What if You Violated an Irrevocable Trust?

By Wayne Thomas

The person appointed to oversee an irrevocable trust must act according to the terms of the trust and in the best interest of those who benefit under the trust. While all states recognize this duty, the type of recourse available in cases of breach can vary. Knowing when you may petition the court for removal of a trustee and when he may be personally liable for financial losses will help ensure that your trust operates according to the wishes of its creator.

Overview of Irrevocable Trust

An irrevocable trust is a trust that cannot be withdrawn by the creator, often referred to as a grantor or settlor. The creator effectively parts ways with the trust once the property, known as the corpus, has been transferred into the trust and the trust document has been executed. Once the trust is established, an appointed trustee oversees the administration of the trust and is in charge of disbursing the funds to the beneficiaries according to the terms of the trust.

Duties of the Trustee

A trustee duly appointed to oversee an irrevocable trust must follow the express direction provided by the creator as specified in the trust document. In addition, the trustee has an independent duty to the beneficiaries to manage the trust responsibly and act with their best interests in mind. This includes maintaining trust property and refraining from commingling the assets with his personal assets. It also requires the trustee to avoid risky investments that could frustrate the purpose of the trust. In addition, the trustee must provide an accounting to the beneficiaries of all transactions affecting the trust.

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Breach

If a trustee fails in his fiduciary duties or violates a term of the trust, he is considered in breach. For example, assume the trust instrument specified that the trustee was to make prudent investments with the trust property to ensure that sufficient funds existed to pay for the beneficiaries' college education. If the trustee instead secretly invests the trust assets in his own struggling business resulting in a huge loss and insufficient funds to cover the education expenses, this action could result in multiple breaches. First, the trustee engaged in self-dealing by placing his interests above that of the beneficiaries. Second, the trustee violated the terms of the trust and his fiduciary duty by knowingly and intentionally failing to make prudent investments, as well as failing to disclose his actions to the beneficiaries.

Removal

If a trustee breaches his fiducuary responsibilities or the terms of the trust, the beneficiaries have the right to petition the court to remove the trustee and appoint a replacement trustee. The process for removal and the remedies available to the beneficiaries are outlined in state law, and can vary. For example, in Florida, the beneficiaries may recover against the trustee for lost funds by denying compensation and requiring the trustee to personally contribute money or transfer his own property into the trust.

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Enforcing a Trust

References

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Roles of a Trustee

A trustee manages property for beneficiaries according to the terms of a trust. Generally, a trustee is appointed by a person, called a grantor or settlor, who establishes and funds the trust. The settlor transfers legal title of assets to the trustee so she may manage and distribute them for named beneficiaries. A trustee's role includes responsibly and honestly handling trust assets and ensuring the purpose of the trust is carried out.

Trustee Not Paying Beneficiary

A trustee is a party who administers the assets of a trust and distributes them to beneficiaries in compliance with terms established by the trust grantor. Although the terms of a trust often allow a trustee considerable discretion with respect to the distribution of assets to beneficiaries, beneficiaries have legal options if the trustee's refusal to distribute trust assets appears to be unjustified.

What Is a Contingent Trust Trustee?

A contingent trust, also known as a standby trust, is a trust that does not yet exist but will come into existence if and when a particular event occurs. As soon as the trust comes into existence, the trustee named in the trust document is responsible for administering the trust on behalf of the trust beneficiaries.

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