What Happens if a Trustee Misappropriates Funds?

You entrusted someone to care for the property you put in your trust. That person, called a trustee, has a duty to act in the best interest of the trust’s beneficiaries. But what happens when that trustee steals from the trust, violating the trust you put in them? Beneficiaries of a trust can take legal action. The trustee may suffer consequences, from returning the stolen property to criminal charges.

This article explains what happens when a trustee misappropriates trust funds. An experienced trust litigation attorney in your area can explain your state’s laws. They can also give you legal advice about your situation.

What Is a Trustee?

When you make a trust, you’ll name the trustee in the trust document. The trustee is the person you entrust with managing the property and assets you put into the trust. They must do so according to the terms of the trust. They also make distributions from the trust to the trust beneficiaries that you name.

Due to the trustee’s importance, they owe many duties to the beneficiaries. Trustee duties include the duty of loyalty and the duty to provide an accounting.

What Is a Breach of Fiduciary Duty?

Since they manage the trust, the trustee has access to all trust assets. Because of that power, the trustee has a fiduciary duty to the trust beneficiaries. That means the trustee must act in the best interest of the beneficiaries.

A trustee breaches their fiduciary duty when they use trust funds for their benefit. Examples include self-dealing and having a conflict of interest. One of the more egregious examples is stealing from the trust. When the trustee does that, they are stealing from the beneficiaries.

Following are some examples of how a trustee can embezzle from a trust:

• Transferring trust assets into their name
• Using trust funds for their personal use
• Stealing physical assets like jewelry and collectibles
• Selling trust assets and keeping the profit
• Stealing money from the trust’s bank account

Why Make a Trust?

Why make a trust instead of giving your assets directly to your family members? Then you wouldn’t have to worry about a misbehaving trustee. One answer is that most trustees aren’t thieves. The vast majority act with professionalism and care.

Another answer is that trusts have benefits that make the risk of a dishonest trustee worth it. For an example, let’s look at the revocable living trust (RLT). People often use an RLT instead of a last will and testament in estate planning. Like a will, you can name who gets your property when you die. But, unlike a will, your estate can avoid probate with a trust. This benefit can be valuable since the probate process can be long and expensive for your beneficiaries.

Another advantage of a trust is that you can include instructions saying how trust funds can be used. For example, you can limit your beneficiaries to using trust assets only for their health and education. So, you can effectively control your money from beyond the grave. Some types of trusts also give you tax benefits while protecting assets from creditors and lawsuits.

What Can I Do if I Think the Trustee Is Stealing From the Trust?

You can request an annual trust accounting if you’re a trust beneficiary. You can often see evidence of theft in the accounting. It can also be evidence of fraud if the trustee doesn’t keep accurate records and can’t produce an accounting. One thing to look for is transactions that hurt the beneficiaries or benefit the trustee. Interpreting a trust accounting can be difficult. A CPA experienced with trust accountings can help you.

What Are the Penalties for Misappropriation of Trust Funds?

A trustee who mismanages funds can face several punishments. Here are some of the most common:

• You could have the trustee removed. You can also have a co-trustee appointed.
• The trustee could have to return the stolen money.
• Trustees are often allowed to charge a fee for managing the trust. A dishonest trustee could have their trustee fee reduced or waived.
• The trustee may have to pay the beneficiaries. This payment is called a surcharge.
• The trustee could face criminal charges if the misappropriation is severe enough.

Contact an Estate Planning Attorney for Help

A trustee has a fiduciary duty to the trust beneficiaries. Whether the trust is part of an estate plan or a tax-saving tool doesn’t matter. When a trustee fails in their duty, the beneficiaries can take legal action. An experienced estate litigation attorney can help. They can advise you if you think a trustee is misappropriating trust funds.