Breach of Trust

It is possible to place assets in trust in a variety of ways, including:

• Funds
• An asset
• Investing
• Inland

The main reasons to set trusts are:

• Controlling and protecting family assets
• An incompetent beneficiary
• A person who is incapacitated cannot handle their affairs.
• Transferring assets while a settlor is still alive
• In the event of a settlor’s death (a “will trust”), the property passes to the beneficiaries.
• A person without a will dies without a will.

In this article, the author discusses the Breach of Trust and how trust develops and breaks down.

 

Trust Law: What Is It?

In trust law, fiduciary relationships exist and implemented by-laws governing their creation and implementation. An asset or property belongs to a second party (the trustee) on behalf of a third party (the beneficiary) by one party (the trustor). Among the types of trusts in finance is closed-end funds incorporated as public limited companies.

It is possible to establish trust in the following ways:

• Provide legal protection for trustors’ assets.
• Distribute those assets following the trustor’s instructions.
• Time-saving
• Reduce paperwork
• Reduce or avoid estate taxes or inheritance taxes altogether.

 

Trusts: Why Do You Need Them?

It is possible to establish a trust for a variety of reasons. The following are some reasons:

• Tax and probate avoidance
• Choosing how to distribute and manage an individual’s money while they are alive or after they die
• Specifying the terms of an inheritance for beneficiaries
• Creditor protection
• Beneficiaries with disabilities or underage beneficiaries who are unable to manage their finances

There are some disadvantages of trusts as well. Among them are:

• Time-consuming
• Creating something requires money.
• Revocation being difficult

 

Trust Categories

Trust law recognizes many types of trusts, but each falls into a particular category.

 

Testamentary or living trusts

As with inter-vivos trusts, living trusts are written documents preserving an individual’s assets for their lifetime and benefit. Following the death of that individual, the assets pass to their beneficiaries. These types of trusts transfer the assets to a successor trustee. A successor trustee transfers the assets after the individual’s death.

When someone dies, a testamentary trust specifies how the asset passes according to their wishes.

 

Irrevocable or revocable trusts

Trustors can change or terminate revocable trusts during their lifetime but cannot alter irrevocable ones once they have established them. Upon the death of a trustor, revocable trusts become irrevocable. Unlike a living trust, which can be irrevocable or revocable, a testamentary trust is usually irrevocable only.

Irrevocable trusts are typically preferred because they are irrevocable and contain assets permanently removed from ownership by the trustor.

 

Trusts with or without funds

In a funded trust, assets are put into the trust during a trustor’s lifetime, whereas an unfunded trust only includes the trust agreement.

If the trustor dies, it may become funded, but it may also remain unfunded. To protect the trustor’s assets from many of the issues that a trust usually avoids, it is necessary to ensure that the trust has adequate funding.

 

Types of Trust Funds

Trust funds are available in many varieties to suit different situations.

 

Blind trusts:

A blind trust allows trustees to handle trust assets without beneficiaries’ knowledge, which may be helpful if a beneficiary needs to avoid conflicts of interest.

 

Charitable trusts:

Charitable trusts exist to benefit a particular charity or nonprofit organization. They often serve as part of an estate plan, which helps reduce or even avoid gift and estate taxes.

 

Charitable lead trusts:

In these trusts, certain benefits go to a given charity, while the remainder goes to the beneficiaries of the trustor.

 

Charitable remainder trusts:

After the trustor dies, the trust disperses income to beneficiaries such as spouses or children and then donates the remaining assets to the specified charity.

 

Credit shelter trusts:

People can bequeath a sum up to, but not exceeding, the estate tax exemption through these trusts. They are sometimes called family, bypass, or “B” trusts. The rest of the person’s estate passes tax-free to a spouse. Even if the funds grow, you won’t have to worry about estate taxes on funds you place in a credit shelter trust.

 

Generation-skipping trusts:

People can transfer their assets to beneficiaries tax-free with these trusts. This type of trust often serves to transfer assets to grandchildren. To qualify as a beneficiary, the trustor must be two generations younger than the beneficiaries.

 

Insurance trusts:

An irrevocable trust protects life insurance policies that exist within the trust. Life insurance trusts exclude the policies from being taxable. In the event of a death, proceeds can help to cover estate costs, although the trustor may not be able to borrow against the policy or change beneficiaries.

 

Marital trusts:

The marital trust, also known as an “A” trust, benefits a surviving spouse, which usually appears in their taxable estate.

 

Qualified personal residence trusts:

There are good qualified personal residence trusts. These trusts allow someone to remove their home (or vacation home) from their estate when a property is likely to appreciate significantly.

 

Qualified terminable interest property trusts:

People can designate particular beneficiaries (who will survive them) at different times in these trusts. As an example, a trust that provides income to the trustor’s spouse, and when the spouse dies, the trustor’s children receive whatever remains in the trust.

 

Separate share trusts:

Parents can establish trusts with different features for different beneficiaries, typically their children.

 

Special needs trusts:

For dependents receiving government benefits, such as disability benefits through Social Security, these trusts exist. As a result of setting up this type of trust, disabled individuals can receive income without losing their government benefits or even losing them.

 

Spendthrift trusts:

There are a few essential functions that spendthrift trusts fulfill:

• The trustor places assets in these trusts to prevent creditors from claiming them.
• Independent trustees manage the assets of these trusts.
• Beneficiaries of these trusts are prohibited from selling their interests in the trust.
• Totten trusts:

These trusts, also known as payable-on-death accounts, are more straightforward than others. The trust occurs during the trustor’s lifetime, who also serves as the trustee.

 

Totten trusts serve to protect bank accounts.

Typically, Totten trusts serve to protect bank accounts. It is not possible to include physical property in Totten trusts. Totten trusts’ primary advantage is allowing assets included in the trust to escape probate upon the trustor’s death. No particular written document is required to establish a Totten trust, and it rarely costs anything. Instead, the only requirement is that identifiable language is present in the account title. Examples include:

• “As Trustee For”
• “In Trust For”
• “Payable on Death To”

 

Breach of Trust: What Is It?

A trustee is a fiduciary, so they owe it to the trust’s beneficiaries to act in their best interests. Violations of fiduciary duties constitute a breach of trust.

 

 

A trustee’s duties to trust beneficiaries include:

• Acting in the beneficiary’s best interest.
• Prudently managing the trust property.
• Keeping accurate records.

A trustee will likely have broken the trust if they violate these duties.

Beneficiaries have the following duties under California law:

• As per the conditions in the trust contract.
• The trust must be in the best interest of the beneficiaries and the trust.
• Fair and fair treatment to all recipients.
• Trustees should be wary of using trusts to benefit themselves.
• The separation of assets in trust.
• Protection of trust assets and enforcement of legal claims.
• The trust is protected from legal actions.

California Probate Code #16400 defines a “breach of trust” as violating one of these duties.

 

Examples of Common Problems

The following are some common ways a trustee can breach trust:

• Putting their interests ahead of the trust beneficiaries by “self-dealing.”
• Mixing trust funds with personal funds
• One or more beneficiaries receive preferential treatment over others.
• Taking a bribe or kickback related to the trust’s assets
• Managing trust assets negligently or in bad faith (to deceive)

 

Limitation Statute

Suppose you suspect that a breach of trust has occurred. How long do you have to sue the trustee as a beneficiary? It takes a beneficiary three years after discovering (or should have known) the breach of trust to file a lawsuit against the trustee under California Probate Code section 16460.

A trustee’s accounting may set out a 180-day deadline if it states this deadline in the accounting.

 

What Do You Do If Your Trust Is Breached?

A trust beneficiary has several options if they believe the trustee breached the trust.

Beneficiaries and co-trustees can ask the probate court to take any of the following actions when a trustee breaches trust.

• Ensure that the trustee performs their duties.
• Prevent the trustee from violating the trust.
• Require the trustee to pay money or otherwise redress a breach of trust.
• Vacate the trustee’s position.
• Trustees’ acts should not stand.
• Deny or reduce the trustee’s compensation.
• Place a constructive trust on trust property or impose an equitable lien.
• Identify wrongfully disposed of trust property and recover it.

 

California Probate Code

Additionally, California Probate Code §16440 provides that if a trustee breaches trust, they can be “surcharged” or required to pay the following amounts.

• In the event of a breach of trust, any loss or depreciation in the trust estate’s value, together with interest.
• With interest, any profit made by the trustee due to the breach of trust.
• A breach of trust may result in a loss of profit to the trust estate.

There may, however, be instances where a trustee must pay “exemplary” or “punitive” damages where there is involvement of oppression, fraud, or malice. When the trustee behaves particularly reprehensible, punitive damages can serve as additional compensation.

 

Is There Anyone Who Can Sue For Breach Of Trust?

It is the responsibility of any beneficiary or co-trustee to file a petition in the probate court alleging breach of trust. Beneficiaries and co-trustees can seek relief from the court under this section when a trustee threatens the trust.

 

Breach of Trust: What Is the Penalty?

Trustees found guilty of a crime in a criminal court for a breach of trust can receive a jail sentence only for a criminal offense.

California’s misdemeanor crime of embezzling trust assets worth less than $950 carries a maximum sentence of 6 months imprisonment while stealing trust assets worth more than $950 carries a maximum sentence of 3 years.

A breach of trust is usually handled as a civil matter in probate court rather than a criminal matter. In such cases, police departments and district attorneys lack sufficient resources to pursue criminal charges.

In this case, an attorney in trust litigation court usually represents a beneficiary or co-trustee alleging a trustee misappropriated trust assets. Even if trustees have stolen or misused trust property for their benefit, they are rarely charged criminally and sentenced to jail for breaches of trust.

 

The Prevention of Trust Breaches

 

Open Communication:

Keeping your communication honest and direct prevents misunderstandings and fosters trust between you and your colleagues.

 

Set Expectations:

Establish clear expectations in any relationship or agreement so that unintentional breaches do not occur.

 

Stay Consistent:

A company’s credibility increases by consistently fulfilling obligations and promises.

 

Transparency:

By being open about your intentions, decisions, and actions, others can better understand your motivations, reducing suspicion.

 

Active Listening:

Listening to another person’s concerns and feelings shows respect and understanding, strengthening people’s trust.

 

Avoid Conflicts:

A proactive approach will prevent potential trust problems. Recognize and address conflicts between personal interests and responsibilities.

 

Seek Feedback:

It shows that you value other people’s perspectives and are open to improvement when you solicit input about your actions and decisions.

 

Educate:

Individuals about ethical behavior and the importance of trust in relationships to promote trust-building.

 

Monitor:

Ensure trust remains intact by regular assessment and review of interactions and processes.

 

Apologize Promptly:

It’s human nature to make mistakes. Recognizing and rectifying them quickly can prevent a minor issue from becoming severe.

 

Taking the First Step

It is crucial to consult a trust litigation lawyer when you suspect a trustee has broken trust. Their job is to help you analyze the facts, determine if you have a case and its strength, and guide you through the complicated litigation process. Feel free to contact our office if you have any questions regarding a breach of trust.