When Your Trust Has Been Mismanaged
By: Barry E. Haimo, Esq.
August 4, 2015
I’ve sung the praises of trusts in many of my previous posts, touting them as an excellent and versatile estate planning tool that can help preserve and protect assets from creditors and financially irresponsible beneficiaries, avoid probate and guardianship, and reduce estate, gift, and income taxes.
When you set up a trust, you are called the Settlor or Grantor. In this role, you must assign a trusted individual or entity to manage your trust, such as a bank, trust company, close friend or family member, your attorney, CPA, or any combination of the above.
But what happens if the person or organization you choose does not manage your trust responsibly or according to your instructions? Regrettably, it is not uncommon to hear of situations where a trustee deliberately or inadvertently mishandles a trust, causing unwanted and often heartbreaking consequences to the beneficiaries.
For a look at the devastating consequences of a mismanaged trust, read on to hear the story of Gloria Munson and her nephew.
The Untrustworthy Trustee
When describing their oldest daughter, Mr. and Mrs. Munson would use terms like “smart” and “hard-working” and “a career girl.” But not even her parents would use the words “pretty” to describe Gloria Munson.
But what Gloria lacked in looks, she made up for in ambition and smarts. When her two younger sisters, Stacy and Bernice, were just beginning to date, Gloria found a part-time job as a secretary at the local Gulfport newspaper. By the time they were married, Gloria had become one of the paper’s best reporters.
By the time they reached a ripe old age, Mr. and Mrs. Munson were very proud of all of their children. Stacy and Bernice had married well and brought them five healthy, beautiful, and promising grandchildren. Gloria remained single, applying her sharp mind for business to become one of the finest writers in all of Gulfport.
Gloria had often advised her parents on finances. She frequently encouraged them to invest in stocks, save for retirement, and place their assets in a trust to preserve and protect it down the road. When Mr. and Mrs. Munson created their trust, Gloria seemed like an obvious choice for their trustee.
The Munson parents had left careful instructions to use the $150,000 within the trust to pay for their grandchildren’s college education. They passed away a few years before their oldest grandchild—Shelly—would graduate from college.
Shelly was accepted into a prestigious—and expensive!—liberal arts school in the Northwest. Shelly’s mom, Stacy, was thrilled with her daughter’s accomplishments, and grateful that her parent’s trust would be able to help pay her college’s steep tuition. Eerily, as Shelly’s high school graduation grew closer and Stacy tried to get in touch with her sister about the trust, it soon became apparent that Gloria was avoiding her calls.
Finally, Stacy decided to pay Gloria a visit to determine the root of Gloria’s silence. She booked a short flight from her home in Virginia back to their hometown in Florida, and arrived at Gloria’s home to find all the lights on, but the door bolted shut.
“Gloria?” she called as she knocked on the door. “Sis, it’s me!”
There was rustling inside.
“Come on, Gloria, let me in!” Stacy insisted. “I can hear you in there!”
“Go away!” called a muffled voice.
Stacy pleaded with her sister to let her in, but Gloria had fallen silent. Luckily, Stacy had house-sat for Gloria many times before, and remembered that she kept a spare key hidden beneath her birdhouse. After locating the key, Stacy let herself in.
She found her sister in her bedroom, lying in bed with the covers over her face.
“Don’t look at me!” Gloria wailed. “Please go away!”
“Come on, sis, what’s the matter?” asked Stacy, alarmed. “I’m sure whatever happened, it’s not so—“
Stacy stopped short as soon as Gloria pulled the covers off and stepped out of the bed.
“I’m sorry, Stacy!” Gloria said. “I’ll earn the money back, I promise!”
Stacy just stared. Gloria was totally transformed—her nose was smaller, her lips swollen, her face shiny and plastic, her breasts augmented to an absurd size, and her tummy tucked. Even if they hadn’t known Gloria before, no one would doubt that this was a woman who had undergone extensive plastic surgery.
“I was only planning on getting a little bit done!” Gloria insisted. “But the first three doctors botched the job so terribly, I kept having to pay and pay to have everything fixed.”
Stacy couldn’t believe it — Gloria had wasted their parents’ trust fund to pay for plastic surgery?! Surely that couldn’t have taken all the money.
Gloria looked chagrined. “Well,” she said, “this is only part of what I spent it on. I was also behind on some credit card payments and thought it made more sense to use the money and pay back the trust later than have to fork over the high interest payments. And I also put a large chunk of it in some high-return investments… that went belly up. I’m so, so sorry!”
To say that Stacy was disappointed in Gloria is an understatement. Nevertheless, both she and Bernice decided not to take legal action against their sister. Fortunately, Gloria was true to her word. She contributed to her niece’s and nephew’s college funds out of her pocket, though it would never equate the value of their grandparents’ original gift.
Legal Options When a Trust has Been Mismanaged
Had the sisters been less forgiving, they could have proven that Gloria went beyond mere mismanagement of the trust in court. In that case, the court would easily find that Gloria did not satisfy her fiduciary duty to act in the best interests of the beneficiaries. The court would first have Gloria removed and replaced as trustee. Then, since Her actions caused the trust beneficiaries to lose substantial money, the beneficiaries – by way of the trust – would be awarded damages as a result. As beneficiaries, the grandchildren may have also received additional financial compensation from the court, since Gloria, as the trustee, used the assets within their trust for individual gain.
If you or a loved one is a beneficiary of a trust that you believe may have been mismanaged, your best move may be to consult with a Florida estate planning attorney who has experience in trusts and estates and trust litigation. Your lawyer will help you understand the mechanics of trusts. He or she can also help you determine whether the trustee has acted irresponsibly, and explain your options for recovering damages.
Barry E. Haimo, Esq.
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