Case Study: Trustee Treats Trust Like Personal Piggy Bank for Years Without Being Caught, Misappropriating Millions in Assets
It is an unfortunate reality that the older people get, the more vulnerable to elder financial abuse they become. Physical abuse can often be detected, as there may be visible signs of it, such as a sharp decline in weight or bruises on the body. Financial abuse, on the other hand, is more insidious, making it harder to uncover. In fact, since financial abuse is frequently perpetrated against elders who have mentally declined and cannot adequately manage their finances on their own, it is possible the abuse won’t be detected until after the elder’s death, if at all.
In this breach of trust case, it was clear the elderly surviving settlor of the trust was being financially abused by the older of his two sons, who was acting as a de facto trustee of the trust despite not having been appointed to the role. The consequences of the abuse were significant: Not only was Keystone’s client, the surviving settlor’s only other child, disinherited from the trust in contravention of the settlors’ original wishes, but the trust also suffered substantial financial losses.
Luckily, the client discovered some suspicious trust-related transactions and took legal action before it was too late. He sought the help of Keystone’s probate attorneys to protect both his future inheritance and the surviving settlor’s interest in the trust. Keystone proceeded to investigate the matter, but neither its attorneys nor its client were prepared for the shocking acts of trustee misconduct they would find.
Breach of Trust Case Overview
In this breach of trust case, Keystone’s client and his brother had been named as equal beneficiaries of their parents’ trust. Each brother was designated a 50% share of the trust, but the trust did not provide for them to be distributed their shares until after the death of the surviving settlor, the client’s father.
Included in the trust were certain safeguards to ensure the surviving settlor would not deplete the assets held by the trust following the death of the first settlor. Most notably, there was a safeguard calling for a lucrative income-producing property to remain in the trust for the lifetimes of not only the settlors but also of the settlors’ children. The settlors saw this property as a family heirloom and wished for it to be preserved for future generations. Unfortunately, the brother of Keystone’s client had a different plan in mind for this property.
Client’s Suspicions Are Aroused When Several of the Trust’s Real Properties Are Encumbered With Unnecessary Loans
Despite the fact that the property in question was producing substantial income and was almost paid off, the brother of the client took out millions of dollars of loans against the property in an effort to circumvent the safeguard that precluded the principal of that property from being disposed of during the lifetimes of both the settlors and their children. He also unnecessarily encumbered two of the other real properties held by the trust with significant loans.
Keystone’s client eventually noticed the new loans being taken out against the trust’s real properties and knew immediately that something was amiss. He could not comprehend why his father would encumber these properties with huge loans when neither the properties nor his father were in financial trouble. The client sought Keystone’s help to get to the bottom of the situation.
Keystone’s initial look into the case concerned them enough to urge the client to retain counsel. It was apparent that not only were trust assets being mismanaged but that the client’s brother was perpetrating elder abuse against the client’s father by isolating him from family, among numerous other things.
“I needed urgent help to stop a family member from committing emotional and financial elder abuse against my father,” says Keystone’s client. “Our wonderful team at Keystone took immediate action to stop the financial abuse before the estate became bankrupt.”
Keystone Sues for Breach of Fiduciary Duty, Giving Rise to Illuminating Revelations About the Trust
Keystone was forced to sue the client’s father, who was officially the trustee of the trust, for breach of fiduciary duty relating to improper management of trust assets; however, during the father’s deposition, two things became evident: 1) The father was having capacity issues, and 2) It was the client’s brother who was pulling the strings, not the father. The father could not even answer basic questions about the trust or the loans he had allegedly taken out against the trust’s real properties. More than once, he stated that his older son was in charge of the trust.
Following the illuminating deposition, the father immediately resigned as trustee, relinquishing his position to the client’s brother. Keystone then filed an amended petition naming the client’s brother since it was obvious he was acting as the de facto trustee even before being formally appointed to the position. Around this same time, it came to light that Keystone’s client had been disinherited from the trust by three amendments the surviving settlor executed several years prior. The client’s disinheritance directly contrasted the settlors’ original wishes to leave both their sons equal shares of the trust. It seemed likely to Keystone that its client’s disinheritance was a consequence of his brother’s undue influence on his father. To protect the father’s estate and trust from further harm, Keystone also filed for a conservatorship over the father’s estate.
Tables Turn in Litigation After Trustee Has Allegedly Violent Confrontation With Settlor and His Caretakers
The tables turned in litigation when the client’s brother was accused of physically assaulting one of the father’s caretakers. Thus far, the father had been siding with the client’s brother; now, the father, who was still under the influence of his son, was rethinking his loyalties. Both he and his caretakers took out restraining orders against the client’s brother. Additionally, the client’s father executed a document that removed the client’s brother as trustee and replaced him with a private professional fiduciary (a neutral third party).
Succumbing to pressure, the client’s brother agreed to attend mediation with Keystone’s client, his father and their respective attorneys, but an accurate surcharge amount could not be arrived at without a trust accounting, which had been requested from the client’s brother on multiple occasions to no avail. Nevertheless, all the parties agreed to the terms of the settlement, which included a procedure for determining at trial the amount of the surcharge to be levied against the client’s brother once he prepared an accounting.
Keystone Manages to Settle Matter at Mediation Despite Other Parties to the Trust Having Died
Sadly, the client’s brother died shortly after mediation, which meant that his 50% share of the trust would go to his children, who were not parties to the settlement agreement and claimed to not be bound by the terms of the agreement. The client’s father also regrettably died not long after the brother’s death, complicating matters even further.
With two of the parties to the trust deceased, Keystone attended a second mediation at which this breach of trust case was finally resolved. The details of this second mediation are set forth later in this case study.
What Constitutes Breach of Trust?
A trustee is a fiduciary, which means they are at all times obligated to act only in the best interests of trust beneficiaries when making decisions or taking actions related to the trust.
For a breach of trust to occur, the trustee must have acted in a way that was in violation of their fiduciary duty and/or the provisions of the trust. Usually, a breach of trust has the effect of providing inequitable benefits to the trustee or certain beneficiaries over the other parties.
In What Contexts Can Breach of Trust Cases Arise?
Keystone’s trust and estate attorneys frequently litigate breach of trust cases. Here are some of the contexts in which they see them arise:
- The trustee used undue influence to induce the settlor to act not by their own free will but in accordance with the trustee’s or another party’s agenda (e.g., The “Sugar Daddy” Abuser: Elder Unduly Influenced into Giving Assets to Abuser).
- The trustee was negligent in carrying out their duties (e.g., Family Inheritance Issues: Client Wanted Her Rightful Share of the Family Business; Keystone Gets Her the Entire Company).
- The trustee misappropriated trust assets for personal use (e.g., Revoking an Irrevocable Trust: Keystone Successfully Suspends Financially Abusive Son as Trustee and Invalidates a Qualified Personal Residence Trust).
- The trustee had a conflict of interest that resulted in improper management of trust assets (e.g., the trustee made a risky investment of trust funds in a personal business endeavor).
- The trustee favored one beneficiary over another (e.g., the trustee provided a loan to one beneficiary but denied a loan to a similarly situated beneficiary).
While the above list is not exhaustive, it represents the types of actions that can land trustees in hot water. If the trustee’s offenses are verifiable and harmed the trust financially or otherwise, beneficiaries are entitled to sue the trustee to try to have them suspended or removed and possibly even surcharged. If the court finds that the trustee acted in bad faith, the trustee may even be held personally liable for repaying the damage they caused.
Breach of trust cases can be complicated since they are generally brought by beneficiaries who may not have been provided trust-related information or accountings by the trustee. As a result, before any determinations can be made as to whether litigation might be needed, an investigation will need to be carried out to glean an accurate picture of the trustee’s offenses.
In What Ways Did the Trustee Violate Fiduciary Duties in This Breach of Trust Case?
In this breach of trust case, the client’s brother, who had been the de facto trustee and later was formally appointed to the role, violated his fiduciary duties in numerous ways, including:
- Unnecessarily taking out loans against the trust’s real properties, including the trust’s most valuable real property, which depleted their equity;
- Unduly influencing the surviving settlor to disinherit Keystone’s client, even though he and his late wife had provided for both their sons to inherit equal shares of their trust when they originally executed it;
- Embezzling trust assets to fund a lavish lifestyle for his family; and
- Improperly managing the trust.
There are many remedies for beneficiaries in case of breach of trust, but to be able to utilize them, you will need to work with an experienced trust litigation attorney to establish in what specific ways the trustee acted improperly and the extent of the damage the trustee caused. It is always a good idea to speak with an attorney at the first sign of breach of trust.
“If it seems that a trustee is mismanaging trust assets or misappropriating trust funds, it is essential you consult with a lawyer immediately,” says Lindsey Munyer, the handling attorney on this breach of trust case. “Failing to act could deplete the trust of its assets or severely devalue the trust to the detriment of beneficiaries.”
A Closer Look Into the Facts of This Breach of Trust Case
The shocking circumstances surrounding this breach of trust case probably have you wondering: How did the client’s brother as de facto trustee manage to misappropriate millions of dollars’ worth of assets for years without neither the father nor Keystone’s client noticing?
This breach of trust case represents a common fact pattern in probate litigation. A family member, friend or acquaintance will become close with an elderly person to gain their confidence. When they have it, they will start controlling the elder by restricting who they can see and isolating them. Their goal is usually to be trusted enough by the elder to be given the responsibility of managing their finances, at which point, it would become easier than ever for them to both steal from the elder and unduly influence them into modifying their estate plan to favor them.
The trustee in this breach of trust case had for years been feeding his father, the settlor, a steady diet of lies surrounding Keystone’s client, including that the client had abandoned his father and was only interested in his father’s money. Before the client’s brother poisoned his father’s mind, Keystone’s client and his father had enjoyed a close relationship. Furthermore, it was obvious that Keystone’s client was not interested in his father’s money, as he owned a successful construction business. The client’s brother, on the other hand, had always relied on his parents for his livelihood: His sole sources of income had been his parents’ upholstery business, which he managed poorly, and the trust.
Was Keystone’s Client Entitled to a Trust Accounting?
Trust beneficiaries are not always entitled to receive information or an annual trust accounting from the trustee, particularly while a settlor is living and/or while the trust is revocable. A court can order a trustee to account when, for example, there is a reasonable likelihood that a breach of trust has occurred.
To assess the extent of the financial damage caused to the trust by his brother, Keystone’s client needed to see an accounting, but his multiple requests for an accounting went unheeded. What was particularly puzzling in this breach of trust case was where all the money the client’s brother had misappropriated had gone, as the client’s father did not have in his possession or bank accounts anywhere close to the amount he should have from all the loans he purportedly took out on the properties held by the trust. Additionally, the father had been earning social security benefits, which, according to the private professional fiduciary who was eventually appointed the role of trustee, were being withdrawn by the client’s brother for unknown purposes.
In the end, after the client’s brother died, his wife provided an accounting that confirmed Keystone’s suspicions that the brother had been treating the trust like his personal piggy bank for many years, stealing millions of dollars’ worth of assets to support his family’s sumptuous lifestyle. Still, the wife was suggesting the trust owed her family money for her late husband’s management of his parents’ upholstery business. Keystone found this claim to be preposterous, given that the client’s brother had been paying himself a generous salary for years while the business incurred significant losses under his watch.
Upon reviewing the accounting, there was no question in anyone’s mind as to why the client’s brother had been reluctant to share any financial information about the trust.
Are Trust Amendments Valid If Executed by a Settlor Who Lacks Capacity?
Another significant factor in this breach of trust case had been the settlor’s declining mental competence. He confessed multiple times during an initial deposition that he had no knowledge of how his trust functioned and that his son, the client’s brother, was in charge of managing the trust. The father also had been signing loan documents he clearly did not understand, because when he was asked about taking out a loan on the trust’s most valuable property, he grew confused, confessing that he had thought the home had been paid off.
If a settlor lacks the mental competence to comprehend the nature of the documents they are signing or how they will affect them or the other beneficiaries of the trust, the rational assumption would be that they should not be permitted to execute a new trust or any new amendments. In this breach of trust case, it seems likely the elderly settlor executed the trust amendments disinheriting Keystone’s client after he had already started to lose competence, which begs the question: Are these trust amendments valid?
When a person lacks competence, they are more susceptible to the undue influence of people close to them. Undue influence occurs when excessive pressure is used to persuade a person to act not by their own free will but in accordance with the influencer’s or someone else’s motives without any regard for the consequences that could follow.
Keystone argued that these trust amendments should be voided since all evidence points to them having been the result of the client’s brother unduly influencing the client’s father to alter his trust. Furthermore, not only were the amendments in contravention of the settlor and his late wife’s original intentions, but extended family members also confirmed the settlor’s intent to leave both his sons an equal inheritance.
The settlor in this breach of trust case was not happy with Keystone’s client for bringing litigation, as he believed the litigation to be the result of the client not loving him and wanting his money. He did not understand for a very long time the gravity of his older son’s actions and was defending him as a result. However, the older son finally revealed his true colors when he took his family to his father’s home to confront him. The incident ended with the client’s brother allegedly physically assaulting one of the father’s caretakers.
At last, the father had seen his son for who he was, and both he and his caretakers took out restraining orders against the son and his family. The tide had turned and the true character of the client’s brother became evident to the court.
What Are Remedies for Beneficiaries in Case of Breach of Trust?
After this distressing series of events, Keystone was able to have the client’s brother removed from the role of trustee and replaced with a private professional fiduciary. While neutral third parties can be costly to use, they are worthwhile in situations, such as this one, where conflicts of interest can arise. While there is nothing inherently wrong with a trustee also being a beneficiary, this arrangement can become problematic if the trustee manages the trust in such a way as to place their personal interests above those of the other beneficiaries, like the client’s brother did in this breach of trust case.
If a trustee believes they are incapable of fairly administering a trust, they can either decline their appointment or retain a trust lawyer to guide them.
“Even seasoned trustees seek the help of trust lawyers during administration to protect them against liabilities,” says Shawn Kerendian, the managing attorney on this breach of trust case. “If the trust is well-funded, attorney’s fees and costs can usually be paid directly from the trust so there is no reason to not have an experienced attorney on your team.”
Beneficiaries should keep in mind that the trustee’s lawyer is not their lawyer. If beneficiaries desire legal representation, they should retain their own probate lawyer.
How Did Keystone Resolve This Breach of Trust Case?
While it was important to Keystone’s client that he ultimately receive the inheritance to which he was entitled from the trust, his more pressing priorities had always been to protect his father from the ostensible abuse of his brother, to make the trust whole again after the extensive damage caused to it by his brother, and to uphold the settlors’ original intent to keep the trust’s most valuable asset in the family for years to come. While he was hoping that the court would award him his attorney’s fees and costs on account of his litigation having benefited the trust, he went into litigation having paid all attorney’s fees and costs out of his own pockets.
The Results of the First Mediation
This case was an uphill battle for Keystone’s trust attorneys since neither the client’s brother nor the client’s father were cooperating by providing to them accountings or any additional information about the trust. But after the client’s brother had a restraining order issued against him for the physical altercation he had been involved in with the father’s caretaker, he had no choice but to cooperate.
Both the client’s father and brother agreed to attend a mediation with Keystone’s attorneys and client present; however, at the time of the mediation, the client’s brother still did not have an accounting to show, so while it was certain he would be surcharged, it was unclear for what amount.
The parties agreed that once the client’s brother provided an accounting, they would have the right to evaluate the accounting to determine their desired surcharges. They would then submit their proposed surcharges to the mediator who would determine the final surcharge amount. All the parties agreed to be bound to the mediator’s surcharge determination.
The other terms of the settlement agreement called for the client’s father to revoke the amendments that disinherited Keystone’s client, reallocate to Keystone’s client his 50% share of the trust, and follow certain requirements any time he wished to amend the trust going forward.
All the parties signed the settlement agreement, but an accounting from the client’s brother was still needed.
Because the client’s brother died before he could provide the parties with an accounting, effectuating the settlement agreement was difficult. His 50% interest in the trust passed to his children, but as they were not signatories of the agreement, they argued that they were not bound by its terms. Because they were unwilling to comply, Keystone had to take them to court, where they ultimately decided to resolve the matter through a second mediation.
The Results of the Second Mediation
By the time the second mediation rolled around, the client’s father had also died, so the only remaining parties to the trust were Keystone’s client and the children of the client’s brother, who had inherited their father’s 50% interest in the trust.
The client’s sister-in-law finally provided an accounting, which shed light on the exorbitant sums of money her husband had misappropriated from the trust for his immediate family’s personal use.
Despite the initial resistance of the children to surrender any portion of their trust shares to cover their father’s surcharge, which the previous settlement agreement had stipulated should come out of his share of the trust, when faced with the extent of the damage their father had caused the trust, they agreed to being bought out of their interests in the trust.
Keystone was successful in getting all the parties to sign the final settlement agreement, which provided for Keystone’s client to be given a 100% interest in the trust’s most valuable property. So, instead of the property remaining in the trust for years to come, Keystone’s client would own the property outright. Additionally, the settlement appointed Keystone’s client to the role of trustee, which enabled him to preserve and properly manage the remaining assets held by the trust.
But the most noteworthy aspect of Keystone’s success with this case was how its lawyers were able to facilitate a reconciliation between Keystone’s client and his father prior to the father’s death. Keystone’s client couldn’t have been more pleased with Keystone’s work on this case.
Keystone’s client writes in an email:
“We were 100% satisfied with the resolution. Not only did Keystone help preserve the assets of the estate, but they assisted in reaching a timely global settlement that saved all parties the financial and emotional pain of extensive litigation. Despite seemingly insurmountable obstacles presented by COVID and the volatile personalities of some family members, our Keystone attorneys diligently and artfully pushed the case into a position that eventually allowed for a very favorable settlement of our claims. Had it not been for our fast-acting and persevering attorneys, we would almost certainly have received nothing from the estate and remained estranged from my father, but, because we hired Keystone, we ended up stopping the abuse, reconnecting with my father, and preserving a very sizeable estate for the benefit of our family.”
Takeaways
Misconduct surrounding family trusts can be complicated to navigate on account of the parties involved not wanting to upset one another or create hostility; however, ignoring the matter or waiting to address it until after the settlor’s death could prove to be an uphill legal battle.
If anything is to be learned from this case, it is to take immediate action upon the first sign of abuse. Waiting too long or until after the death of the settlor could cause the trust to be irreparably damaged (i.e., its assets could be depleted) and/or beneficiaries to be disinherited, which would leave them in the disadvantageous and challenging position of having to piece together everything that had transpired in relation to the trust without the benefit of having its settlor there to act as witness.
In this breach of trust case, the client displayed great courage by spending a substantial portion of his own money to both protect his father’s financial interests while he was still living and uphold his father and late mother’s intentions for the distribution of their assets after their deaths.
The client’s courage earned him results that were astounding to say the least, including:
- Stopping the financial abuse the client’s brother was perpetrating against their father, the settlor, to amass the funds needed for the father’s care;
- Invalidating all the amendments that disinherited him from the trust;
- Not only preserving his inheritance but obtaining the trust’s primary asset without the asset having to stay in trust for the duration of his lifetime, as had been instructed by the provisions of the trust; and
- Rekindling the relationship with his father
While it is recommended for all parties to a trust to have a lawyer representing them early in the process, it is particularly essential in matters where abuse is suspected. The client in this breach of trust case did not discover his brother’s financial misconduct for years, but as soon as he started sensing that something was awry with the trust’s finances, he did the right thing by immediately getting in touch with Keystone’s probate attorneys.
The main lesson to take away from this breach of trust case is to play an active role in trust and estate matters. If you know you are a beneficiary of a trust or estate, try to find out information about trust assets and your inheritance. More importantly, consider retaining an experienced probate lawyer to both protect your inheritance and litigate on your behalf if anyone threatens it. Keystone’s probate attorneys have a proven track record of resolving breach of trust cases favorably for its clients.
“We know good legal work when we see it, with my wife being a licensed attorney with ties to many major Los Angeles law firms, and the Keystone legal team is top-notch,” says Keystone’s client. “They are responsive, ethical, and possess excellent oral and written skills. All of this combines to produce very effective results, and you couldn’t ask for a better team to represent your interests.”
Do You Have a Possible Breach of Trust Case? Keystone’s Trust Attorneys Are Standing By to Answer Your Questions
If this breach of trust case study resembles an issue you are facing with a trustee, or if you are a trustee being sued for breach of trust, Keystone’s trust attorneys can help. As a probate-only litigation practice, we receive breach of trust cases on a regular basis, which we have a solid track history of resolving favorably for our clients. Call us today to request a free consultation with one of our attorneys.
