What a trustee cannot do can be summed up as follows:
- Ignoring the beneficiaries
- Refusing to follow the trust
- Taking unreasonable expenses
- Failing to keep records of every single expense
Let’s look at each of those things in more detail.
Table of Contents
A trustee cannot lie about anything related to the trust. A trustee cannot provide false information to the beneficiaries or the court. For example, when a beneficiary asks about something relating to the trust, the trustee must answer truthfully. And when the trustee fills out court forms and schedules, the trustee must not write down false information or check the wrong boxes.
A trustee cannot steal from the trust. On the most simple level, the trustee cannot steal money or property they’re managing. The trustee also cannot steal in more sophisticated ways.
Penalties for Stealing from a Trust
There are significant penalties for stealing from the trust. The court can discharge the trustee and replace them with someone else, force them to return the money, and take away their commissions. There can also be criminal a penalty, but most trust theft allegations do not escalate to criminal prosecution.
Taking More Funds than the Trustee is Entitled to
It can be tempting for a trustee to take some extra cookies from the cookie jar. You have access to trust funds and the power to take some funds out. You don’t see anyone looking over your shoulder. But that sense of safety is false. Banks and courts have systems in place to detect fraud. Beneficiaries can get suspicious and hire a trust attorney or report the suspect to the police and hire a trust attorney to get the inheritance that they are entitled to.
Transferring Trust Property Below Market Value
A trustee can transfer property to himself only if he pays fair and full market value for it, or if the transfer is being done as part of distributing the trust, with equal distribution among all the beneficiaries and in accordance with all the applicable rules.
Trust property does not belong to the trustee – he is just managing it.
What do we call it when a manager steals the money or property he is managing? That’s right; it’s called embezzlement. Or more simply, stealing.
Let’s say a trust contains a house that is worth $1 million, and the trustee transfers it to himself for $200,000. This gives him the opportunity to “flip” the house on the market and walk away with $800,000 or live in a $1 million house having only paid $200,000. Even if the trustee is one of the beneficiaries, he is responsible to manage the trust for everyone’s benefit, not just his own.
The trustee cannot transfer trust property to himself because the property belongs to someone else unless he pays the full price for it. As explained above, doing so can be interpreted as stealing and can lead to an array of legal woes. A smart trustee would want to avoid transferring trust assets to himself, even if paying fair and market value. If beneficiaries are getting more money than they would have, if not for the trustee buying them out, the trustee should explain it to the beneficiaries. For example, the trustee can explain the savings on transaction costs, such as not having to pay a broker. There must be a feeling that the trustee fulfilled his responsibilities to the beneficiaries.
The trustee should place all trust funds into a trust account and not into his personal account. New York Consolidated Laws, Estates, Powers and Trusts Law – EPT § 11-1.6 states that “Every fiduciary shall keep property received as fiduciary separate from his individual property. He cannot invest or deposit such property with any corporation or other person doing business under the banking law, or with any other person or institution, in his own name, but all transactions by him affecting such property shall be in his name as fiduciary.” Surrogate’s Court Procedure Act – SCP § 719 states that the court can take away a person’s power to manage the trust “where he mingles the funds of the trust with his own or deposits them with any person, association or corporation authorized to do business under the banking law in an account other than as fiduciary.”
Using Trust Funds for Personal Needs
The trustee can only use trust funds to pay the legitimate expenses of the trust, taxes, and legal fees. The trustee cannot use trust funds for his personal needs or expenses.
Using Trust Property for Himself
A trustee cannot use trust property such as real trust and a vehicle for his own personal use. The trustee cannot use the property of the trust for himself or his family without the consent of the other beneficiaries. For example, living in a house that belonged to the person who died.
Taking Over Trust Business for the Trustee’s Own Gain
If a trust owns a business, a trustee cannot use that business for his own gain. The business has to be sold at a fair market value. When there is a family business as part of the trust, it is likely that the beneficiaries are due to inherit part or all of it in order to keep the business ownership within the family. The trustee cannot indefinitely assume control of the family business and take it over to the detriment of the other beneficiaries.
Favoring One Trust Beneficiary Over Another
Favoring one beneficiary over another can be considered stealing from the trust. It has the same effect as the trustee stealing money from one beneficiary for himself and then transferring that property to another beneficiary.
There are all sorts of other contractual or legal matters that may require a trustee’s attention. For instance, if the settlor owned commercial property and had tenants, the trustee may have to collect rents, work with a property management company or hire one depending on the size of the building and the number of tenants. What a trustee cannot do is fail to work with attorneys and accountants in order to make sure assets are properly valued and contractual obligations are completed.
Here is a list of things that the trustee cannot do as far as neglecting the trust is concerned:
- Mismanage trust assets including bank accounts, stock, bonds, retirement accounts, pensions
- Be negligent or careless in investing assets
- Sell personal and real property below market price
- Fail to distribute assets
- Fail to file a trust tax return if required, fail to pay trust taxes and back income taxes
- Mismanage trust business
- Fail to wind up and settle a trust if required
- Fail to distribute assets to the beneficiaries
Ignoring the Beneficiaries
The trustee should communicate with the beneficiaries, be transparent about the money he is taking from the trust, explain the reasoning behind it and try to get on the same page with the beneficiaries. The trustee cannot fail to communicate with the beneficiaries in a clear, reasonable and timely manner.
Refusing to Follow the Terms of the Trust
A trustee is named by a settlor (the person who made the trust) at the time a trust is made. After the death of the settlor, the successor trustee takes over. The trustee cannot refuse to carry out the wishes and intent of the settlor and cannot act in bad faith, refuse to represent the best interests of the beneficiaries at all times during the existence of the trust, and refuse to wind up close a trust.
Charging Unreasonable Expenses
The trustee is allowed to charge reasonable expenses and is not allowed to charge unreasonable expenses.
The trustee is allowed to charge reasonable expenses:
- commission based on a formula
- reasonable expenses, usually not a big amount
- court fees
- attorney fees
- accountant fees
- house maintenance if the house belongs to the trust
- reasonable travel and accommodation expenses
The trustee is not allowed to charge unreasonable expenses:
- no taking a salary
- A trustee or their relative cannot take a salary for managing property of the trust or taking care of the deceased or their property while they were still living
- no expenses before the trust was created
- Expenses incurred out of obligation to the deceased, such as taking care of them when they were sick. Although this compensation may be allowed if there is a contract that obligates the now-deceased person to pay for the services.
- no transportation and accommodation for friends or family
- A trustee is allowed to charge his own reasonable transportation and accommodation expenses while taking care of the trust, but not for his friends and family
- no excessive expenses
- expenses that are not needed
- above market price
- or benefitting the trustee
A trustee is entitled to receive compensation for his or her services in accordance with the law. When a spouse or a family member acts as trustee, many times they do not take compensation for their services, especially when they are also a beneficiary receiving a distribution of assets under the trust. A trustee cannot take compensation that is in excess of what they are allowed to take by law. For example, a trustee cannot take a salary for managing trust property or get reimbursed for hotel stays and meals related to managing the property.
A trustee is held a higher standard of behavior and is expected to act in an honest, fair and ethical manner. A trustee cannot breach their fiduciary duty. They could be held legally liable for any losses suffered by the trust or beneficiaries. A trustee can be removed by the beneficiaries for breach of fiduciary duty and could be subject to restitution of any financial losses to the trust and beneficiaries, as well as face criminal charges if the trustee committed any crimes such as embezzlement of trust assets.
Failing to Keep Records
Because a trustee is managing the trust for the benefit of the beneficiaries, they should keep records of every single expense.
Acting as a trustee is a big responsibility, and one needs to be careful not to do the wrong thing. If you think that the trustee is doing something wrong, or you are a trustee who is being accused of doing something wrong, you need to get in touch with an experienced trust litigation attorney.
Because there are many things that a trustee cannot do, some family members decide they do not want to take on the job and end up resigning and hiring an attorney or another personal representative to replace them and administer the trust.
If you have an issue with a trustee or if you wish to hire a New York trust attorney to assist you with your duties as trustee, we at the Law Offices of Albert Goodwin are here for you. You can send us an email at [email protected] or call us at 718-509-9774.