Can You Trust the Trustee?

Key Takeaways:

1. Trustees and executors are bound by fiduciary duties that require them to act in the best interests of the beneficiaries, exercising loyalty, care, impartiality, and disclosure.
2. Indicators of fraud or breach of fiduciary duty include unusual beneficiary changes, delayed trust administration, or commingled funds.

Trustees and executors have a fiduciary responsibility to the beneficiaries of a trust or an estate. Fiduciary duties include:

• Duty of Loyalty – To invest and manage assets solely in the beneficiaries’ interests.
• Duty of Care – To exercise reasonable care and skill in asset management. If not addressed in the governing document, the Uniform Prudent Investor Act requires trustee to manage assets like a prudent investor would.
• Duty of Impartiality – To treat all beneficiaries fairly and not favor one over another.
• Duty of Disclosure – To provide complete and accurate information about assets and transactions.
• Duty of Good Faith – To act with honesty and integrity, in accordance with fiduciary responsibilities.

Breaches of Fiduciary Duty

A breach of fiduciary duty happens when the fiduciary acts in the best interest of someone other than the beneficiaries. Fiduciaries should not use estate or trust assets for personal gain. Failure to act in the beneficiaries’ best interest could leave the fiduciary liable for negligence and, in some cases, subject to criminal charges.

An executor is responsible for settling the estate by maximizing the beneficiary’s inheritance. This is done by inventorying assets, settling debts, and distributing the remaining assets according to the will. A formal accounting of the estate, detailing every asset and every expense, is a must. Similarly, trustees have the same responsibility to maximize the asset value for the beneficiaries of the trust while providing detailed, transparent accounting. Common Breaches of Fiduciary Duty Include:

• Embezzlement
• Commingling of estate or trust assets
• Self-dealing
• Losses created by a wrongful act or omission
• Material misrepresentation, such as concealing or falsifying facts

Can You Spot the Red Flags?

Red flags are not always readily apparent nor a clear indication of estate fraud. However, identifying multiple irregularities through forensic review may signal an increased likelihood of fraud or abuse. Estate fraud often involves people closest to the decedent, who may exploit their position to manipulate or defraud the estate.

Potential Indicators of Estate Fraud Include:

• Any will, instrument, or agreement executed by someone whose death is imminent.
• If the decedent depended on a beneficiary to provide basic quality-of-life items.
• Unexplained exclusion of a spouse or child from the will.
• Non-relatives—such as a caregiver or advisor—named as primary beneficiaries.
• A will that was not drafted or witnessed by an attorney or notary.
• The will does not accurately reflect the decedent’s estate.
• Substantial gifts made shortly before the decedent’s passing.
• Multiple wills were executed during the two years prior to death.
• Distribution of assets prior to death by the power of attorney, especially if he/she was the recipient.

Trust Fraud

Trust fraud can mirror many of the same warning signs as estate fraud. There are irregularities specific to trusts, and the presence of any of them could indicate wrongdoing or breach of fiduciary duty by the trustee.

These Indicators May Suggest Trust Fraud:

• Unexplained delays in trust administration.
• The trustee’s own finances are commingled in the trust.
• Conflict of interest between the trustee and the beneficiaries.
• Self-dealing or willful misconduct, such as altering terms, misappropriating funds, or acting outside of legal authority.

Some types of fraud can start before estate or trust administration even begins, while others occur during the administration. For instance, someone can present a falsified or revoked will or trust agreement at the beginning or improper distributions are made when the decedent was ill or immediately after death.

Consequences and Next Steps

If an executor or trustee is proven to be in breach of their fiduciary duty, they could face a number of civil consequences. Cases involving constructive fraud or deliberate misrepresentation can result in fines and repayment to beneficiaries or even the removal of the trustee.

While the trustee or executor may often appear to be acting in the best interests of the beneficiaries of a trust or estate, a forensic accountant may be needed to review the activities of the underlying assets to ensure their proper distribution to the beneficiaries.