Before You Defend the Trustee, Diagnose the Problem
When a beneficiary accuses you of mismanaging a trust, you may start looking for a trustee
attorney because your natural reaction is to defend yourself.
Maybe the beneficiary is wrong. Maybe the accusations leave out years of family history. Maybe
perfectly reasonable decisions are being made to look suspicious after the fact.
All of that happens.
But when I evaluate a trustee dispute, I don’t start by assuming my client did everything right.
Family trustees make mistakes. They are often spouses, sons, daughters, or siblings who have
been handed responsibility for substantial assets without ever having served as a fiduciary before.
The legal standards can be demanding, and decisions that seemed perfectly reasonable at the
time can look very different when examined years later in a courtroom.
So before deciding how to defend a trustee, I usually want to answer three questions:
- What actually happened?
- What can still be fixed?
- What outcome actually makes sense?
Those questions sound simple.
Answering them often determines whether a trust dispute becomes a manageable problem or
years of expensive litigation.
1. What Actually Happened?
By the time a trustee comes to see me, there are usually at least two stories.
The trustee has one.
The beneficiary has another.
My first job is not to decide which person I like better. It is to reconstruct the sequence of events and test both stories against the trust documents, financial records, and applicable law.
What does the trust actually say?
What happened to the assets?
What money came in and went out?
Why were distributions made?
Were expenses reimbursed?
What records exist?
Does my client’s explanation make sense?
Does some part of the beneficiary’s explanation also make sense?
Which Arizona laws apply?
Are there defenses, including possible limitations issues?
Are there claims against the beneficiary or someone else that also need to be considered?
This is one reason trustee disputes can look very different after a careful review than they did
when the first angry letter arrived.
Sometimes the accusations are largely unfounded.
Sometimes the beneficiary has identified a real problem but misunderstood its legal significance.
And sometimes the trustee has a more serious problem than the trustee realizes.
The strategy should depend on which of those situations actually exists.
Good Intentions Do Not Always Produce Good Trust Administration
Consider a common situation.
A trust owns a house.
The house needs repairs. The insurance premium comes due. Property taxes need to be paid.
There is not enough cash readily available in the trust, so the trustee pays some of those expenses
personally.
Later, the trust receives money and the trustee reimburses himself.
To the trustee, this may seem entirely reasonable. He used his own money to preserve a trust
asset and later got it back.
But what if the documentation is poor?
What if some expenses went through the trustee’s personal checking account, others through the
trust account, and nobody kept a clean record of which was which?
Now a beneficiary demands an accounting.
The trustee responds by explaining that all the expenses were legitimate.
That may be true.
But the explanation doesn’t answer the accounting question.
Worse, once trust and personal transactions have been commingled, the trustee’s personal
financial affairs may come under scrutiny as everyone tries to reconstruct what actually
happened.
A problem that began with an attempt to keep the trust’s house insured and maintained has
become a fiduciary dispute.
This is something family trustees often learn too late:
A transaction does not have to begin dishonestly to become difficult to defend.
Don’t Answer an Accounting Problem With an Argument
When beneficiaries begin asking questions, trustees sometimes try to solve the problem
themselves.
The beneficiary sends an accusatory email.
The trustee sends back a long explanation.
The beneficiary responds with another accusation.
The trustee writes another defense.
Eventually lawyers are copied on everything, everyone is angry, and the legal bills begin
accumulating.
But nobody has answered the underlying question:
Where did the money go?
Sometimes the next professional a trustee needs is not another litigation attorney. It is a
bookkeeper, accountant, or forensic accountant who can reconstruct several years of transactions
and produce a reliable financial picture.
Once we know what actually happened to the money, we can make much better legal decisions.
Perhaps the accounting proves that the trustee’s decisions were appropriate.
Perhaps it reveals administrative mistakes that can be addressed.
Perhaps it identifies transactions that create genuine exposure.
But arguing about the trustee’s intentions before reconstructing the financial record can consume
enormous amounts of time without moving the dispute any closer to resolution.
A Trustee Attorney Should Not Defend Everything the Trustee Has Done
This is where my approach may differ from what some people expect when they hire a litigation
lawyer.
If the beneficiary’s allegations are wrong and the trustee needs a strong defense, we defend the
trustee.
But if my client made a mistake, I need to tell the client that too.
The objective is not to construct an argument defending every decision the trustee has ever made.
The objective is to understand the problem well enough to find the best path forward for the
trustee and the trust.
That leads to the second question.
2. What Can Still Be Fixed?
I have seen trustee disputes where money was taken from a trust and was simply gone.
The trustee could not put it back.
Those are difficult cases.
But I have also seen questionable transactions where the underlying value still existed and there
were legitimate options for addressing the problem before everyone became entrenched in
litigation.
The difference matters.
One case I have worked on involved a husband who had used his wife’s money to acquire a
house that was placed in their joint names.
That created a serious issue.
But the house still existed. The value had not disappeared.
Rather than waiting for the transaction to become the centerpiece of litigation, we looked for a
way to address the economic problem while options were still available. One part of that solution
involved documenting obligations through promissory notes for the wife’s benefit.
That does not mean correcting a transaction magically erases whatever happened before it. It
does not.
It means the problem looks very different while there are still assets and options available than it
does after the money is gone and everyone has spent a year fighting about it.
When I discover that a trustee has made a mistake, one of my first questions is therefore:
Is the problem reversible?
Can property be restored?
Can money be repaid?
Can an accounting be reconstructed?
Can an obligation be properly documented?
Can administration procedures be corrected?
Can another professional be brought in?
Can a questionable practice stop now rather than continue for another year?
Not every problem can be fixed.
But trustees often wait until litigation has begun before asking these questions.
By then, some of the best options may no longer exist.
Some Problems Are More Serious Than They Look
This is especially important when the trust dispute involves an elderly or vulnerable person.
I represented a man who years earlier had spent his own money to purchase a wheelchair van for
his mother.
From his perspective, he had helped his mother when she needed it and had simply never been
reimbursed.
Years later, he reimbursed himself from money belonging to his mother.
He did not see himself as taking advantage of her. He saw himself as finally getting back money
he had legitimately spent for her benefit.
But by the time he paid himself back, the legal circumstances were very different. His mother
was vulnerable, questions existed about her capacity, and the old reimbursement claim itself
presented serious legal problems.
What he viewed as repayment of an old family debt created potential financial-exploitation
consequences far more severe than he understood.
That is an extreme example, but it illustrates something important.
“Mom agreed to it” and “I was only paying myself back” may be important facts. They do
not necessarily end the legal analysis.
When a trustee or family caregiver benefits personally from transactions involving an elderly or
vulnerable person, I want to understand that issue early.
Sometimes what initially looks like an accounting disagreement is considerably more serious.
3. What Outcome Actually Makes Sense?
Once I understand what happened and what can still be changed, I ask clients a question that has
very little to do with legal doctrine:
If you could wave a magic wand, what would you want to happen?
The answers vary enormously.
One trustee wants to remain in control and finish administering the trust.
Another wants the beneficiaries to stop sending twenty emails a week.
A surviving spouse wants enough money to continue living the way she and her husband
intended.
Another trustee is exhausted and would happily resign if there were a way to do it without
creating additional problems.
Someone else simply wants the accounting approved, the final distributions made, and the trust
closed.
Those are different objectives.
They require different strategies.
And they raise a question lawyers sometimes skip:
What is this fight actually worth?
Winning a Lawsuit and Solving a Trust Problem Are Not the Same Thing
Suppose a trustee can spend $100,000 litigating an issue involving $75,000.
Perhaps the trustee can win.
Should the trustee spend the money?
Maybe. There may be reasons the issue matters beyond the immediate dollars involved.
But “we can litigate this” and “we should litigate this” are two different conclusions.
Trust assets are not simply a litigation budget. They exist to accomplish whatever the person who
created the trust intended them to accomplish.
Legal fees therefore belong in the strategy from the beginning.
Can a trustee attorney use trust assets to pay legal fees?
Yes. Arizona law can permit reimbursement of appropriate legal expenses arising from trust
proceedings, but the answer is not simply, “You’re the trustee, so the trust pays.”
The circumstances matter. The trustee’s conduct matters. The nature of the dispute matters. And
in some cases, the payment of the trustee’s legal fees can itself become another issue in the
litigation.
That is another reason I want to understand the economics before choosing the strategy.
The goal should not be to win the most arguments.
It should be to reach an outcome that makes sense given the trust, the risks, the assets, and what
the client is actually trying to accomplish.
Sometimes the Beneficiary Is the Problem
Diagnosis cuts both ways.
There are also cases where the trustee is essentially doing what the trust requires and a
beneficiary is consuming enormous amounts of time and money.
Every distribution generates another complaint.
Every update produces five more questions.
The trustee forwards everything to the lawyer.
The lawyer responds.
The beneficiary replies.
The trust pays for another round.
If nothing changes, the administration itself can become organized around one difficult
beneficiary.
Sometimes the better solution is operational rather than adversarial.
We may establish a predictable reporting schedule. Appropriate recurring distributions may be
systematized. Communications may be structured so the trustee is not reacting to every email in
real time.
The beneficiary receives the information he or she is entitled to receive, but the trust is no longer
administered through an endless email argument.
And sometimes those boundaries do not work.
A beneficiary may continue filing unnecessary petitions or otherwise interfering with
administration. At that point, asking a court to establish or enforce boundaries may be
appropriate.
The point is not that trustees should tolerate unreasonable behavior.
It is that another lawyer letter is not automatically the best response to another angry email.
Before Going to Court, Read the Trust Again
Years ago, I drafted a trust for a couple that included a trust protector.
After my clients died, a dispute developed between the successor trustee and a beneficiary over
how the trust should be interpreted.
The parties hired lawyers and litigated.
What bothered me was that the trust itself contained another potential way to address the dispute.
The trust protector had been given powers that could have been relevant to interpreting or
changing the trust.
That mechanism existed in part so every disagreement did not necessarily have to become
conventional litigation.
Yet the lawyers continued litigating without using it.
The lesson is not that every trust has a trust protector. They do not.
Nor does every trust protector have the same authority.
The lesson is simpler:
Before deciding how to litigate a trust dispute, read the trust carefully enough to know
whether litigation is actually the only tool available.
There may be powers, procedures, people, or options in the document itself that everyone has
overlooked.
And if there aren’t—and litigation really is necessary—then litigate.
But make that decision after understanding the available tools, not before.
What If the Solution Were Simple?
This is a question I return to in difficult cases.
Not because trust disputes are simple. They often aren’t.
A trustee may be dealing with years of incomplete records, substantial assets, complicated trust
language, accusations of self-dealing, difficult beneficiaries, and family history stretching back
decades.
The natural response is to assume that the solution must be equally complicated.
Sometimes it is.
But sometimes the problem becomes clearer once we ask the right question.
Does the trust need an accounting?
Does money need to be restored?
Does a transaction need to be documented?
Does the trustee need professional help administering the trust?
Do beneficiaries need regular information instead of irregular arguments?
Does the trust document contain an overlooked solution?
Does the trustee really need to remain trustee?
Does this issue justify the cost of litigation?
Or is the beneficiary making demands that finally need to be addressed in court?
What if the solution to this were simple?
That question does not tell us the answer.
It keeps us from assuming that the most expensive and adversarial answer must be the best one.
When a Trustee Should Get Advice
The best time to solve a trustee problem is often before everyone has committed to a litigation position.
If you know the accounting is incomplete, if you reimbursed yourself and are unsure whether it
was handled correctly, if a beneficiary has begun making serious accusations, or if you have
discovered a transaction that concerns you, you do not necessarily need to wait for a court
petition before getting advice.
Getting advice does not mean filing a lawsuit.
It means answering the three questions while the answers can still help:
- What actually happened?
- What can still be fixed?
- What outcome actually makes sense?
If litigation is eventually necessary, those same questions help determine what is worth fighting
about and what is not.
For Professionals Who Refer Trustees
If you are an estate planning attorney, financial advisor, CPA, trust officer, or other professional
deciding where to send a trustee who has gotten into trouble, you are evaluating something
slightly different.
You need a lawyer who can litigate if litigation is necessary.
But you probably do not want someone who turns every administrative problem into a lawsuit.
A trustee may need to hear that the beneficiary is wrong.
The trustee may also need to hear that the trustee made a mistake.
And sometimes the most valuable thing counsel can do is identify the problem early enough that
it can still be corrected before the trust loses substantial assets to litigation.
That is the kind of trustee representation we try to provide.
The question is not simply:
Can we defend this?
It is:
What happened, what can still be done about it, and what outcome actually serves the
trustee and the trust?
Talk With an Arizona Trustee Attorney
If you are serving as trustee and a dispute has developed, you may already be receiving
conflicting advice about what you should do next.
Before deciding whether to fight, settle, resign, account, repay, distribute, or take some other
action, it helps to understand what problem you actually have.
That is where our work begins.
We reconstruct what happened. We determine what the trust and Arizona law require. We
identify what can still be changed. We talk about what you actually want to accomplish and what
the available strategies are likely to cost.
Then we decide what deserves to be fought over.
Sometimes the answer is litigation.
Sometimes it is not.
Either way, the objective is the same:
Find the best path forward for the trustee and the trust.
If you are serving as trustee of an Arizona trust and need help with a beneficiary dispute,
accounting issue, fiduciary claim, removal proceeding, or developing trust controversy, contact
Sudden Wealth Protection Law to discuss your situation.