When our clients sign living trusts, they usually are thinking about how to simplify legal proceedings. Trusts normally are not subject to court supervision, which helps save court costs and fees. Without court oversight, though, the trustee of a trust can sometimes get crosswise with the beneficiaries. When things reach too difficult of an impasse, the beneficiaries might even get the court involved — often by filing a request for trustee removal.
Suppose that you are the beneficiary of a trust established by your parents, and that they have since died. Your sister was named as trustee, but she doesn’t return your phone calls, won’t explain what she’s doing and won’t give you a timeline for when to expect the trust to be wrapped up. Can you file a petition to have her removed and someone else appointed as trustee? Perhaps.
Grounds for trustee removal
Of course state laws differ, and trust documents differ even more. Some of the grounds for trustee removal always apply, and some might be waived by the trust itself. Facts are often subject to interpretation, making it even harder to generalize. That said, trustees usually have some minimum duties, and if they violate those duties a court will have the power to remove the trustee.
Some of the duties usually applicable to trustees include:
- Impartiality. When dealing with trust beneficiaries, a trustee must treat them impartially. If there are, say, four beneficiaries, the trustee may not favor one or two over the others. That can be particularly difficult when the trustee is one of the beneficiaries. It is also important to be impartial as between current and future beneficiaries.
- Loyalty. A trustee may not benefit from the trust (except that they may charge a reasonable fee). Self-dealing is generally prohibited.
- Prudent administration. Even though no court is overseeing the trust’s administration, the trustee is supposed to work toward getting the trust concluded. Trust assets need to be collected, and distributions should be made with reasonable speed. When faced with difficult problems, the trustee should figure out what needs to be done — and do it.
- Control and protect trust property. Assets belonging to the trust — or which should be part of the trust — need to be gathered under the trustee’s control. This might even require legal proceedings in some cases.
- Inform and report to beneficiaries. It’s not enough for a trustee to do a good job. He or she also has to keep beneficiaries advised about the administration of the trust.
Problems can arise in trust administration
If a trustee fails to adhere to those (and other) duties, a beneficiary may ask the appropriate court to remove him or her and name a new trustee. It is important for beneficiaries to realize, though, that trustee removal is not automatic. The court has the discretion to leave the trustee in place (perhaps with instructions about how to finalize the trust’s administration). That’s exactly what happened in a recent Arizona case.
Patricia Oakland left her estate in trust for the benefit of her four children: Catherine, Gary, James and Victoria. She named James as trustee, and he took over at her death. The four children met and began working together to divide her personal property and exchange information.
One problem that James had to deal with was that two Individual Retirement Accounts (IRAs) named the trust as beneficiary. One of those was easily divided into separate inherited IRAs. The custodian of the other IRA, though, refused to divide it and insisted on paying the entire balance to James as trustee. This resulted in a tax bill of about $50,000, which James had to pay from the trust.
As individual problems arose, James hired a lawyer to help deal with them. He asked the lawyer and his sister Victoria to try to resolve the disagreement with the IRA custodian, but that did not ultimately pan out.
James made a partial trust distribution early in the process, but held the net IRA proceeds and other assets in the trust’s name. As Catherine and Gary began to ask for distributions — and an accounting and schedule for resolution of the trust — friction in the family increased.
Another problem for the trustee was that one of the remaining assets was Patricia’s home in Phoenix. After getting an independent appraisal, James and Catherine decided to “buy” the house from the trust as part of their distributions. James set the price at 6% less than the appraised price, since there would be no real estate commission involved. James and Catherine paid an additional $120,000 into the trust, to be held as part of the other two siblings’ shares.
Court proceeding for trustee removal
When Catherine and Gary were unable to get details on the trust’s administration, or to find out when they could expect their final distributions, they filed a petition in Arizona asking for trustee removal. They alleged that James had violated a number of fiduciary duties, and that he should be replaced.
The Arizona probate court heard the trustee removal proceeding. Though the judge decided that James had violated a number of his fiduciary duties, he left James in charge — but ordered a number of adjustments in the trust’s accounts. For instance, the 6% reduction in the sales price for Patricia’s home was reversed, and ordered that he file further accounting information.
The Arizona Court of Appeals upheld the probate judge’s decision. The appellate court was quick to note that James could have been removed for the breaches found by the probate judge. The question, though, was not whether he could have been removed, but whether the probate court was required to grant the trustee removal petition. Though it seemed like a close call, the appellate court left James (and the probate court) in charge of concluding the trust. In the Matter of Oakland Living Trust, June 13, 2017.
What does this mean for your trust?
Patricia Oakland’s selection of her son James to be trustee was ultimately upheld. His actions as trustee, though challenged, were ultimately approved (with some minor adjustments). It would be easy to say that the outcome endorsed the trustee and his administration.
On the other hand, two different state courts had gotten involved (Gary and Catherine had filed an earlier action in Missouri). Legal fees were certainly substantial. Family relationships were fractured. Even though the trust was intact, trust among the siblings was lost.
What might have worked better? Perhaps an outside trustee might have helped keep family disputes at a minimum (though it would have been at some cost of its own, of course). Legal advice cautioning James about the risks of action might have reduced the friction. Complete disclosure about trust administration could perhaps have headed off disputes.