Bad Trustee Case Study: Keystone Uncovers Trustee Misconduct
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Overview: Bad Trustees Control the Family Trust and Leave Him Out of It
A parent’s passing is an inevitable part of life, but it’s never easy. Our client lost his mother in 2013 and his father seven years later in 2020. On top of this, he’d soon be dealing with bad trustees who ignore his inquiries regarding his portion of the inheritance. Making matters worse, it was his own sisters who were engaging in trustee misconduct at his expense.
As is common for parents with multiple offspring, each of the three siblings were to receive an equal amount from the family trust.
His two sisters were named as successor co-trustees of the trust, meaning that they had the responsibility of managing and administering the trust. It was a part of their trustee responsibilities to provide a trust accounting to beneficiaries and to treat each beneficiary equally. Regrettably, the client’s sisters were completely delinquent in their duties as co-trustees and were freely using trust property at the expense of the trust, and by extension, Keystone’s client.
Use of the Trust’s Resources Without Accounting for Its Assets
Despite making countless inquiries about the family trust to his sisters, they were not providing him with the information he needed to understand his beneficiary share, nor providing any distribution of trust assets while making use of those assets themselves.
The co-trustees’ misdeeds, however, did not end there. One sister was living on a trust property without paying rent, whereas the other sister was claiming that she owned a second property once listed in the trust, but the circumstances by which she acquired it were highly suspicious. In essence, both sisters were ignoring the provisions of trust and were using trust assets to enhance their personal lives.
Over time, our client grew increasingly frustrated with his sisters’ selfishness. He reached out to Keystone to help him put their reckless abuse of trust assets to an end.
Trust Administration Is Required by Law
Unfortunately, our client’s siblings stepped into the role of successor co-trustees without taking the time to understand the significant duties that accompany the role. The fiduciary duty of trustees to treat beneficiaries equally isn’t based on the honor system; it’s detailed in the California Probate Code, along with the other fiduciary duties of a trustee.
While it’s true that the job of a trustee comes with substantial power and access, the other side of the coin is that trustees are bound to placing the beneficiaries’ collective best interests first. In other words, it doesn’t matter if the trustees are also beneficiaries; they cannot prioritize certain beneficiaries over others.
It’s perfectly acceptable to turn down your appointment as trustee or step down from the role to avoid the responsibilities that come with it, but it is not acceptable to continue serving as successor trustees if you plan to ignore the laws associated with the position. In fact, doing so can cause you to become the subject of a fiduciary misconduct claim.
The Importance of Fiduciary Duties
Not only is fulfilling the duties of trust administration required by law, but when the sisters agreed to become co-trustees, they implicitly accepted the duty to carry out this process. There are strict requirements for the steps involved in trust administration; completing them out of order or missing a step can not only derail the entire process, but it can lead to the trust being financially harmed.
Being a fiduciary gives you access to the trust and its assets, which means that there is a lot of potential for this access to be abused. The reason trustees must abide by certain standards is to ensure that they remain loyal and prudent, and don’t squander trust assets before they’ve had a chance to distribute them to trust beneficiaries in accordance with the terms of the trust.
Had the sisters upheld their fiduciary duties as co-trustees and not engaged in multiple acts of trustee misconduct, they could have enjoyed their equal share of the trust and even taken a trustee fee. But by completely ignoring their statutory responsibilities, the sisters made themselves liable to legal action.
Keystone Takes Action to Remedy Trustee Misconduct
Our first move was an effort to avoid litigation entirely. We called the co-trustees directly in hopes of convincing them to begin the trust administration process. We wanted to give them the benefit of the doubt in case they simply weren’t aware of what they had to do. Many times, a call from our attorneys will spur bad trustees into action.
Unfortunately, that didn’t happen, and the sisters continued to sit on their hands, ignoring their duties as successor co-trustees.
At this point, we had to take a more aggressive approach. We filed a petition with the probate court to compel the co-trustees to provide our client with an accounting of trust assets and distribution of trust assets. We also were seeking reimbursement for the rental income lost by the trust due to one of the co-trustee’s occupancy of a trust property.
We also sought for the property that the other co-trustee claimed she owned to be returned to the trust because of the suspicious circumstances surrounding its transfer.
How Did the Co-Trustee Come to “Own” the Property?
Although the sister claimed ownership of the second property listed in the trust, the situation by which she acquired it seemed questionable from the start. We had to uncover the truth about how she came to take ownership of the property, which had belonged to her late father as an asset of the trust.
First, we subpoenaed documents from the estate planning attorney who had drafted the suspicious property transfer deed. We then subpoenaed multiple medical providers, who demonstrated that the sister had a direct hand in procuring the suspicious deed while her father was debilitated.
Keystone then took the sister’s deposition, which revealed critical information that benefited our client. Not only did she divulge that she lied during the discovery process, but she admitted that she was in fact biased against her brother.
This new information left us in a prime position for our upcoming mediation.
Results: Keystone Secures a Substantial Settlement for Its Client
At mediation, our and our client’s extensive work paid off. Now that we were able to prove that one of the client’s sisters had fraudulently persuaded her father to transfer ownership of his property to her, and that she was biased against our client from the beginning, we had a clear advantage.
Going into mediation with significant leverage led to a multifaceted settlement that our client was more than satisfied with. It included:
- Payment for our client’s interest in the wrongfully taken property
- The other co-trustee’s payment of back-rent
- Payment of a portion of our client’s attorney fees by the trust
- The trustees waiving their own trustee fees
There was also one more thing we secured for our client: a contractually binding process for the timely and orderly administration of the trust. This ensured that our client would receive the inheritance he was entitled to without additional delay.
Trust administration is designed to ensure that the instructions provided by the trust are executed fairly, and thanks to our client’s decision to pursue this matter and the litigation strategy implemented, the bad trustees were contractually bound to make it happen.
Key Takeaway: Don’t Sit Idly by While Misconduct Takes Place
Our client watched his sisters take advantage of the family trust for long enough. He knew what they were doing wasn’t right and that he wasn’t being given his fair share of the trust. Instead of letting this bad trustee behavior persist for the long run, he contacted Keystone to help him set things right, as his sisters were engaging in trustee misconduct.
As our client’s sisters demonstrated, some people default to selfishness when they’re given a hint of power. But in the end, we helped our client not only obtain more than his equal share of his parents’ trust but ensure that the trust would be administered properly from that point forward, despite the bad actors involved.
While you may think it best to let the trustee do the job they were appointed to do, it is never a good idea to sit idly by while they do it. If you have an interest in a trust, you should be playing an active role in administration to ensure that it is progressing smoothly.
If this is challenging for you, or if you suspect the trustee to be engaged in misconduct, Keystone can keep tabs on administration for you and bring legal action as necessary. Learn how we can help by scheduling a free consultation with one of our attorneys.