How to Handle Misappropriation of Trust Funds by the Trustee
For trustees who have been accused of stealing from a trust, retaining a skilled attorney is a must. If misconduct is proven, you not only face removal but serious legal and financial consequences as well.
Can a trustee go to jail for stealing from a trust? Is stealing from a trust a felony? Explore the ways trustees take money from trusts and learn how a trust litigation attorney from Keystone can help.
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How well do you know the successor trustee of your deceased loved one’s trust?
Serving as the trustee of a trust instills a person with significant power. They have access to all the trust assets, but with a catch: They can only use those assets to carry out the instructions of the trust.
For some trustees, the temptation to use trust assets for their own benefit is too great. It’s an unfortunate fact that not everyone can handle the allure of having access to large sums of money.
Discover the impact of a misappropriation of trust funds by the trustee, including how and why it happens, and more importantly, what actions you can take to stop this kind of trustee misconduct.
What Is a Trustee’s Job During Administration?
Put simply, a successor trustee’s job is to administer the trust of a deceased trust creator, otherwise known as the settlor, trustor or grantor. The successor trustee generally does not need permission from the court in the way executors and administrators do to step into their power. If a trust nominates a successor trustee to take over, it usually happens automatically upon the incapacitation or death of the settlor.
The trustee’s job while administering the trust includes:
- Gathering the decedent’s assets and creating an inventory of them
- Providing annual accountings to beneficiaries
- Satisfying valid creditor’s claims
- Informing the beneficiaries of any major decisions involving the trust
- Making disbursements to beneficiaries as instructed by the trust instrument
The tasks mentioned above will require the trustee to have access to the settlor’s financial information and assets. While the hope is always that the appointed trustee’s trustworthiness is what got them appointed to the role in the first place, trustees can occasionally go wrong. For example, it is not uncommon for trustees to misappropriate funds from the trust they manage.
When there is a misappropriation of trust funds by the trustee, it is considered a breach of the trustee’s fiduciary duties. We discuss a trustee’s fiduciary duties in more detail in the next section.
What Are the Fiduciary Duties of a Trustee?
When a trustee is appointed, they have a fiduciary duty to act solely in the best interest of the beneficiaries of the trust. After all, the trust was created by the settlor for their benefit.
Because beneficiaries cannot oversee the trust, make decisions in relation to it or access its assets, the trustee must take special care to remain within the confines of their role and act fairly at all times.
California Probate Code sections 16000-16015 break down the general duties of a trustee. We’ve included the most notable of these duties below.
- Duty to administer the trust according to the trust instrument: The trustee cannot stray from the provisions of the trust.
- Duty to administer the trust solely in the interest of beneficiaries: The trustee must only consider what is ideal for beneficiaries when making decisions.
- Duty to act impartially with beneficiaries: The trustee cannot favor one beneficiary over another.
- Duty not to use or deal with trust property for personal profit or for any purpose unconnected with the trust: The trustee can only use trust assets on trust-related transactions.
- Duty to preserve trust property: The trustee must physically and financially secure trust assets.
- Duty to keep trust property productive: The trustee must make wise and sound investments of trust assets.
- Duty to keep trust property separate: The trustee must keep trust assets separate from other assets.
- Duty to litigate: If trust assets are under threat or if the trust is owed assets, the trustee may need to litigate to defend or enforce a claim.
If you’re a beneficiary, it’s crucial to thoroughly understand a trustee’s responsibilities. This way, if they go beyond their authority, you can notice early enough to take action.
Trustees should also take time to understand the responsibilities of their role, because the last thing you want while administering a trust is to deal with an expensive and time-consuming fiduciary misconduct claim.
Can a Trustee Take Money from a Trust?
Many beneficiaries ask: Can a trustee withdraw money from a trust?
The answer to this question is complicated. Trustees will have to take money from the trust they oversee to perform their duties, but when they take money for purposes unrelated to the trust, their withdrawal of money or property equates to stealing.
When a trustee steals from a trust, the consequences can be dire for both the trustee and beneficiaries.
Trustees not only could be ordered to reimburse the trust for what they stole, but they may have to pay a hefty surcharge as well. They also could be removed from their role.
Beneficiaries would also be affected by a trustee stealing from a trust, because it is their inheritances that the trustee is messing with. While a trustee could hypothetically borrow funds from a trust and later return the funds, doing so may be improper.
If you’re a beneficiary, it’s important to understand that misappropriations of trust funds by the trustee not only happen, but they’re fairly common.
It is within a beneficiary’s rights to receive and request trust accountings. From these, you may notice withdrawals or expenses that point to misconduct. If you do suspect the trustee to be misappropriating trust funds, it’s critical to take legal action as soon as possible by hiring a trust account attorney to review the accountings and challenge them if necessary. Doing so will reduce damage to the trust.
In the next section, we discuss common scenarios suggesting a misappropriation of trust funds by the trustee.
Trusts can be substantial in size, containing millions of dollars’ worth of assets, real properties and more. Because of their complexity, it’s possible a trustee could transfer money or property that is supposed to go to a beneficiary to themselves without anyone finding out.
For example, the trust may call for certain jewelry to pass to a beneficiary, but the trustee could claim that the jewelry could not be found and steal it for themselves. That’s why beneficiaries should keep a close eye on the trustee’s activities. If something seems off, it may just be.
A common mistake trustees make is to mix funds from the trust with their personal assets or assets outside the trust.
The best way for trustees to ensure trust assets are kept separate is to open a bank account dedicated to the trust. Any financial transactions that need to be made related to the trust should be carried out using the funds in this account. This way, if the trustee is ever wrongfully accused of misappropriating trust funds, they can produce bank statements to provide a clear record of trust-related transactions.
Trustees may believe that they can borrow trust funds or property without any harm being done. But borrowing from a trust may be considered a breach of duty for many reasons, one of which is that it usually does not benefit the beneficiaries in any way.
In fact, a trustee’s borrowing of trust funds could actually result in the beneficiaries being financially harmed. For instance, what if the trustee borrows trust funds to invest in a business endeavor they believe will turn a profit, but it never does? If the trustee does not have the funds to repay the trust, they could find themselves in hot water with the beneficiaries and possibly even the court.
California Probate Code section 16004 forbids self-dealing, or the trustee using trust property for their own profit or for purposes unconnected to the trust.
If you are a beneficiary who suspects the trustee to be borrowing from the trust, contact a probate lawyer immediately to prevent further misconduct by the trustee.
As long as the trust provisions don’t forbid it, the trustee may be able to make loans of trust funds to certain parties. Generally, when trustees do exercise this right, it is to provide a loan to a beneficiary, although they may be able to provide others with loans as well. It all depends on the terms of the trust.
There is always the potential of the trustee self-dealing when loaning out money or property. For example, they may use trust funds to provide a friend with a loan at less than market interest rates.
If a trustee has questions about whether a loan they plan to make is ethical and within the confines of the authority they’ve been granted, it is best for them to go over their plans with a probate lawyer.
Trustees generally have the power sell trust property, and they can exercise this power without obtaining consent from the beneficiaries first. So, if beneficiaries are interested in protecting their inheritances, they should consistently seek information from the trustee about potential sales. This way, the trustee will have a hard time making a sale under the radar and keeping some or all of the profit.
On occasion, trustees abuse the powers they’ve been granted by selling trust property to themselves. This is not permitted unless the terms of the trust say it is. It is also considered a form of self-dealing.
If you suspect that a trustee has made a clandestine sale of trust assets from which they personally benefited, then it’s important you work with a lawyer to investigate whether or not misconduct was involved.
It should be noted that the trustee generally can take a fee for facilitating a sale of trust property. If the sale was complex in any way, they may even be able to take extraordinary fees.
Trustees are usually allowed to take a reasonable trustee fee for the time and effort they spent managing the trust, but this can become a point of contention if trustee compensation is excessive or more than what the trust instrument allows.
While not all trust instruments provide instructions regarding trustee compensation, some do. When that is the case, those instructions should be followed. When that is not the case, California Probate Code sections 15680-15688 provide a general roadmap for trustee compensation.
If beneficiaries believe trustees are compensating themselves too generously, they have a right to bring the matter to the court, at which point the judge will have the final say as to what a fair compensation for the trustee would be. The best way to avoid such a scenario if you are a trustee is to be upfront with beneficiaries about what you plan to pay yourself.
One of the more inconspicuous ways a trustee could misappropriate trust funds is by overcharging the trust for legitimate third-party services.
For example, they may hire a landscaping service to maintain trust properties, which generally is considered an acceptable use of trust funds. But the trustee, to pocket some extra money for themselves, may claim that the service charged $10,000 when it actually charged $5,000.
Of course, this type of misconduct can be prevented. For example, beneficiaries can ask to see receipts for significant charges or any charges they find suspect. A lawyer can help with analyzing such documents to determine whether a misappropriation of trust funds by the trustee had taken place.
Can a Trustee Go to Jail for Stealing from a Trust?
A trustee can go to jail for stealing from a trust, although a misappropriation of trust funds by the trustee is rarely handled in such an extreme manner. There are numerous other penalties that will be imposed first.
These penalties can include being removed as trustee and having to pay punitive damages as well as the plaintiff’s attorney fees. In cases where the trustee caused excessive damage to the trust, then jail time could result, but only if the authorities decide to pursue a case against them.
Much of the time, claims of trustee theft are misunderstandings or innocent mistakes that can be resolved by beneficiaries discussing their concerns with the trustee.
Trustees should be aware that most embezzlement cases are handled in the probate court, with the outcomes generally being that the trustee is removed from their role and ordered to return the trust property they stole.
It is rare for authorities to pursue criminal charges for a misappropriation of trust funds by the trustee, even though it is within their rights to do so. Trustee thefts are not usually substantial enough to warrant a full-blown criminal case, since these types of cases require substantial government resources to prosecute.
Nevertheless, if you’re a trustee who has been accused of theft, it’s important to seek legal representation as soon as possible. Not only can being accused of trustee embezzlement destroy your professional reputation, but it can lead to criminal convictions.
Is Stealing From a Trust a Felony?
The deciding factor in whether stealing from a trust is a felony is the amount that was embezzled. The offense is treated like grand theft or petty theft depending on the severity of the crime.
According to California Penal Code section 487, embezzling $950 or less in trust funds or property is considered a misdemeanor and could result in up to six months of jail time. When the amount stolen is more than $950, it is considered a felony offense. In such a case, the judge may order the trustee to serve up to three years in jail.
What to Do if a Trustee Is Stealing From the Trust
When a trustee steals from a trust, it is not always easy to detect — especially if the trustee intended to steal from the trust, as they will be doing everything they can to hide their misdeeds.
If you’re the beneficiary of a trust or a creditor with a claim to trust assets, it is crucial you pay attention during administration so you can notice a potential misappropriation of trust funds by the trustee.
There is no reason to get up in arms if you suspect theft by the trustee. If the trustee is stealing, you’ve caught it and can take steps to stop it and recover the assets that were lost.
Read the following subsections to learn more about what to do if you believe a trustee to be misappropriating trust funds or property.
Being proactive as a beneficiary can be the difference between receiving your full inheritance and receiving a substantially reduced inheritance or nothing at all.
The last thing you want to do is stand by while the trustee squanders trust assets. If a trustee is misappropriating trust funds, you do not have the luxury of time in bringing them to justice.
By quickly taking action to hire an attorney when you notice a trustee stealing from a trust, you can minimize damage to the trust and put an end to the trustee’s criminal actions. But more importantly, you will be protecting your and your fellow beneficiaries’ inheritances from being decreased or eliminated as a result of the trustee’s misdeeds.
Speak With the Trustee
Before resorting to drastic measures to resolve a trustee’s possible misappropriation of trust funds, you should raise your concerns with the trustee directly. Sometimes, trustee theft is nothing more than a minor error by the trustee that they can resolve by adjusting accountings or returning assets to the trust.
If there is animosity between you and the trustee that would make it difficult to have a conversation with them, hire an attorney to have the conversation on your behalf.
Collect Accountings and Financial Documents
Before visiting a lawyer, you should gather accountings and any other trust-related documents you can find to share with them. Without these documents, your lawyer will not be able to assess the extent of the damage to the trust, let alone whether a misappropriation of trust funds by the trustee has taken place.
If you’re dealing with a trustee who is refusing to provide you with accountings and other financial information about the trust, this also is a form of misconduct that should be dealt with promptly with help from a lawyer.
Enlist the Help of a Probate Attorney
Trustee embezzlement cases generally are quite complex since they require a thorough review and analysis of the trust’s financial transactions and assets. This is something only seasoned professionals can do accurately and efficiently.
As such, if there is reason to believe that a trustee is taking from a trust illegally, your best bet would be to hire an attorney to investigate.
File the Necessary Petitions
A trustee’s misappropriation of trust assets can usually be effectively handled with the filing of a few petitions in the probate court. If you have a lawyer, they can do this for you.
First, you will need to decide how you want the trustee’s alleged misconduct to be remedied. Do you want the trustee to be removed from their role? Do you want to recover the assets that were lost? Do you want to impose a surcharge on the trustee?
Be sure to be clear with your lawyer about your desired legal outcomes so they can be included as part of the petition. Once the court accepts your petition for filing, a hearing date will be set.
How Can a Trust and Estate Attorney Help Your Case?
When a trustee steals from a trust, proving it can be a challenge, because the trustee may be going to great lengths to hide their nefarious actions. Without help, it can be hard to verify your suspicions and even harder to confirm that the trustee committed a crime.
This is one of the many ways an experienced probate attorney can help you. With knowledge of the state and county laws concerning trustees, your attorney will know exactly which petitions to file and what remedies to use to bring the trustee to justice.
Some ways an attorney can help if you’re dealing with a misappropriation of trust funds by the trustee are:
- Navigating the process for you
- Analyzing financial documents related to the trust to find proof of trustee embezzlement
- Keeping you informed of court dates and attending court hearings with you
- Litigating on your behalf in the courtroom
- Guiding you through any follow-up actions that may be necessary, such as replacing the bad trustee with someone new
If beneficiaries successfully prove a trustee’s misappropriation of trust funds, they may be able to recoup their attorney fees and costs from the trustee. As for the trustee, they may be able to pay for their defense with trust assets; however, they could be asked to pay back their defense costs if the claims against them are proven to be legitimate.
Whether or not your attorney fees can be paid from the trust, the expense would be worthwhile if it results in you receiving your rightful inheritance or staying out of jail.
Trustees are supposed to provide beneficiaries with a trust accounting at least once a year. These accountings, as well as other financial documents related to the trust, will be crucial in determining whether a misappropriation of trust funds by the trustee has taken place.
Red flags that can signal a misappropriation of trust funds by the trustee include:
- A failure by the trustee to respond to beneficiary requests for information
- A failure by the trustee to provide timely accountings and other financial documents
- Dwindling trust assets or assets that are missing
- Assets that were sold under the radar without beneficiaries being notified
- High credit card balances
- Unpaid bills
If any of the bullets listed above pertain to your situation, it would be worth your time to share your concerns to a probate attorney, who can further investigate your claim, and if necessary, take legal action on your behalf.
If a trustee uses money from the trust in their beneficiaries’ best interests, then they’re simply upholding their fiduciary duties. However, if a trustee spends money from the trust on items, loans or investments that directly or indirectly benefit them or persons not connected to the trust, that’s a violation of their fiduciary duties, and they could be held liable.
That said, it is rare for trustee misappropriation to fully deplete a trust of its assets; it’s generally much more subtle than that.
If a trust appears to have dwindling assets, it is crucial to take immediate action to investigate potential trustee misconduct with help from a lawyer.
Yes, when a trustee steals from a trust, they are in effect also stealing from beneficiaries. This is because beneficiaries are supposed to ultimately inherit all the assets contained in the trust.
Beneficiaries should be receiving the exact inheritance they were left in the trust instrument, unless their inheritance was reduced by the trustee having to use trust funds on valid expenses, such as paying off creditors and enlisting the help of third-party professionals.
The most common penalties imposed on trustees who were found to have stolen from a trust include suspension or removal, and surcharges.
While trustees won’t always incur a surcharge, when they do, they could have to pay double or triple damages depending on the nature and severity of their misdeeds. In most cases, trustees will also have to return any assets they stole from the trust.