Conflicts between Trustees and Beneficiaries | Dunlap Bennett & Ludwig LLC
When a person dies without a will, the person in charge of managing the estate is called the “administrator”. If the person died with a will, they would normally appoint someone to that position, an “executor”. Both the administrator and the executor are the “personal representative” of an estate. If a person was executing an inter vivos trust during their lifetime, the person responsible for managing the trust after their death would be called a “trustee”. Personal representatives and trustees are trustees. They have a duty of loyalty and care towards the beneficiaries when they manage the estate’s assets. This means that they must exercise reasonable care, be competent and not show bias.
Problems and questions
One of the most important aspects of estate planning is the smooth transition of a deceased’s assets to the people to whom they wish to leave their estate. When the estate trustee and the beneficiaries are not on the same page and disagree, the negative consequences can be very serious. Administration of the estate may be extended for an unreasonable period. Courts may need to step in to resolve issues, which can result in tens of thousands of dollars in legal costs. Some recipients may feel unhappy and bitter, increasing animosity among relatives of the deceased (especially in “blended families” involving children from previous marriages).
The problem can be even worse if a person dies without a will and has multiple heirs. In this case, each heir would have the same priority as administrator of the estate. If the heirs can’t agree on who to defer to, a protracted legal battle could loom on the horizon, possibly lasting several years.
Personal representatives are required to give notice to all beneficiaries/heirs, file an inventory and annual accounting of the estate with the court, liquidate assets, repay estate debts and make final distribution to beneficiaries or heirs. The whole process is complicated and can take up to three years for some estates. This creates many opportunities for intense fights and conflicts between the personal representative and the beneficiaries/heirs.
The best solution against this would normally be to set up a revocable living trust with a trustee who is able and willing to manage the assets of the trust. Unlike wills, living trusts are not public records and the successor trustee does not need to petition the court to become the estate trustee. Instead, the appointment is automatic. The settlor(s) of the trust should think carefully and deeply about their family dynamics and pre-existing tensions. A corporate fiduciary can be a good idea in certain circumstances to give everyone a sense of impartiality. It is also generally inadvisable to appoint successor co-trustees as this could lead to stalemate and internal bickering. If the settlor wants to ensure that there is some level of checks and balances on the trustee, adding a “trust protector” to provide oversight may be a better alternative to a successor co-trustee.
Unfortunately, even with careful planning, conflicts between trustee and beneficiaries cannot always be avoided. If the beneficiaries believe that the fiduciary is not faithfully performing their fiduciary duties, Virginia law provides them with certain protections to preserve their share of the estate and enforce their legal rights.
Legal Obligations of Trustees and Available Remedies
Once the surviving settlor of the living trust dies, the trust becomes irrevocable. At that time, the beneficiaries of the trust will have the right to demand a report from the trustee to inspect and review how the estate is being handled. This allows for accountability even though the trust is not subject to the public probate process. Virginia law also requires trustees to follow the prudent investor rule. The trustee must act with reasonable care, skill and prudence in managing the estate’s assets. Typically, this also forces them to diversify their assets, unless there’s a good reason not to (eg, the saying “don’t put all your eggs in one basket”). To demonstrate that it exercises reasonable care, skill and prudence, the fiduciary must, among other things, take into account the following factors: general economic conditions, inflation and deflation, the consequences expected taxes, as well as the expected rate of return and capital appreciation.
A fiduciary not only has a duty of care to beneficiaries, but also a duty of loyalty. They must act with impartiality towards all beneficiaries and not favor one person over others. They can’t be too belligerent in their interactions. Insider trading should be avoided, especially if the trustee greatly benefits from the transaction (for example, by liquidating the assets of the estate, the trustee sells the house itself at well below fair market value).
If a fiduciary breaches their fiduciary duties of care or loyalty, the court can offer several remedies to the beneficiaries, such as removing the fiduciary, refusing to indemnify the fiduciary, or holding the fiduciary personally liable for losses to the estate. However, unpopular decisions by themselves will not be enough to get the court to intervene. As estate trustee, the trustee has some discretion to make decisions, even if the beneficiaries strongly disagree.
Choosing who will administer your estate is one of the most important decisions you will make when setting up your estate plan. You and your attorney need to think carefully about your family relationships and the best person who can both manage your beneficiaries’ assets while sensitively navigating their interpersonal dynamics.