Tips From the Pros: Dealing With a “Bad” Trustee

Unfortunately, some trusts, even when the administrative and dispositive provisions are well-designed, fail to operate as intended because the trustee lacks the ability to be an effective fiduciary. The trustee’s shortcomings may result from having insufficient trust administration expertise, a confrontational attitude towards one or more of the beneficiaries or both. Depending on the nature and extent of the trustee’s deficiencies, resolving the situation may prove difficult.

Relationship With Beneficiaries

A beneficiary may be justifiably dissatisfied and unhappy with a trustee’s performance even if an actionable breach of fiduciary duty can’t be identified. The trustee may operate on the edge of breaching the trustee’s duties to beneficiaries without crossing the line. Indeed, a mere showing of conflicts of interest or hostility between a trust’s beneficiaries and the trustee generally isn’t sufficient grounds, standing alone, for removal of the trustee.1 However, even in the absence of a breach of fiduciary duty, constructive action may be taken to develop a cooperative and informative relationship between the beneficiaries and the trustee and, ultimately, improve the quality of trust administration.

Communication and Transparency

A trustee’s relationship with the beneficiaries, as evidenced by the frequency, content and tenor of communications between them, can be a major factor in determining whether a problem or disagreement involving trust administration will lead to dysfunction and confrontation. If a trustee has made regular disclosures of activities involving trust assets and transactions, promptly (and satisfactorily) answered all questions from beneficiaries and treated them with respect, properly obtained their consent to extraordinary transactions after full disclosure and received reasonable compensation, usually the beneficiaries will perceive the trustee as qualified and will accept that the trustee is administering the trust in their best interests and in accordance with its terms. In the context of such a working relationship between the trustee and the beneficiaries, when problems do arise, such as when a significant investment underperforms or the trustee misses an opportunity to obtain beneficial tax consequences or avoid adverse tax consequences, the beneficiaries are more likely to be forgiving and willing to resolve issues without threatening or instituting a lawsuit. 

On the other hand, a trustee and beneficiaries are likely not to have a good relationship when the trustee isn’t responsive to their questions, the beneficiaries don’t receive adequate information regarding trust assets and transactions, the trustee communicates with the beneficiaries in a harsh or condescending manner, the trustee has a conflict of interest or the beneficiaries believe that the trustee’s compensation is too high or that the trustee unreasonably or arbitrarily denies requests for discretionary distributions. A tense or toxic relationship between the trustee and the beneficiaries will hinder the trustee’s attempts to resolve problems quickly and amicably without court involvement.

Periodic Reviews

Regular reviews of trust administration procedures can contribute to a good relationship with the beneficiaries. This is especially true when one beneficiary dies and a new beneficiary becomes eligible to receive distributions. The new beneficiary may be much younger than the deceased beneficiary, have different financial and family situations and may qualify for discretionary distributions that weren’t available to the now deceased beneficiary. Similarly, a current beneficiary may reach an age or experience a change in circumstances giving rise to entitlement to or eligibility for additional distributions of trust income or principal.

During each such review, the trustee and the trustee’s counsel should examine all of the trustee’s responsibilities under the trust instrument and applicable law and determine whether any procedures should be changed given current circumstances. The trustee’s review of the duties to disclose and provide information will be especially important in developing or maintaining a cooperative and informative relationship with the beneficiaries. The review process should be carefully documented by both the trustee and the trustee’s counsel. If, despite the trustee’s attempts to establish or maintain a good relationship with the beneficiaries, a beneficiary brings a claim against the trustee, the records of these reviews will help demonstrate that the trustee was acting professionally and prudently.

Additional Steps

There are cases in which it doesn’t seem possible to establish a productive relationship between the trustee and the beneficiaries, or repair a broken relationship, simply by having more meetings or otherwise increasing or enhancing the quality of communication. In those circumstances, additional steps, short of trustee removal (which may not be possible) or litigation (which may not be justified) may be considered. These steps include:

• If the trustee is a corporate fiduciary, it may be that the officer administering the trust and one or more beneficiaries have an irreconcilable personality conflict. The beneficiaries could request that the officer handling the administration of their trust be replaced with a different officer. If the corporate fiduciary agrees, such a move may be all that’s needed to put the trust on a path to smooth administration.
• A process analogous to mediation could be undertaken whereby a third party, perhaps an experienced mediator, a lawyer or another person, would act as a go-between in an effort to address or repair a difficult or awkward relationship between beneficiaries and trustee. 
• The beneficiaries could ask the trustee (whether individual or corporate) to resign. In some cases, assuming there’s a mechanism (under the trust instrument or local law) by which to effectuate a smooth transition to a responsible successor trustee, the trustee may gladly accept such a suggestion. A trustee who isn’t wanted will sometimes take advantage of an opportunity for a graceful exit, that is, a resignation that’s requested as opposed to one that looks like an abandonment of duty.
• Perhaps the beneficiaries are displeased with the trustee’s performance of a particular function, such as investing and reinvesting, preparation of accountings or tax return preparation, but are otherwise satisfied. In such a case, the beneficiaries could ask the trustee to engage an agent (for example, investment advisor, accountant or tax return preparer) to assist the trustee in implementing the aspect of trust administration as to which the beneficiaries seek improvement. Of course, the agent will expect and be entitled to receive reasonable compensation for services rendered, which will be in addition to the trustee’s compensation, but the agent’s additional compensation may be money well spent.
• The trustee may feel compelled by provisions in the trust’s governing instrument to handle certain fiduciary duties in a particular manner while, at the same time, the beneficiaries are frustrated by the resulting actions or inaction by the trustee. If all the beneficiaries are in agreement, the ideal solution in this scenario may be to modify the trust in a manner to add, remove or change the problematic pre-modification provisions. The following components of the Uniform Trust Code (UTC) may provide a successful framework for trust modification in this type of context:

  • UTC Section 111 allows interested persons to enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust so long as a material purpose of the trust isn’t thereby violated. Ostensibly, to invoke UTC Section 111, there must be a matter that requires resolution, but that would appear to be an easily surmountable challenge.
  • UTC Section 411(a) authorizes the settlor and all beneficiaries to modify a noncharitable irrevocable trust, even if the modification is inconsistent with a material purpose of the trust.2
  • UTC Section 411(b) provides that the court may order a modification of a noncharitable irrevocable trust if all beneficiaries consent to the modification and the court concludes that such action isn’t inconsistent with a material purpose of the trust. Material purposes aren’t readily to be inferred.3
  • Under UTC Section 412(a), the court may modify the administrative or dispositive terms of a trust if, because of circumstances not anticipated by the settlor, modification will further the purposes of the trust. Such modification, if practicable, must be made in accordance with the settlor’s probable intention.
  • UTC Section 412(b) provides that a court may modify the administrative terms of a trust if continuation in their present state would be “impracticable or wasteful or impair the trust’s administration.”
  • UTC Section 415 allows the court to reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s intention if it’s proved by clear and convincing evidence what the settlor’s intention was and that the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.

• In the same type of circumstance, if for any reason a trust modification is impossible or inadvisable, the trustee may be able and willing to consider decanting the existing trust to a new trust with terms that conform to what both the beneficiaries and the trustee would find conducive to moving forward without difficulty. The trust’s dispositive provisions and the law of the trust’s situs would need to coincide to make decanting possible.  
• The beneficiaries and the trustee may wish the trust were a so-called “directed trust.” In a directed trust, the trust instrument provides that a non-trustee party (variously called a director, an advisor or a protector) has the power to direct the trustee in carrying out one or more identified responsibilities. The director has the power to direct the trustee as to the matter under the director’s control, and the trustee has no discretion over (and, importantly, no liability for) that particular area of administration. It may be possible for directed trust provisions to be engrafted onto a trust instrument by means of a trust modification or decanting.

Endnotes

1. See, e.g., Restatement Of The Law (Third) Of Trusts (2003) (Restatement Third) Section 37 and cmt. e; Uniform Trust Code (UTC) Section 706.

2. An alternative version of UTC Section 411(a) requires the court to approve such a modification when the court finds that the settlor and all beneficiaries have consented to it.

3. Restatement Third Section 65 cmt. d.