In this article, we’ll discuss a trustee’s responsibility and fiduciary duties, examples of breach of duties, and the possible remedies ordered by the court against the trustee.
When drafting a trust, choosing the right trustee is a very important decision. This individual or entity will be tasked with following the responsibilities set forth in the trust. These responsibilities can be as simple as making sure the estate’s assets are properly disbursed among the beneficiaries, or as complex as overseeing the continued financial success of stocks, assets, investments, etc. The trustee is obligated to carry out the terms of the trust in good faith and to the best of his or her abilities within reason. If the trustee makes informed decisions, exercises caution when appropriate, follows the guidelines set forth in the trust and takes his or her fiduciary responsibilities seriously, it is unlikely that the trustee would be liable for breach of trust. However, every case is different and if you as a beneficiary feel action needs to be brought against your trustee, or conversely if you’re a trustee who feels the legal action brought against you is erroneous, seeking the guidance of a qualified attorney is highly suggested.
How is one to know if there has been a breach of fiduciary responsibilities? Ultimately it will be the court’s decision if the case is brought to trial. Generally, a trustee’s fiduciary duties can be simplified into three categories:
Many cases against a trustee involve beneficiaries who feel the trust estate has lost value or not grown as anticipated. While there is a lot of room for interpretation, the trustee will usually not be held liable for losses if he or she exercised reasonable caution, skill, knowledge and did not abuse his or her discretionary powers. A trustee cannot be considered insurance against poor market results and making a reasonable mistake should not land a trustee in legal action.
The distinction between an honest mistake and breach of trust is often determined by the expressed duties set forth in a trust. Again, a trust cannot read “trustee X guarantees Y returns on trust investments over Z period of time,” but if there is a substantial decrease in the value of retained stocks and it was found that the trustee failed to attend stockholder meetings, perform adequate due diligence, or follow the value of said stocks on the stock market the trustee may be held liable. A trustee may find herself liable if she violates an express or implied duty set forth in the trust whether the violation was in good faith, bad faith, due to negligence, forgetfulness, oversight, etc. The trustee is expected to know and understand what their duties are when accepting the trustee position.
If the court finds the fiduciary (trustee), guilty of breach of contract he or she can be ordered to pay a surcharge for any costs or damages to the estate, trust, fiduciary account, etc. The surcharges will fit into one of three categories:
A surcharge can also be ordered by the court for any costs and fees associated with the breach of duties and the cost of litigation incurred by the plaintiffs (typically the beneficiaries).
Fiduciaries often receive payment in the form of a percentage of profits and/or a flat fee for managing the trust investments and assuming fiduciary responsibility. If the trustee has breached their duties the court may order their fees denied over a given period, or up to a certain amount, and the trustee will be barred from using any of the trust’s money to pay for attorney fees.
Illinois courts reserve the right to remove a trustee if a breach in fiduciary duties has taken place. However, there is no concrete set of parameters outlining what amount of breach constitutes the removal of the trustee. Illinois courts point to malfeasance as the deciding factor in trustee removal cases, but the degree of dishonesty and bad faith warranting removal is unclear. If the breach of duty involves theft from the trust and/or wrongful conduct there is a strong chance the court will order the removal of the trustee. However, there have been cases in Illinois where significant mismanagement of the fiduciary account was enough to have the trustee removed.
Extra punishment in the form of punitive damages can be awarded by the court against trustees who show egregious behavior in the breach of duties including malice, willfulness, wantonness, fraud, oppression or gross negligence, or any other behavior which demonstrates an extreme disregard for the rights of others. Even if punitive damages are levied against the defendant they are still required to pay any other surcharges ordered by the court.
If you are a beneficiary and feel a breach of duties has occurred the first step would be to speak to a qualified attorney. He or she can investigate your claim and better determine if a breach of duties has taken place.
O'Flaherty Law is happy to meet with you by phone or at our office locations in: