Can You Sue a Trust, Whether as a Beneficiary or a Creditor

Asking can you sue a trust can mean several things. You can be a beneficiary suing a trust to pay you more or a person who was left out of the trust. You can be a creditor suing claiming that the trust was created to preclude you from collecting what is due to you. You can be a person who is trying to sue a trust for a number of particular reasons and a based on a number of particular grounds.

Behind every trust, there are people. A trust can be sued, but because it is not a separate legal entity that can respond to actions on its own, the respondent will be the trustee.

Beneficiaries or people who are left out can sue a trust

When a beneficiary or a potential beneficiary is suing a trust, we generally categorize the lawsuit into one of  two categories: (a) cases pertaining to the trust and its provisions; and (b) cases pertaining to the trustee’s actions. Therefore, a trustee can be sued individually and/or in his representative capacity, as trustee of the trust.

Examples of cases pertaining to the trust and its provisions could be a trust contest involving the capacity of a settlor/grantor to establish a trust, or a question involving the validity of a trust provision or the validity of an asset’s inclusion into the trust. These are actions brought against the trustee on a representative capacity as trustee of the trust.

Breach of fiduciary duty

In cases of mismanagement of trust assets, self-dealing, non-distribution of interests or assets, and breaches of fiduciary duties, these claims can be filed both against the trustee in his representative capacity, and individually. Generally, the trustee has discretion in managing the trust assets, and for this reason, any suit against his management is a suit against the trust. However, if one has evidence that the trustee engaged in self-dealing or clearly mismanaged the trust assets, the trustee can be personally liable for his inappropriate actions and his attorney’s fees will not be covered by the trust assets.

Creditors can sue a trust

A creditor may question the inclusion of an asset in an irrevocable trust, claiming that such inclusion was made in fraud of creditors because the remaining assets are insufficient to pay the debts. This suit should generally be filed against the trustee. However, if it is a testamentary trust that was established through will, depending on the state the trust was established, the suit might need to be filed against the estate. It is best to consult with an experienced trust and estates litigation lawyer to ensure that your suit is filed properly.

Legal representation

If you are a distributee who has been left out of a trust, want to contest the validity of the trust's provisions, or want to sue the trust for any matter, please consult a New York estates lawyer immediately to consult about your rights. We, at the Law Offices of Albert Goodwin, are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

Who You Actually Sue: The Trustee, Not the Trust

A trust is not a person and is not a legal entity that can be sued directly. Lawsuits "against the trust" are technically against the trustee in their representative capacity. The trustee is the proper defendant. The trust's assets are reachable through the lawsuit, but the trustee is the one who appears in court, files responsive pleadings, and acts on behalf of the trust.

This structural feature has practical consequences. The trustee's name appears on the caption of the lawsuit ("Jane Doe, individually and as Trustee of the John Smith Trust"). Service of process must be on the trustee personally. The trustee may need both personal counsel (if the trustee is sued individually) and counsel for the trust (paid from trust funds for matters relating to trust administration).

Where the Trust Can Be Sued

Jurisdiction and venue for trust litigation depend on the type of claim:

• Surrogate's Court has jurisdiction over testamentary trusts (created in a will) and over certain inter vivos trust matters. The relevant Surrogate's Court is generally the one where the trust was established or where the grantor was domiciled.
• Supreme Court has jurisdiction over inter vivos trust matters and is the standard venue for trust contests of revocable trusts where the grantor is still living, certain breach of trust actions, and trust matters not falling within Surrogate's Court jurisdiction.
• Federal court may have jurisdiction over certain claims (federal tax disputes, ERISA matters, diversity actions of sufficient amount) but is not typically the venue for ordinary trust disputes.

SCPA § 207 sets out the rules for Surrogate's Court jurisdiction over inter vivos trusts. The court must be the one where assets of the trust are located, where the grantor was domiciled at the commencement of the proceeding, or where the trustee resides or has its principal office.

Types of Claims Against Trustees

The lawsuits brought against trustees in their representative capacity fall into recurring categories:

Trust contests. Challenging the validity of the trust on grounds such as lack of capacity, undue influence, fraud, or improper execution. The remedy is invalidation of the trust (in whole or in part).

Construction proceedings. Asking the court to interpret ambiguous trust provisions. The remedy is a court order construing the language.

Reformation proceedings. Asking the court to modify the trust to fix scrivener's errors. The remedy is a court order changing specific provisions.

Accounting proceedings. Compelling the trustee to file a complete report of trust activity. The remedy is the accounting itself plus any surcharge based on objections.

Breach of fiduciary duty claims. Alleging that the trustee mismanaged assets, self-dealt, or otherwise violated fiduciary obligations. The remedy is surcharge, removal, or both.

Removal proceedings. Seeking to oust the trustee for cause. The remedy is replacement of the trustee.

Distribution proceedings. Seeking to compel the trustee to make distributions the trust requires. The remedy is a court order directing distribution.

Personal Liability of the Trustee

When a trustee is sued in their individual capacity rather than as trustee, the trustee's personal assets are at stake. Personal liability typically arises in cases of:

• Self-dealing (using trust assets for personal benefit).
• Conversion (taking trust assets for personal use).
• Gross negligence (mismanagement falling well below the standard of care).
• Bad faith conduct (acting in willful disregard of duties).
• Fraud against beneficiaries or third parties.

The trustee's bond, if one exists, may cover some categories of personal liability. The trustee's own assets are reachable for the balance.

Defenses Available to the Trustee

Trustees facing suit have several defenses available depending on the claim:

• Statute of limitations. Most claims must be brought within defined time periods.
• Laches. Equitable defense for unreasonable delay that prejudiced the trustee.
• Release. If the beneficiary previously signed a release covering the period at issue, the release may bar the claim.
• Court approval. If the disputed action was previously approved by the court, the approval is generally a complete defense.
• Standard of care. The trustee's conduct may have met the prudent investor or similar standard despite poor outcomes.
• Lack of standing. The plaintiff may not have a sufficient interest to maintain the claim.

Creditor Claims Against Trusts

Trust assets can be reached by creditors of the grantor (for revocable trusts during the grantor's lifetime), creditors of the beneficiaries (depending on the trust structure), or in certain other circumstances. Creditor reach depends on:

• Whether the trust is revocable (reachable by grantor's creditors) or irrevocable (typically not).
• Whether the trust has spendthrift provisions (provisions restricting alienation and creditor reach).
• Whether the beneficiary has a mandatory or discretionary interest.
• Whether the trust was funded under circumstances that constituted fraud on creditors.

Creditors seeking to reach trust assets typically file lawsuits in Supreme Court or, where appropriate, fraudulent conveyance actions to undo transfers into the trust.