Anyone who plans a trust puts a great deal of care into appointing a responsible trustee who will take their duties seriously. Despite careful consideration, however, trustees sometimes neglect, disregard, or violate their responsibilities. Thankfully, Michigan law includes provisions that can help you and your loved ones protect your assets if and when a trustee doesn’t carry out their duties.
What Is a Trust?
A trust is a legally binding agreement that allows an individual to name a third-party (a trustee) to hold and distribute assets as part of executing an estate after you’ve passed away. There are two main types of trusts.
- Irrevocable Trust: You cannot alter an irrevocable trust once you’ve created and filed the proper paperwork, and you will relinquish control of all assets included after your death.The main reason people create irrevocable trusts is to avoid probate court proceedings over their last will and testament. Trusts allow individuals to pass their wealth and assets to their loved ones seamlessly without additional estate taxes or court fees. A trust can also help you protect your assets from your beneficiary’s creditors or prevent potential losses from a divorce. In some cases, individuals might also use a trust to donate to their favorite charities tax-free long after they’ve passed.
- Revocable Trust: You can alter or dissolve a revocable trust (sometimes called a “living trust”) while you are alive and of sound mind and body.People create revocable trusts to maintain control of their assets during their lives and avoid having their loved ones suffer through probate court after their passing. Revocable trusts are especially helpful for individuals who want a third-party to manage some or all of their property, business, or assets while they’re still alive. People also sometimes create revocable trusts to protect their assets from their beneficiary’s potential incompetency.
Both types of trusts help to keep your assets out of probate after your death, but revocable trusts are usually subject to estate taxes, while irrevocable trusts are usually not.
What Is the Role of a Trustee?
When you write your trust, you will appoint a trustee to pay your debts and distribute the remaining assets according to your instructions. Most of these duties are clerical in nature — such as filing taxes, gathering vital documents, and maintaining accurate and comprehensive records. In most instances, this type of work will be relatively straightforward, but a good trustee must have a solid system to keep everything organized.
A trustee is also responsible for making important decisions related to the trust and for keeping communication lines open, especially when it comes to distributing assets and considering the interests of each beneficiary. More complex duties include making investment decisions, funding sub-trusts, and transferring ownership or property and assets.
Here’s a list of common trustee responsibilities for even the most basic trust:
- Notify the beneficiaries
- Gather death certificates
- File the will with the local probate court
- Notify the Social Security Administration and Department of Health
- Get a Taxpayer Identification Number
- Review the trust investments
- Transfer property into your name
- Inventory and appraise the assets
- Pay off all debts
Michigan law states that all trustees are required to keep their private interests separate from their duties and prevents them from benefiting directly due to any personal biases. Simply put, trustees must be trustworthy.
What Is a Breach of Trust?
A breach of trust is any action or inaction that violates the terms of the trustee’s fiduciary duties.
If you feel that a trustee violated their fiduciary responsibility or failed to act in good faith causing you to suffer economic hardship, you might be able to recoup your losses by filing a breach of trust claim. However, proving a breach of trust can be difficult, so you should hire a skilled and experienced estate and trust attorney to prove that the trustee violated their fiduciary duty in one or more of the following ways.
- They engaged in a conflict of interest that benefited a non-beneficiary
- They engaged in trustee behavior that led to their personal benefit
- They engaged in actions that were not in the best interest of the beneficiary (or the majority of beneficiaries)
- They were influenced by outside parties
- They were negligent in their duties, and this negligence resulted in trust mismanagement
In the event of trust mismanagement and subsequent trustee removal, the next step is to determine and recover any financial losses that occurred as a result of the breach of trust. This can play out in three different ways:
- Constructive Trust: Court orders to recover property purchases.
- Surcharge: Court orders the trustee’s inheritance of fees reduced according to the amount they lost or mismanaged.
- Money Judgment: If a court cannot order the recovery of assets or funds from the trustee, it will order the trustee to compensate the trustee through their personal assets.
Removing a Trustee From a Trust
While trustees are required to abide by your instructions and act in your beneficiaries’ best interests, things don’t always work out that way. If a trustee fails to carry out their duties according to their instructions, you might be able to relieve them of their responsibilities through one of three methods.
1. Removal by the Trustor
Trust agreements usually contain provisions that allow the trustor to remove a trustee. With the proper provisions, the trustor can remove a trustee at any time and without having to provide any reason. To remove a trustee, the trustor will execute an amendment to the trust agreement.
2. Removal by a Co-Trustee or Beneficiary
While trustees are responsible for carrying out the trustors wishes, they’re often given some leeway in how they do so. However, if the trustee is failing to acknowledge or follow their fiduciary duty to follow the terms of the trust and act in good faith on behalf of the beneficiaries, they could be removed from their position by a fellow trustee or beneficiary.
Legal grounds for removal include:
- Violating the terms of the agreement
- Charging exorbitant fees
- Misappropriating or mismanaging trust assets
- Failure to communicate or cooperate with beneficiaries or trustees
- Mental incapacitation
- Financial insolvency
- Self-dealing or conflict of interest
If a fellow trustee has observed these behaviors, they should speak with the trustor (if still alive) about removing their co-trustee. If the trustor is deceased, the trustee should speak with the beneficiaries about removing their co-trustee — a majority vote is usually required. In most cases, the court will not remove a trustee against the trustor or beneficiaries’ wishes, so be prepared to provide detailed evidence of any of the allegations above when discussing removal.
3. Removal Through Probate Court
Beneficiaries and co-trustees are both eligible to file for the removal of a trustee. In addition, they can petition for compensation for any financial damages incurred. However, this process can be extremely complicated (especially if a trustee is also a beneficiary), so you will need to submit substantive evidence of wrongdoing (such as any of the actions listed in the section above) to prove that the trustee violated the trust agreement and/or their fiduciary duty.
The trustee removal process can be a lengthy endeavor involving depositions, subpoenas for records, and a full accounting of the trustee’s records and actions. In addition, the petitioner might need to hire financial experts or a skilled and experienced trust and estate attorney to prove sufficient cause for the removal of a trustee.
Contact the Law Offices of Kari Santana for Help With an Irresponsible Trustee
Whether you’re developing a trust and looking for legal help or a beneficiary who is worried about how a trustee is managing a loved one’s trust, the Law Offices of Kari Santana are here to help with all of your estate and trust needs. We understand that every situation is unique, which is why we are dedicated to providing the personal attention that each of our clients deserve to help them make the best legal decisions for themselves and their families.