While this guide provides useful information that aids in the understanding of how trust litigation works and when it is appropriate, it is by no means a substitute for proper legal advice. For those faced with the prospect of trust litigation, it is strongly recommended to reach out to an experienced attorney specializing in trust litigation to ensure the best possible outcome.
Basics of Trusts
Trusts exist in order to protect assets from legal and tax liabilities, as well as guarantee the passing down of assets, in the event of an individual’s incapacitation or death. Trusts involve two different types of individuals – trustees and beneficiaries. Trustees are tasked with the extraordinarily important task of managing the trust for the beneficiaries, who are the ones who ultimately have ownership of the trusts assets.
There are two primary types of trusts used by individuals and families, known as revocable and irrevocable trusts. These trusts vary in their basic control structure, as well as the ease with which they can be dissolved. Revocable trusts place sole control and discretion over the trusts assets into the person who created the trust, known as the grantor or trustor. The control over this type of trust lasts for the lifetime of the grantor or until they decide to dissolve the trust.
Irrevocable trusts differ in that the grantor or trustor creates the trust and places assets within the trust, but relinquishes control of the trust to a trustee and does not participate in its management for the designated duration of the trust. Normally the grantor becomes the beneficiary, although there can be other beneficiaries named as well. These types of trusts are typically the ones involved in litigation, as most trust litigation and disputes are between the beneficiaries and the trustee.
Common Litigation Situations
There are several common types of situations in which trust litigation becomes necessary. This usually involves the trustor violating the terms of the trust, not fulfilling their fiduciary duty, or failing to provide enough information to their beneficiaries. As mentioned previously, these issues often take years to resolve through litigation and cost a considerable amount of money, so they should only be undertaken when mediation and other methods of negotiation between parties fail.
Trusts normally provide some liability protection for the trustee to prevent action being taken against them as a result of errors in judgement or honest mistakes. Without this liability protection, it is highly unlikely that a trustee would be willing to take on the responsibility of managing a trust. However, this protection does not mean that the trustee is protected in the event that they intentionally violate the terms of the trust for their own benefit. If this were to happen, litigation could be pursued against the trustee by the beneficiaries in order to financially compensate them. For instance if the trustee were to be tasked with managing a business that is part of the trust, and were to do something that directly harms the trust for their own personal benefit, the beneficiaries could file suit against the trustee for damages.
Failure to fulfill fiduciary duty is a relatively common source of trust litigation that can often be considered a grey area. Fiduciary duty is a one way responsibility, in that the trustee has fiduciary duty to the beneficiaries, but not the other way around. If the trustee is perceived to fail in their fiduciary duties, they can be subject to litigation by the beneficiaries in order to make things right. Normally, this is a result of a perceived conflict of interest resulting from the actions of a trustee and their duty to managing the trust.
Trustees providing inadequate, inaccurate or incomplete information to beneficiaries is another common source of litigation that occurs with trusts. More often than not this can simply be a result of poor communication on the part of the trustee to the beneficiaries, and can be resolved without resorting to litigation. However, sometimes this is intentional on the part of the trustee and litigation is required to sort out the details for the best interests of the beneficiaries. When litigation is pursued, courts normally require extensive documentation as to the management of the trust. This includes things such as the transfer of assets in and out of the trust, as well as detailed financial records and accounting information.
For example, in Florida the Duties of a Trustee are spelled out specifically to help ensure there is no confusion or unnecessary issues arising between the trustee and the beneficiaries. According to Florida Statute 736.0813: (Duty to inform and account)
“The trustee shall keep the qualified beneficiaries of the trust reasonably informed of the trust and its administration.” (Florida Legislature, 2020, Florida Trust Code)
Other states also include similar clauses in their public code, for a similar purpose. In the event that litigation is required to ensure that the beneficiaries are compensated for the improper actions of a trustee, these laws will very likely be brought up during the court proceedings.
How Litigation is Processed
When a dispute arises between a trustee and beneficiaries, and is not able to be mediated outside of the courts, it ends up going through the probate court system. There are multiple steps in the litigation process, beginning with the beneficiaries filing a lawsuit in order to have the trustee removed. These suits are also intended to make the trustee accountable for all the sums spent during their management of the trust, as well as repaying the trust for damages. Certain trusts even provide for arbitration to settle these disputes.
After the filing of the suit the trustee is required to respond in court, which starts the discovery process that is followed up by a court trial. Because these cases can take a very long time to settle, trusts have the option to be taken over by a temporary fiduciary, who will be in control of the trust until the suit is settled. Having this option helps to ensure that the management of the trust continues and minimizes the burden and hardship on the beneficiaries.
During this process, it is normal for the trustee to insist that the trust pay for the defense costs. Even if beneficiaries object, most courts will allow this with the caveat that the trustee must pay the trust back if they were in fact found to be in violation of their fiduciary duties. Having the ability to use a trusts own funds to pay for the defense of a trustee is beneficial to the entire legal system as well as all parties involved because it helps to discourage frivolous lawsuits.