiary.

A trust is a legal agreement between two parties, a settlor (or grantor) and a trustee. Trusts are used to manage and protect the assets of the settlor. Trusts are used to help pass and preserve wealth both efficiently and privately and can help reduce estate taxes. There are many different types of trusts which can be set up but we will not be discussing types of trusts at this time.

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The trustee manages and administers the trust. This includes distributing trust income and principal as allowed by the trust for the benefit of the beneficiaries of the trust. A trustee could be a professional, such as an attorney or trust bank, or a trustee could be an individual such as a son or daughter of the settlor/grantor. Whether a professional trustee or a family member, a trustee is a fiduciary who must act with reasonable care in administering the trust. All duties are performed according to the wishes of the settlor/grantor as outlined in the trust document.

A trustee can be held personally liable for a breach of his or her fiduciary duties. Those duties include a duty of loyalty, a duty of prudence, and subsidiary duties. The duty of loyalty requires the trustee to act solely in the interest of the beneficiaries. The duty of prudence requires the trustee to be held to an objective standard of care with regards to the management of the trust assets. Subsidiary duties include not comingling trust and personal assets, impartiality with respect to the beneficiaries and communication and accountability to the beneficiaries.

As a beneficiary of a trust, what rights do you have with regards to the trust and the trustee? Of course, as with everything, it depends on the type of trust and the type of beneficiary. A beneficiary of a revocable trust may have very few rights as the grantor can change the terms at any time. But the beneficiary of an irrevocable trust often has certain rights including:

  • The right to distributions as set forth in the trust document.
  • The right to be provided information regarding the trust and its administration.
  • The right to an accounting of the activity of the trust including a report of all income, expenses, and distributions of the trust.
  • The right to petition the court for removal of the trustee if the trustee is not acting in the best interest of the beneficiaries.

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If you are the beneficiary of a trust and something just doesn’t seem right about the information being provided (or not provided) to you, or you suspect the trustee is not acting in the best interest of the trustee or beneficiaries, consider contacting an attorney. The attorney will review the trust documents to determine what rights the beneficiaries have and advise you as to the best course of action to proceed. If assets or income of the trust are unaccounted for, expenses are questionable, or assets have been distributed outside the terms of the trust, the attorney may suggest hiring a forensic accountant to trace the trust activity. The forensic accountant can prepare a report and potentially testify in court regarding the activity of the trust. A court of law will then determine whether or not the trustee has breached his/her fiduciary duty. IT HAPPENS – more often than you would like to think.

 

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

Director, Litigation+Valuation Services

 

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