What Is Diversion of Property From a Trust?

By Mike Broemmel

Diversion of trust property is a legal term used to describe the misapplication or misuse of trust property. Not only does diversion of trust property violate the terms of the trust itself, but it's often a criminal act. A trust agreement forms a contract between the person who sets up the trust in the first place, the trustee and the beneficiary. The trustee has a fiduciary duty to act in the best interests of both the trust and its beneficiary.

Recovery of Stolen Assets

State laws govern the establishment, operation and management of trusts. These laws establish a process by which diverted trust assets are recovered not only from the trustee but, in some cases, from other third parties who benefited from the diversion or improperly received assets from the estate. Often the probate court becomes involved in the recovery process. In addition, civil lawsuits can be filed against the trustee and other individuals.

Civil Lawsuit

Not only can the value of diverted assets be recovered in a lawsuit, costs and fees associated with pursuing the trustee can be recovered as well. In addition, a judgment in a civil lawsuit also may assess additional damages against the trustee, legally known as "punitive damages." This type of award is designed to punish the trustee for her misconduct and send a message that this type of conduct has serious consequences. The court requires a person to have standing to bring a lawsuit against the trustee for diverting assets. This means that the individual filing suit must have an interest in the trust. For example, a beneficiary would have standing to bring a lawsuit.

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Criminal Charges

A trustee who diverts assets from a trust may face criminal charges that range from theft to fraud. If the trust exists for the benefit of an elderly or disabled person, the trustee can face a charge involving a crime against a vulnerable person. These types of crimes often result in jail time and fines. A restitution order is also likely in a criminal case, even if restitution is ordered in a civil lawsuit.

Successor Trustee

The serious nature of diverting trust assets requires the immediate removal of the trustee. If the trustee does not step aside voluntarily, a petition is filed in the probate division of the county or district court in the community where either the trustee, the person who created the trust or a beneficiary resides. A successor trustee must be appointed immediately. The person who created the trust can designate a successor. The court can appoint one. In some cases, a successor is named in the original trust document itself.

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Does a Trust Beneficiary Have Standing in a Suit to Determine a Trust Property?

All trusts have trustees and beneficiaries. A trustee's job is to manage, hold and distribute trust assets in favor of beneficiaries. Trustees have a legal right, called standing, to make decisions in lawsuits to determine, protect and oversee trust property interests. Generally, trustees, not beneficiaries, are the named plaintiffs or defendants in lawsuits for trusts. However, under certain circumstances, beneficiaries also have standing to directly participate in trust litigation.

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