Trusts — testamentary, revocable, and irrevocable — all impose fiduciary duties upon a trustee (See: Fiduciary Duties of a Trustee). Whenever a trustee breach his/her fiduciary duty (self-dealing, improper investment, fraud, etc), the beneficiary of the trust has a few separate options.
(1) The beneficiary can ratify (i.e., consent) to the transaction, thereby waiving the breach and making everything okay.
(2) The beneficiary can file a lawsuit for the resulting loss. While breach of a fiduciary duty is itself an automatic wrong which may be grounds for removing the trustee, the measure of the resulting loss will depend on the extent of the monetary loss.
(3) In fraud or self-dealing circumstances, the beneficiary can request that the court create a constructive trust and trace and recover the property for the trust. This tracing can become quite complicated at times. Say a trustee takes $100,000.00 out of the trust and places it in the trustee’s own personal name and uses it to buy a house. Under the tracing approach, the beneficiary may claim an interest in the home — and potentially an increase in the home’s equity, if any.
Contact us if you need help in creating a trust, interpreting a trust, or exploring whether the trust is being properly administered and handled by the trustee.