Whether you created a family trust or are a trustee or beneficiary of a trust, there may come a time when you think a trustee needs to be removed.
While a family trust can offer probate avoidance, tax advantages, and even benefits associated with long-term care planning, it is also a complex fiduciary arrangement that can result in disputes between trustees and beneficiaries.
Trusts, Trustors, Trustees, and Beneficiaries
The person creating the trust transfers assets to the trust, which is then managed by a trustee for the benefit of designated beneficiaries.
The person who creates a trust is called a trustor, grantor, or settlor. If the trustor and the beneficiaries of a trust are members of the same family, it is known as a family trust, which can have one trustor or spouses acting as joint trustors.
A family trust is set up by a legal document often known as a trust agreement, which usually designates an initial trustee or two or more initial co-trustees. The document also designates one or more successor trustees in the event the initial trustees can no longer serve, such as in cases of resignation, death, or removal. Removal or replacement of a trustee is governed by the terms of the trust agreement and by state law.
Removal by the Trustor
A trust agreement should state the circumstances under which a trustee may be removed by the trustor.
Trust agreements usually allow the trustor to remove a trustee, including a successor trustee. This may be done at any time, without the trustee giving reason for the removal. To do so, the trustor executes an amendment to the trust agreement.
In an irrevocable trust, the trustor cannot become a trustee, as is possible in a revocable trust. An irrevocable trust is most often set up in order to make the trustor eligible for Medicaid payment of long-term care. In order to do this, the trustor must give up the right to revoke the trust and to serve as trustee.
Removal by Co-Trustee or Beneficiaries
Although trustees have some discretion in managing trust assets, trust agreements usually give the trustees some degree of guidance as to how the assets should be managed as well as the reasons and procedures for removing a trustee. State law also provides guidelines about a trustee's duties and responsibilities, which involve what is known as the trustee's fiduciary duty, or the obligation to follow the terms of the trust agreement and to act in good faith and in the best interests of the beneficiaries.
Legal grounds to remove a trustee may include:
Violating requirements of the trust agreement
Mismanagement of trust assets, either intentionally or negligently
Fraud or misappropriation of trust assets
Self-dealing or conflict of interest, such as a trustee purchasing assets from the trust for their own benefit, especially if the purchase is for less than fair market value
Charging excessive fees
Inability to cooperate with the other trustees or to get along with the beneficiaries
Mental incapacity of the trustee
Financial insolvency of the trustee, such as when the trustee has filed for bankruptcy
Removal by Trustee
A serious conflict between co-trustees can lead to one or more seeking to remove another. If the trustor is still alive, the trustees should express the problem to the trustor and ask that the other trustee be removed. If the trustor is deceased or incapacitated, the trustees should convey the problem to the beneficiaries and ask the beneficiaries to join in seeking removal.
The matter is more complicated if any beneficiary is a minor or is not specifically named, such as when beneficiaries are designated as the children of a certain person rather than as named individuals. It is unlikely that a court would remove a trustee against the wishes of the trustor or the beneficiaries. The trustees seeking removal may also file a petition for removal, as discussed below.
Removal by Beneficiaries
Trust agreements commonly have provisions that allow beneficiaries to remove or replace a trustee. Usually a majority vote of the beneficiaries is required. Often the trust agreement provides that a trustee may only be removed for cause. Beneficiaries seeking removal of a trustee may also need to file a petition for removal, as discussed below.
Petitioning Court for Removal
A petition for removal of a trustee can be filed by either a co-trustee or a beneficiary. This process can be further complicated if beneficiaries are also designated as trustees. The petition may also seek financial damages from the trustee.
Sufficient evidence needs to be submitted to show the court that the trustee violated the terms of the trust agreement or their fiduciary duty. Court removal of a trustee is a complex process, often involving conducting depositions, issuing subpoenas for records, and asking the court to order the trustee to provide an accounting. It may also require the assistance of accountants and other financial experts, and a trustee may use trust assets in order to defend against removal.
Removal of a trustee, as well as setting up a trust to minimize the chances of conflict, should be done with the help of a competent attorney.