There are significant penalties for misappropriation of trust funds by the trustee. 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.
Civil penalties and remedies for misappropriation of trust funds
Surcharge. Beneficiaries will ask the court to surcharge the trustee who they are claiming took more than they are entitled to. If the trustee is one of the beneficiaries, then the court can surcharge the trustee’s share of the trust, giving some or all of the trustee’s share to the other beneficiaries.
Turnover. Beneficiaries can bring a proceeding for Discovery and Turnover. If the court grants the turnover, then it will force the trustee to return property that he wrongfully transferred.
Discharge of trustee. If the person caught with misappropriation of funds from a trust is the, the judge of the court can discharge them from their position, taking away their power to manage the trust. The judge can discharge and remove the trustee “by reason of his having wasted or improperly applied the assets of the trust.” The court can appoint someone else as the trustee instead, typically one of the beneficiaries who brought the proceeding to remove the misbehaving trustee.
Attorneys’ fees. Trustees use trust funds for their defense. If the court finds that the trustee improperly took funds from the trust, the court can order the trustee to reimburse the trust for their attorneys’ fees. In some rare cases, the court can even order the trustee to pay the beneficiaries’ attorneys’ fees.
Waiver of commission. A trustee is entitled to a commission for their services. As a penalty for misappropriation of trust funds, the court can take away the trustee’s right to receive the commission.
Criminal penalties for misappropriation of trust funds
It is not common for a trustee of a trust to be criminally prosecuted, but it does happen. A trustee or anyone else improperly taking money from a trust can be subject to criminal prosecution for theft from the trust, even if they are one of the beneficiaries. Taking more than you are entitled to by law can be interpreted as misappropriation of trust funds.
Everyone has their side of the story, and it could be that the beneficiaries’ allegations of theft are unfounded. But if the District Attorney’s office decides to bring charges, then the potential penalties can be significant.
The alleged thief’s side of the story. Trustees or others who are accused of misappropriation of trust funds have their own side of the story. They say that they are paying for trust expenses, taking their legal fees, taking their share as a beneficiary, or comingling funds by mistake. Whether the trustee is caught with misappropriation of trust funds and is now making an excuse or the trustee did have a valid reason to transfer trust property to themselves is up to the court to decide, unless the trustee makes a plea agreement with the District Attorney’s office.
The Penal Law. The trust is the owner of the property. When a trustee is committing misappropriation of trust funds, he commits larceny. New York’s Penal Law (the Criminal Law) states that “A person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof.”  New York Penal Law continues to say that “Larceny includes a wrongful taking, obtaining or withholding of another’s property, with the intent prescribed in subdivision one of this section, committed … by conduct heretofore defined or known as common law larceny by trespassory taking, common-law larceny by trick, embezzlement, or obtaining property by false pretenses.” 
Sentencing guidelines. New York Penal Law 155 describes the sentencing guidelines for someone misappropriation of trust funds. The sentence depends on the amount that the trustee steals. A trustee convicted of larceny can incur a sentence of up to twenty-five years in prison.
|Amount Stolen||Type of Grand Larceny||Section of Penal Code||Felony Class||Penalty|
|In excess of $1,000 but not more than $3,000||Fourth Degree||PL 155.30(1)||Class E Felony||up to 4 years in prison|
|In excess of $3,000 but not greater than $50,000||Third Degree||PL 155.35||Class D Felony||up to 7 years in prison|
|In excess of $50,000 but is not more than $1 million||Second Degree||PL 155.40(1)||Class C Felony||up to 15 years in prison|
|In excess of $1 million||First Degree||PL 155.42||Class B Felony||up to 25 years in prison|
Restitution. The court can force the trustee to return the property to the trust and pay restitution to the beneficiaries.
Although we talk about a trustee, the same rules apply to an administrator and a trustee, as well as a preliminary trustee, administrator d.b.n., administrator c.t.a.d.b.n., administrator c.t.a., ancillary trustee, ancillary administrator, and ancillary administrator c.t.a.  Trustees are not the only ones who can be accused of misappropriation of trust funds. Anyone who has access to funds of the trust could potentially be a thief, such as the attorney, real esate broker, financial advisor, caretakers and others.
How a trustee Can Avoid Penalties
Do not take more funds that you are entitled to. Don’t steal from the trust. 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.
Avoid self-dealing. 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 misappropriation of trust funds 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.
Communicate with 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.
Do not commingle funds. The trustee should place all trust funds into a trust account and not into his personal account, unless he wants to be accused of misappropriation of trust funds. New York Consolidated Laws, Trusts, Powers and Trusts Law – EPT § 11-1.6 states that “Every fiduciary shall keep property received as fiduciary separate from his individual property. He shall not 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.”
Do not use trust funds for personal expenses. The trustee can only use trust funds to pay the legitimate expenses of the trust, taxes and legal fees.
Do not distribute any property without getting signed releases from beneficiaries. Once the trustee collects the assets of the trust and pays out its debts, it’s time for the trustee or administrator of a New York trust to disburse the funds to the beneficiaries. But before the trustee does that, it is important to get a written release from the beneficiaries. The release states that the beneficiaries are satisfied with what they are getting and are never going to sue the trustee. The best release comes with an informal accounting, which provides a summary of what property went into the trusts, what the expenses were, and what is the share of inheritance for each beneficiary.
Having your New York trust lawyer get a release from beneficiaries is especially crucial when the trustee is one of the beneficiaries. For example, if the trustee is transferring a share of the decedent’s business, house, or other property to themselves, the trustee should obtain a written release from the beneficiaries, or at least get them to approve it in writing, to avoid the possibility of the authorized transfer being misconstrued as self-dealing or commingling of funds.
If you feel things like “my family stole my inheritance,” or “my inheritance is being stolen,” it’s time to speak to an attorney.
Whether you are a beneficiary and you are claiming that the trustee is committing misappropriation of trust funds or if you are a trustee and you insist that the transfer of money or property was proper, you can speak with New York trust attorney Albert Goodwin, Esq. at (212) 233-1233.