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If you are the beneficiary of a trust, or the beneficiary of the estate of a deceased loved one in which a trust has or should have been created, make sure you understand your role and rights to avoid trust litigation. All trusts must have a trustee to manage the trust and potentially make disbursements to the beneficiaries according to the trust provisions. Sometimes the trustee and the beneficiary are the same person. In this case, there is little conflict. Where the trustee and the beneficiary are not the same person, and the beneficiary and trustee begin to disagree on how best to manage or disburse trust funds, then issues arise. Some of the issues may only be resolved in litigation. If you have arrived at this point, it is essential to work with an attorney who is knowledgeable about trust law and litigation to help you access what you are entitled to.
What Is a Trust?
Essentially, a trust is a contractual relationship by which there are at least three parties:
- This person gives some type of asset over to a trustee. The asset can be money, accounts, property, etc.
- The trustee is charged with holding something for the benefit of one or more beneficiaries. A trustee is often a relative, business associate, bank trust department, or formal trust company.
- Beneficiary (or beneficiaries). The beneficiary is the party that is intended to eventually receive something from the grantor via the trust.
Types of Trusts
There are different types of trusts. For the purpose of today’s discussion, we will limit it to:
- Intervivos Trust. In this type of trust, property is given over during a grantor’s lifetime.
- Testamentary Trust. A testamentary trust can come out of a will from someone who has passed and leaves all or part of their estate to a party such as children or grandchildren.
What to Know About Trust Litigation
Unfortunately, there is litigation that can arise out of trusts. Even if a trust is put together with a knowledgeable attorney, if a trustee becomes irresponsible or untrustworthy, it may open the door to trust litigation.
A trustee has a fiduciary duty and must account for funds in the trust (i.e. keeping tax returns, books, bank account records, investment records, and expenditures). A trustee cannot spend money on themselves or engage in activities or investments that a prudent businessperson would not.
Trustees must also look out for the best interest of beneficiaries and in a reasonably conservative way for investments so there are no challenges to a trustee if something goes bad or breaches the business judgement rule. If a trustee mismanages, self-deals, or does something irresponsible, they could be accused of violating the business judgement rule.
One of the most common scenarios is a dispute between a beneficiary (or beneficiaries) and the trustee. A beneficiary may want their money for any number of reasons, but the trustee is given some discretion to decide if the beneficiary gets it or not. There may even be a clause included in the trust that stipulates the trustee has discretion to make distributions until said beneficiary (or beneficiaries) turns a certain age. This type of stipulation is generally executed as a protection against creditors by waiting until the liability goes away before distributions to beneficiaries begin.
Another trust litigation scenario is that beneficiary B complains that beneficiary A got all the money, which is not what the trust agreement said was supposed to happen (like it should have been an even split) or the trustee used their discretion and then that discretion is questioned.
There are times when the trust assets cannot be managed or disbursed as the grantor intended. Where circumstances don’t align with the language in the trust document, trustees or beneficiaries may have to get what is called a “Declaratory Judgement.” For example, if an asset such as an apartment complex is in a trust, a trustee may manage it or hire managers, and manage it for ten years. However, if a person comes along and wants to buy the apartment complex, or a government entity is going to put a highway through it and initiates the process of Eminent Domain, then the trustee may end up managing money instead of a property. At this point in time, the trustee may just want to make a distribution. If the trust document does not include instructions for the trustee on how to manage or disburse large sums of cash assets, it may cause problems. Rather than having the trustee make the decision and expose themselves to mismanagement claims or a breach of duty, it may be easier for a trustee to ask a court for a declaratory judgment, tell them the plans to give X amount of money to beneficiaries and X amount of money to creditors and ask the court to approve the decision. Should the beneficiaries complain against one another at this point, the trustee can let them argue about it, but be secure in doing whatever the court advises or orders.
Trusts with oil and gas interests are common in Texas. Great grandparents may put an oil and gas interest in a trust as part of their legacy. If the grandparents owned the land and then passed, the trustee for the grandkids or possibly the grandkids themselves are likely cashing royalty checks. This can create a host of legal issues as well.
In terms of trust litigation, probate courts in Texas have jurisdiction over trusts, so in a lot of counties there will be trust disputes brought into a statutory probate court as opposed to a district, federal, or county court. Probate courts see more of this type of lawsuit, sometimes making them more beneficial than other courts.
Sometimes trustees are bonded and sometimes they are not. Bonded companies will go after a trustee that creates a liability because they have to put up their money. It is important to understand that when you start requiring a bond that the trustee be a trust company or the trust department of the bank, you are adding a lot of expense. However, without it you run the risk of using a trustee that is not sophisticated enough or is so sophisticated that they take advantage of the situation. The takeaway here is to be wise when naming a trustee for your trust.
Why Work with an Attorney in Dealing with Trust Litigation Issues?
Trusts can still be subjected to trust litigation. However, there are several ways attorneys can assist in limiting these issues, such as:
- Enlist their help in wording and formalizing official trust documents. Experienced legal counsel should be able to use key legal phrases that strengthen these contracts.
- Ask them to explain your rights as a beneficiary to you if you are unsure you are getting the money you believe you are due according to the terms of the trust.
- Get legal counsel if you believe the trustee has abandoned his fiduciary duties.
- Sue a trustee that has not carried out their fiduciary duties.
At the end of the day, people are imperfect, so trust litigation can ensue. As such, make sure you have an experienced and successful trust attorney by your side every step of the way.
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- Episode 451: Tax Planning Post 2024 Presidential Election - December 18, 2024
- Episode 450: Beneficial Owner Information Reports: Filing Requirements and Processes - November 8, 2024
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