Trustee Not Paying Beneficiaries

When a trustee is not paying beneficiaries, what can be done to make sure that they get the distributions that they are supposed to according to the terms of the trust? While many times, these distributions may be uneventful and go smoothly, there are other times where a trustee and beneficiary are not in agreement about how funds should be distributed, leading to legal conflict.

The clearest and best-written trusts make it easy to tell when a trustee should pay beneficiaires. Unfortunately, only a small majority of trusts are clear and well-written. In some cases, language could be interpreted to mean that the trustee must distribute funds in a way to keep the beneficiary up to the standard of living that they used to enjoy. Other trusts may only direct that the trustee uses the funds for things such as medical or emergency expenses. There are other trusts that simply allow the trustee to use their discretion entirely, with no additional guidance as to how. It all depends on the language that the attorney who drew up the trust document used and what was requested by the person who set up the trust.

This does not mean, however, that a trustee has unlimited power when it comes to distributing funds. A trustee cannot simply refuse to pay beneficiaries for a bad reason or no reason at all. A trustee has to act reasonably and fairly when making distributions from the trust, meaning that they can’t simply not pay beneficiaires without some sort of good cause. For example, if the trust document says that funds from the trust should be used for educational expenses, it would most likely be found to be unreasonable on the part of the trustee to refuse to pay for textbooks.

When a trustee is not paying beneficiaries, there are a few things that the beneficiary may want to try in order to get the money they feel they deserve. A first step could be as simple as having a New York estate attorney write a demand letter on the beneficiary’s behalf making a demand for distribution of the estate. This could be a simple solution to keep out of court.

If this does not work, then litigation may be the only option. If this is the case, the beneficiary may have to file a lawsuit against the trustee to have the court force them to release the funds. However, before embarking on this step, the beneficiary should be absolutely sure that the trustee is actually not acting within their discretion when refusing the distribution.

A trustee is a fiduciary, meaning that he has a duty to exercise the utmost good faith and undivided loyalty toward the beneficiaries throughout the relationship. Not paying beneficiaries could be a failure of that fiduciary duty.

If you are faced with a situation where a trustee is not paying beneficiaries, call the Law Offices of Albert Goodwin at (212) 233-1233 and speak with a trust attorney.

Mandatory vs. Discretionary Distributions

The first question in any beneficiary-distribution dispute is whether the distribution at issue is mandatory or discretionary. The answer comes from reading the trust document carefully.

Mandatory distributions. The trust requires the trustee to make specific distributions on specific events. Examples include: "The trustee shall distribute all income annually to the beneficiary" or "Upon the beneficiary reaching age 25, the trustee shall distribute one-third of the trust's principal." When the triggering event occurs, the trustee has no choice. The distribution must be made.

Discretionary distributions. The trustee has discretion whether to distribute. Examples include: "The trustee may distribute principal for the beneficiary's health, education, maintenance, or support" or "The trustee may make distributions in the trustee's sole and absolute discretion." When distributions are discretionary, the trustee evaluates whether to make them in each instance.

The two have different remedies when the trustee refuses to distribute. For mandatory distributions, the remedy is simple — petition the court to enforce the mandate. For discretionary distributions, the remedy requires showing that the trustee abused discretion.

Abuse of Discretion Standards

Even when distributions are discretionary, the trustee's discretion is not unlimited. The trustee must exercise discretion in good faith and consistent with the trust's purposes. The discretion standard varies depending on how the trust is worded:

"Sole and absolute discretion." The broadest grant of discretion. Courts are reluctant to second-guess decisions made under this language but will intervene where the trustee acts in bad faith, dishonestly, or with a complete disregard for the trust's purposes.

"Reasonable discretion." A narrower standard. The trustee must make decisions a reasonable person in the same position would make. Courts will more readily review decisions under this standard.

HEMS standard. "Health, education, maintenance, and support" is a specific ascertainable standard used in many trusts for tax reasons. A trustee using HEMS must distribute when those needs arise. Refusing to fund clearly HEMS-qualifying expenses (medical bills, tuition, basic living expenses) is an abuse of discretion.

Other standards. Some trusts use specific lifestyle language ("to maintain the beneficiary's accustomed standard of living"), specific purpose language ("to start a business" or "for a down payment on a home"), or other criteria. The trustee's discretion is bounded by whatever the document specifies.

Common Reasons Trustees Refuse to Pay

Understanding why a trustee is refusing helps in determining the right response:

Legitimate exercise of discretion. The trustee judges that the requested distribution is not appropriate — the beneficiary has other resources, the requested purpose is not within the trust's scope, the distribution would deplete trust funds needed for future obligations.

Concern about beneficiary's circumstances. The trustee worries about giving funds to a beneficiary with addiction, mental health, or financial management issues. The trustee may be willing to pay vendors directly but not to give cash to the beneficiary.

Self-interest. The trustee is also a beneficiary and refusing distributions to the requester preserves more for the trustee personally.

Hostility. The trustee has personal conflict with the beneficiary and is using distribution control as leverage.

Concealment. The trustee has mismanaged or misappropriated trust funds and refuses to distribute because the funds are no longer there.

The first two reasons may be legitimate; the latter three are abuses of duty.

The Demand Letter Step

Before escalating to court, a formal demand letter from an attorney often produces results. The letter typically:

• Identifies the beneficiary's interest and the requested distribution.
• Cites the trust language supporting the demand.
• Describes the trustee's failure to pay and the consequences.
• Demands payment within a specific time frame.
• Outlines the next steps if payment is not made (formal accounting, court proceedings).

Many trustees who have been refusing informal requests respond to a formal attorney letter. The letter creates a record and signals that the beneficiary is serious about pursuing remedies.

Petition for Compulsory Accounting

If the demand letter does not produce results, the beneficiary can petition the Surrogate's Court (for testamentary trusts) or Supreme Court (for inter vivos trusts) for a compulsory accounting under SCPA § 2205. The accounting requires the trustee to file a comprehensive report of trust activity. The beneficiary then has the opportunity to file objections.

The accounting often surfaces the real reason for non-payment. If the trustee has mismanaged the trust, the accounting will show it. If the trustee has been treating one beneficiary unfairly relative to others, the accounting will show that too.

Surcharge and Removal

If the accounting reveals wrongful conduct, the beneficiary can seek surcharge against the trustee — an order requiring the trustee to repay the trust for losses caused. Surcharge typically includes the principal lost, interest, and (in appropriate cases) attorney's fees. In addition, the court can remove the trustee and appoint a successor.

Removal is a strong remedy because it puts a new trustee in place who can administer the trust properly going forward. The combination of removal and surcharge is sometimes the right answer in cases of clear trustee misconduct.

Petition for Court Instruction

Where the issue is genuine disagreement about how the trust should be interpreted, a petition for instructions can resolve the matter with court approval. Either the trustee or the beneficiary can file. The court reviews the trust, hears from the parties, and issues an order resolving the disputed point. The order then guides the trustee's conduct going forward.