Trust disputes and litigation usually result from ambiguities in the trust terms, disputes over asset distributions, allegations of trustee misconduct, or challenges to the validity of the trust itself. As a trust litigation attorney who advocates for both trustees and beneficiaries, I have seen all sorts of misconduct and rights violations.
Table of Contents
Common Causes of Trust Disputes
Trust disputes arise for a variety of reasons. The most frequent sources of conflict include ambiguous trust terms, disagreements over asset valuation and distribution, trustee misconduct or breach of fiduciary duty, undue influence exerted over the trustor, and contested challenges arguing the trust is invalid.
Ambiguous, Contradictory, or Confusing Trust Terms
Poorly drafted or unclear language is a common trigger for trust litigation. Key terms left undefined or provisions that contradict create ambiguity. Examples include failing to define key terms like “income”, “principal”, “issue”, or “per stirpes”, contradictions between handwritten and typed or printed provisions where the handwritten terms often supersede, confusion over whether certain assets are separate or community property, and contradictory provisions on trustee succession and successor appointment. Litigation often arises years later between beneficiaries seeking different interpretations that benefit their positions. Trustees also get embroiled in these disputes. Expert trust counsel should be retained to carefully review and revise any ambiguous or contradictory terms. Ask the attorney to identify and suggest fixes for any confusing language.
Disputes Over Asset Valuation and Distribution
Beneficiaries often challenge trustees’ valuation of assets used to fund trusts or distribute shares. For example, beneficiaries may claim trustees undervalued assets like real estate, businesses, or collectibles in order to minimize distributions. Beneficiaries may also dispute ownership percentages used to allocate or divide assets, with one beneficiary claiming a right to certain property exceeding their actual designated share. Trustees and beneficiaries also end up in litigation over the timing and amounts of distributions, such as beneficiaries demanding distributions trustees believe are improper or excessive, or trustees denying or delaying distributions to beneficiaries who believe they are entitled to funds. Clear trust terms and consistent valuation methods based on objective third-party appraisals help avoid these disputes.
Trustee Breach of Fiduciary Duty
Perhaps the most common source of trust litigation is alleged trustee breach of fiduciary duty, through acts like self-dealing, mismanagement of trust assets resulting in imprudent investment decisions or neglect, charging excessive fees for trustee services, or failure to provide accountings as mandated. Trustees should consult regularly with counsel to avoid any conflicts of interest or lapses in duty that could prompt litigation. Ongoing communication with beneficiaries is also key.
Undue Influence Over the Trustor
Lawsuits often allege someone exerted undue influence over the trustor, causing improper favoritism in the trust terms. This can involve claims that a beneficiary, caregiver, or advisor manipulated or isolated the trustor during trust drafting, or that the trustor lacked mental capacity when swayed to change the trustee, beneficiaries, or distribution structure. These disputes often spur trust contests arguing the entire trust instrument is invalid due to undue influence or incapacity, requiring extensive expert medical evidence.
The most contentious trust disputes involve contests where beneficiaries challenge the fundamental validity of an entire trust on grounds like lack of capacity, undue influence, fraud, or improper execution. This type of litigation seeks to void the trust altogether through intensive discovery and evidentiary battles. Trust contests also tend to spawn collateral lawsuits against advisors who assisted in implementing the “invalid” trust. These contests fracture families and decimate estates with legal costs.
Careful initial drafting and ongoing trust administration are the best litigation avoidance strategies. But if a dispute erupts, experienced trust counsel can often guide the parties to effective resolution through negotiation or mediation, avoiding a prolonged court battle.
Types of Trust Litigation and Claims
Trust disputes frequently arise from ambiguities in the trust instrument or disagreements over administration between the trustee and beneficiaries. Careful drafting and open communication can prevent many issues. But litigation may be necessary if disputes cannot be resolved amicably. This article provides an overview of the most common types of trust litigation claims beneficiaries and trustees pursue in court when seeking to enforce their rights and interests.
Here is a comprehensive article on types of trust litigation and claims.
One of the most common trust litigation claims is a surcharge action filed by beneficiaries against a trustee. Surcharge claims seek monetary damages from the trustee as compensation for losses allegedly caused by the trustee’s breach of its fiduciary duties. To successfully obtain a surcharge, the beneficiaries must prove: (1) the trustee violated one or more fiduciary duties, and (2) the trustee’s misconduct caused quantifiable financial harm to the trust.
Common fiduciary duty breaches leading to surcharge claims include the trustee engaging in self-dealing, improperly investing trust assets, mismanaging real estate or businesses owned by the trust, improperly denying or delaying distributions, charging excessive fees, or incorrectly handling tax matters. The beneficiaries must show specific monetary loss resulting from the fiduciary breach. Examples include trust investment losses, excessive fees paid from the trust, missed investment gains, or improper distributions diminishing the trust.
Courts utilize three primary damage calculations when imposing a surcharge, depending on the circumstances: (1) any loss in trust asset value caused by the breach; (2) any profits the trustee gained through the breach; or (3) any profits the trust would have earned absent the breach. Beneficiaries often request accountings and financial records to help quantify surcharge damages.
Removal of Trustee Actions
Beneficiaries can also file litigation seeking a court order removing a trustee for misconduct or repeated breaches of fiduciary duties. Common grounds for removal include self-dealing, improper distributions, conflicts of interest, co-mingling of trust and personal assets, neglect of trust administration, unreliable accountings, excessive fees, and any conduct substantially prejudicing the trust’s interests. Removal may also be warranted if hostility between co-trustees impairs administration or the trustee becomes insolvent.
To gain removal, the beneficiaries must prove valid grounds with sufficient evidence. If the court grants removal, it will appoint a successor trustee to take over administration of the trust. The removed trustee may be ordered to pay attorneys’ fees and costs if the court finds it defended against removal in bad faith.
Many trusts have provisions requiring the trustee to provide periodic accountings to the beneficiaries detailing trust transactions – assets received, income, distributions made, expenses paid, etc. If a trustee fails or refuses to provide a proper accounting in accordance with the trust terms, beneficiaries can file litigation to compel the accounting. The court will order the trustee to prepare and distribute an accounting if the relevant trust language mandates it.
Trust Reformation Actions
Trust reformation represents another type of litigation pursued in some trust disputes. It involves requesting the court to modify ambiguous or mistaken terms in a trust that allegedly do not reflect the true intent of the trust’s settlor. The goal is to reform the instrument to match what the settlor wanted.
To obtain reformation, the party requesting it must prove, by clear and convincing evidence, that the trust provision at issue contains a mistake or ambiguity not in alignment with the settlor’s intentions. Reformation actions frequently arise from drafting errors or changed circumstances unanticipated by the settlor. If successful, the court will issue an order modifying the trust’s terms.
The most serious trust litigation involves a trust contest whereby beneficiaries challenge the fundamental validity and enforceability of the entire trust instrument. Contests dispute the existence of a valid trust. The most common grounds include claims that:
- The settlor lacked mental capacity when creating the trust;
- The trust was a product of undue influence or fraud;
- The trust failed to comply with execution formalities; or
- The trust violates public policy, laws, or is subject to another invalidating doctrine.
Trust contests aim to void the trust in its entirety to prevent the trustee from administering it. This generally requires extensive discovery and litigation. The beneficiaries brining the contest must prove the grounds for invalidity by clear and convincing evidence, which is a heightened standard. If successful, the assets of the voided trust are usually distributed through the settlor’s will or by intestacy laws.
Contests often spawn collateral litigation against advisors who assisted with implementing the now-voided trust. They frequently fracture families while rapidly consuming the trust assets in legal fees on both sides. But in egregious situations, contests may be justified to prevent an unjust trust from taking effect.
Another common ground for trust litigation involves beneficiaries suing to recover improper distributions of trust assets. This can involve distributions made in violation of the trust terms, payments to non-beneficiaries, premature distributions, or distributions made upon improper trustee discretion.
The beneficiaries bringing suit must be able to show the distributions were contrary to the governing trust provisions or otherwise amounted to a breach of fiduciary duty by the trustee. Remedies may include recovering the improper distributions, obtaining accountings, and surrounding the trustee if the court finds sufficient misconduct or disregard of the trust terms.
Surcharge for Damages
As discussed regarding surcharge actions, beneficiaries can sue a trustee to obtain a monetary surcharge as compensation for financial losses caused by the trustee’s breach of fiduciary duties. The surcharge acts as damages to make the trust or beneficiaries whole from quantifiable harm suffered due to the fiduciary breaches.
Depending on the situation, surcharge damages may be measured in different ways – the actual loss in trust value, profits wrongly obtained by the trustee, income or profits lost to the trust, etc. Punitive damages are generally not available, but accountings often help establish evidence to support a surcharge.
Unlike most litigation, attorney’s fees are not awarded automatically to the prevailing party in trust disputes. However, if the court finds the trustee defended a claim or objection to an accounting in bad faith, it may order the trustee to pay the other side’s reasonable attorney’s fees and costs.
Fees may also be awarded if the trustee is removed for being a “prohibited person” under applicable law, such as someone who drafted the trust or coerced the settlor. Bad faith must be proven – good faith defenses normally will not result in fee awards against trustees.
Removal of Trust Protector
In trusts utilizing a trust protector, beneficiaries can sometimes file litigation to remove the protector. Grounds may include conduct jeopardizing the trust’s purpose, failure to act, or impracticality of communicating with a foreign protector.
The litigation aims to have the court appoint a new protector. Trust protectors serve an oversight role, so removal may be warranted if the protector’s conduct runs contrary to the settlor’s intent.
Change of Trust Situs
Another type of trust litigation involves requesting the court to transfer the governing jurisdiction or “situs” of a trust. This may be requested to move the trust to a jurisdiction with more favorable laws or to one where the trustees and beneficiaries reside.
To obtain a change of situs, there must be good cause, the trustee typically must consent, and the new jurisdiction must have proper contacts with the trust parties or assets. Change of situs actions are less common but can provide important flexibility in some circumstances.
Beneficiaries might request trust partition or division when administration or investment of an undivided trust becomes inefficient or disadvantaged. Having multiple beneficiaries with diverging interests can cause issues administering a single trust. Partition/division attempts to split the trust for better management.
Grounds can include geographical dispersion of assets or beneficiaries, differing investment goals necessitating a portfolio split, disputes preventing efficient administration, or other circumstances warranting separate trusts by beneficiary share. State statutes or the trust instrument may limit partition rights.
Modification Due to Changed Circumstances
Trusts can be difficult to modify after the settlor’s death. But most states allow petitions to modify a trust’s terms if necessary to further the trust’s purpose due to substantial changes in circumstances unforeseen by the settlor.
This is a higher standard than seeking reformation due to a drafting error. Changed circumstances could include new tax laws, the trust losing tax-exempt status, beneficiary life events, or investments/assets render the trust uneconomical to administer. The modification must uphold the settlor’s primary intent.
Limitation of Trustee’s Discretion
Beneficiaries may litigate to limit a trustee’s excessive or improperly exercised discretion over distributions or other decisions. This seeks to rein in use of expansive discretion that violates fiduciary duties or exceeds what the settlor intended.
Grounds can include unreasonable denial or delay of mandatory distributions, abuse of “ascertainable standards” governing discretion like health and education, arbitrariness, or lack of proper regard for the beneficiaries’ best interests. Limits preserve trustee flexibility while preventing misuse of discretionary powers.
In summary, trust litigation arises for a variety of reasons, and can take many potential forms. The unique attributes of a given trust and the relationships between the parties shape the most appropriate approach. Trust beneficiaries and trustees should seek experienced counsel to pursue their rights and interests through the most effective litigation strategy. When feasible, non-adversarial resolution can save considerable time, expense, and relationships.
Alternatives to Litigation for Resolving Trust Disputes
Before initiating litigation, trustees and beneficiaries should always first explore alternatives that could save substantial time, expense, and relationships. Mediation involves retaining a neutral third-party professional to facilitate settlement negotiations. An experienced trust mediator can often guide the parties to a resolution that avoids litigation. Mediation can be either binding or non-binding.
Arbitration is another alternative, where the parties present arguments and evidence to an arbitrator or arbitration panel. The arbitrator then issues a decision that is legally binding, with only limited rights of appeal. Arbitration usually remains private and confidential.
Perhaps the simplest option is direct settlement negotiations between the parties, with or without attorneys involved. Face-to-face dialogue allows creative solutions not available through litigation. Clients are often more satisfied crafting their own settlement instead of having one imposed by a court.
The Trust Litigation Process
If settlement attempts fail and the parties proceed to court, the litigation process typically involves the following:
The initial stage after filing the complaint involves various pleadings and motions. The defendant will usually file an answer responding to the allegations and may include counterclaims against the plaintiff. Litigants often file pre-trial motions seeking to have certain claims dismissed or requesting summary judgment in their favor on particular issues.
Next, the discovery process transpires, where the parties exchange relevant information through tools like depositions, interrogatories, document requests, and subpoenas. Trust litigation frequently involves extensive discovery due to its complex financial issues.
As the close of discovery nears, the parties typically engage in settlement negotiations to avoid the time and expense of trial. Judges often require mediation or some other facilitated negotiation before permitting the case to be set for trial.
If the case does not settle, it proceeds to a trial before a judge. There is no right to a jury trial in trust disputes. The parties present witnesses and documentary evidence to support their positions. The judge then decides the outcome based on the evidence and applicable law.
After entry of a final judgment, either party has the right to appeal the decision to a higher appellate court. The appellate court will review disputed issues of law and alleged procedural errors. However, its power to reweigh evidence is limited.
Costs and Expenses of Trust Litigation
Trust litigation entails significant costs and expenses, including:
- Court costs and fees – These include initial filing fees, subpoena fees, transcript creation fees, etc.
- Deposition costs – Litigants must pay for a court reporter’s appearance time and the preparation of deposition transcripts.
- Attorney’s fees – Lawyers charge hourly rates ranging from $300-$1,000+ per hour depending on experience and location. Most trust litigation utilizes hourly fee agreements.
- Expert witness fees – Parties often retain financial professionals, medical experts, and other specialists. Their fees can range from $300 to $1,000+ per hour.
- Mediation/arbitration costs – The mediator’s or arbitrator’s hourly rates are similar to lawyers and experts.
Prudent settlement remains the most cost-effective option. But if necessary, strong advocacy in trust litigation can protect beneficiaries’ inheritance rights and uphold trustees’ reputation and integrity. Competent legal counsel is essential.
Frequently Asked Questions
What is trust litigation?
Trust litigation is a lawsuit filed by a beneficiary against a trustee or third party, or by a trustee against a beneficiary or third party, regarding disputes over the trust. It often involves claims of trustee misconduct, undue influence, or contests over the validity of a trust. The litigation seeks remedies like damages, removal of the trustee, or having the court resolve a dispute over the trust’s terms or administration.
What triggers trust litigation by beneficiaries?
Beneficiaries often pursue litigation because the trustee won’t provide a copy of the trust, account for the administration, or distribute assets. Litigation also results from allegations of trustee self-dealing, excessive fees, mismanagement, or improper asset valuations. Beneficiaries may also claim undue influence over the trustor or contest the trust’s validity.
Can I sue to remove the trustee?
Yes, beneficiaries can seek a court order removing a trustee if
- the trustee has committed a serious breach of trust;
- lack of cooperation among cotrustees substantially impairs the administration of the trust;
- the court determines that removal of the trustee best serves the interests of the beneficiaries because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively; or
- there has been a substantial change in circumstances or removal is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available.
See Minn. Stat. § 501C.0706. The court will appoint a new trustee if removal is granted.
What if the trust terms are unclear or contradictory?
Unclear trust language often leads to disputes later on between beneficiaries and trustees over proper interpretation. Reformation litigation can be filed to modify ambiguous terms to reflect the trustor’s intent. Or a trust contest may argue the entire instrument is invalid.
How long do I have to contest a trust?
Time limits for contesting trusts vary by state. In many states, you must act within 2-3 years from the date you learned, or reasonably should have learned, about the grounds for contest like incapacity or undue influence. Consult a trust litigation attorney about deadlines.
What damages can I recover against a trustee?
You can obtain a surcharge, which is a monetary award to compensate for loss caused by the trustee’s breach of duty. Some states allow double or triple damages if property was taken in bad faith. But punitive damages are usually not available.
Who pays the litigation costs?
Beneficiaries pay hourly or contingency fees. Trustees normally pay attorneys hourly. Costs come from the trust unless the trustee defended in bad faith. Then the trustee may have to pay the beneficiaries’ costs.
Under Minnesota law, a trustee is entitled to be reimbursed out of the trust property, with interest as appropriate, for (1) expenses that were properly incurred in the administration of the trust; and (2) expenses that were not properly incurred in the administration of the trust, to the extent necessary to prevent unjust enrichment of the trust. An advance by the trustee of money for the protection of the trust gives rise to a lien against trust property to secure reimbursement with reasonable interest. See Minn. Stat. § 501C.0709.
Even before this state statute, case law held that “[a] trustee is entitled to reasonable attorneys’ fees, to be paid out of the trust estate, incurred in good faith in defending his administration of the trust.” In re Freeman’s Trust, 247 Minn. 50, 75 N.W.2d 906, 907 (1956).
How long does trust litigation take?
Most disputes take 1-2 years. Contested cases with extensive discovery and trial can exceed 5 years. Simple petitions for accountings or trust copies may take only weeks if the trustee cooperates. Prompt resolution saves substantial time and cost.
What alternatives exist besides litigation?
Seeking mediation, negotiating directly, or using arbitration can resolve many disputes outside of court. Beneficiaries may also petition the court for instructions to the trustee or acceptance of accounts without full litigation.
Can I get emotional distress damages?
Not usually. Monetary damages in trust litigation typically aim to compensate for measurable financial losses from fiduciary breaches. Damages for emotional harm or pain and suffering are not permitted in most trust disputes.