Defending a Trustee Against Removal and Surcharge Action: Strategies and Considerations

A Track Record of Delivering Exceptional Case Results, Achieving Favorable Outcomes for Our Clients
Attorney representing in court during a trust litigation case

The role of a trustee is of utmost importance in the management of trusts, with the primary responsibilities of safeguarding assets and fulfilling the intentions of the settlor. Nevertheless, trustees may encounter legal challenges, including actions seeking removal and surcharge, which can significantly impact both the trust’s administration and the individual trustee. In the following discussion, we will delve into the strategies and considerations essential for defending a trustee against removal and surcharge actions.

Understanding Removal and Surcharge Actions

A trustee may be removed by the following means: (1) in compliance with the provisions outlined in the trust instrument; (2) upon the court’s initiative; or (3) upon the submission of a petition by a settlor, beneficiary, or co-trustee under Probate Code Section 17200. Generally, removal actions involve the beneficiaries or co-trustees petitioning the court to remove the trustee from their position as trustee due to alleged misconduct, breach of fiduciary duty, or incompetence. In this instance, the removal action is usually accompanied by a surcharge action against the trustee seeking to hold the trustee personally liable for financial losses incurred by the trust due to their alleged mismanagement or negligence.

Grounds for Removal of Trustee:

A trustee’s removal may be warranted in cases where the trustee has committed a breach of trust, as defined in Probate Code Section 15642(b)(1). Removal may be considered even if the breach is unrelated to the trust itself, and even if the trustee acted in good faith. However, it’s essential to note that not every breach constitutes grounds for removal; only serious or repeated breaches or misconduct meet the criteria for removal. The primary objective of removal or other remedies is not punitive but rather aimed at preserving the trust property.

A trustee’s violation of any duty owed to a beneficiary is regarded as a breach of trust, as defined in Probate Code Section 16400. Therefore, when asserting a breach of trust as a basis for the trustee’s removal, it should be clearly articulated in relation to one or more specific trustee duties delineated in the Probate Code. The Probate Code outlines these trustee duties that pertain to beneficiaries, which include, but are not limited to the following:

1.     Duty to Administer the Trust

2.     Duty of Loyalty

3.     Duty to Deal Impartially with Beneficiaries

4.     Duty to Avoid Conflicts of Interest

5.     Duty to Not Require Beneficiary to Relieve Trustee of Liability as Condition for Distribution

6.     Duty Not to Undertake an Adverse Trust

7.     Duty to Take Control and Preserve Trust Property

8.     Duty to Safeguard Trust Property

9.     Duty to Report and Account

Efforts to remove a trustee due to a breach of trust frequently involve accompanying claims for additional remedies linked to the alleged breach. These remedies may encompass actions for damages or the recovery of property against the implicated trustee.

Trustee Must Exercise Duties with Reasonable Care:

The assessment of a trustee’s actions revolves around the statutory standard of care, as outlined in Probate Code Section 16040(a). According to this standard, a trustee is obligated to manage the trust with reasonable care, skill, and prudence, considering the prevailing circumstances. They should conduct themselves as a prudent individual in a similar role would, aiming to achieve the trust’s objectives as defined in the trust instrument.

A breach of trust can vary in nature, being categorized as negligent, willful, or fraudulent, depending on the circumstances, reliance, and resulting harm. Typically, for a trustee to be held liable for a breach of trust, personal fault must be established. This fault requirement is met when the trustee engages in a breach of trust either (1) in bad faith, (2) knowingly but in good faith, or (3) negligently.

Statutory Duties of Trustee May Be Overridden by Terms of the Trust:

The terms of a trust can have a significant influence on a trustee’s obligations, but it’s essential to note that certain aspects of the trustee’s duties remain constant. These include the trustee’s duty to keep beneficiaries informed and the overarching obligation to act in good faith, in line with the trust’s objectives and for the benefit of the beneficiaries. However, it’s important to understand that a trustee cannot be held liable to beneficiaries when they rely in good faith on a settlor’s restriction or expansion of the trustee’s duties or standard of care.

Beneficiaries May Validate Trustee’s Unauthorized Actions:

Beneficiaries with legal capacity have the option to provide their consent, release, or affirmation of a trustee’s actions that would otherwise be unauthorized. In such cases, even if a trustee’s actions deviate from their usual statutory duties, they would not be considered in breach of trust, and therefore, grounds for removal would not apply.

The Concept of Surcharge of a Trustee:

An action for removal against a trustee almost always includes a request for an order surcharging the trustee. Generally, surcharge comes into play when a trustee misappropriates funds from a trust for personal gain, creating a conflict of interest between their fiduciary duties and the beneficiaries’ rights. In such cases, beneficiaries may seek that the trustee be surcharged and the trust assets are not used to redress the damages caused by the trustee. This legal maneuver essentially holds the trustee personally accountable for their breach, demanding compensation for the losses suffered due to the breaches of the trustee.

Strategies for Defending a Trustee Against a Removal Action

Elderly man watches as his legal team defends a trustee against a removal action

In practice, petitions aiming to remove a trustee often come bundled with requests for various other remedies tied to the same or interconnected issues. Removal is frequently sought in conjunction with petitions related to breach of trust, failure to provide an account, conflicts between trustee(s) and beneficiaries, and other related concerns. Besides removal, petitioners typically seek additional remedies, making it necessary for the defense to consider the entire array of remedies pursued by the petitioner.

However, it’s important to note that the defense against the specific removal request may rely on different grounds compared to the defense against claims seeking monetary liability against the trustee. The primary focus should be on demonstrating that removal isn’t crucial for the continued effective administration of the trust. While this approach may involve some overlapping issues with petitions seeking monetary liability, the emphasis is less on proving past liability or quantifying the trust’s financial losses and more on the trustee’s ability to effectively manage the trust moving forward.

In removal actions, trustees initially have an advantage, as courts tend to respect the settlor’s intent to have their nominated trustee serve. Therefore, the defense strategy should center around persuading the court that:

1. Any prior transgressions or administrative challenges within the trust can be resolved with less severe measures than removal.

2. Past breaches of trust are unlikely to hinder the trust’s future operation.3. Past breaches of trust do not warrant disregarding the settlor’s expressed intent to have the trustee in question oversee the trust.

Although there is no fool proof way to ensure that every beneficiary is going to agree with a trustee’s actions, the following are strategies and defenses which a trustee can implement to mitigate a removal action being filed:

  1. Comprehensive Documentation: Trustee actions and decisions should be meticulously documented. Comprehensive records can serve as invaluable evidence to refute allegations of misconduct. Proper documentation includes financial records, communications with beneficiaries, and details of investment decisions.
  2. Legal Counsel: Engaging experienced trust and estate attorneys is crucial. They can navigate complex legal nuances, assess the merit of the claims, and develop a robust defense strategy tailored to the specific case.
  3. Communication and Mediation: Open communication with beneficiaries can sometimes resolve misunderstandings. Mediation, facilitated by a neutral third party, can provide a platform for constructive dialogue, potentially averting a costly legal battle.
  4. No Breach Occurred: When opposing a removal action rooted in an alleged breach of trust, the trustee’s initial and foremost consideration should revolve around determining whether a breach genuinely took place. In order to determine whether a breach occurred, an assessment needs to be conducted to determine whether the acts in question violated the trustee’s duties as established by law, the trustee’s applicable standard of care under the California Probate Code, and the express terms of the trust instrument.
  5. Demonstrating Prudent Decision-Making: Trustees must demonstrate that their decisions were made in good faith, based on sound judgment, and in the best interests of the trust and its beneficiaries. Expert opinions and financial analysis can bolster the trustee’s defense.
  6. Acting by the Trust Instrument: Trustee actions should align with the provisions of the trust document. Any deviation from the terms of the trust should be justifiable and in the best interest of the beneficiaries.
  7. Breach of Fiduciary Duty Defense: Trustees must show that they acted within the bounds of their fiduciary duties. This includes loyalty, prudence, and impartiality. Demonstrating adherence to these duties can undermine claims of breach during the defense.
  8. Breach Was Immaterial: The court has the authority to relieve a trustee, either wholly or partially, from liability for a breach of trust if it deems it fair to do so, provided the trustee acted reasonably and in good faith based on the circumstances within their knowledge. In cases where the breach is deemed minor, the trustee may argue that removal is unnecessary, advocating for the consideration of less severe remedies to rectify the breach.
  9. Act was Taken by Agent: If the actions constituting a breach of trust were carried out by an agent to whom the trustee delegate their duties, the trustee may argue that these actions do not warrant the removal of the trustee. This argument assumes that the trustee can demonstrate compliance with the relevant standards for delegation, which encompass the duty to exercise due care in selecting the agent and the duty of overall supervision. It’s important to note that, with specific statutory exceptions, a trustee is generally not held liable to the trust beneficiary for an agent’s actions or omissions. Given that the trustee bears no liability if they exercised due care, it can be argued that removal is unnecessary, and that removing the agent responsible for the breach of trust may be a more suitable remedy. 
  10. Accounting and Transparency: Maintaining accurate accounts and providing transparent financial reporting can enhance the trustee’s credibility. Regularly updating beneficiaries on trust activities fosters trust and can discourage them from pursuing legal action.
  11. Statute of Limitations: Trustees should be aware of the statute of limitations applicable to removal and surcharge actions. If the claims are time-barred, they may be dismissed. 
  12. Petitioner Affirmed or Released Trustee from Breach: If a trustee engages in an action that allows the beneficiary the choice to approve or disapprove, and the beneficiary chooses approval with informed consent, they are subsequently prevented from holding the trustee accountable for a breach of trust. Similarly, if a beneficiary has executed a valid release of contract, absolving the trustee from liability for a breach, with informed consent, they cannot later pursue the trustee for a breach of trust. 

However, the beneficiary’s affirmation or release regarding a breach may hold less weight concerning removal compared to actions seeking other remedies against the trustee. It might suggest that the petitioner accepted or tolerated the breach to some extent after its occurrence. Nonetheless, the fact that affirmation or release relieves the trustee of financial liability doesn’t automatically make the occurrence of the breach irrelevant in assessing whether retaining the trustee aligns with the trust’s best interests and its intended purposes. 

  1. Petitioner Consented to Action: A beneficiary cannot hold a trustee liable for an act or omission as a breach of trust if the beneficiary provided informed consent to the act or omission, provided proper disclosure was made. Therefore, a beneficiary who consented to a trustee’s action beforehand cannot subsequently seek the trustee’s removal on the grounds of a breach of trust. Exceptions include cases where the beneficiary lacked capacity, was unaware of crucial facts, or the trustee had a conflicting interest and the beneficiary’s consent was not fair and reasonable.
  2. Breach was Isolated and Unlikely to Recur or to Affect Trustee’s Failure: The aim of trustee removal is not punitive but rather to ensure the continued orderly administration of the trust. Considering the courts’ general hesitance towards trustee removal, a trustee contesting such action may contend that any breach of trust was an isolated incident, subsequently rectified, and unlikely to impact the trust’s future operation. Consequently, the removal of the trustee could be argued as unnecessary.
  3. Less Drastic Remedies Available: If the petitioner seeking the removal of a trustee can demonstrate a breach of trust, the trustee may counter by suggesting the availability of alternative, less drastic remedies that safeguard the trust’s beneficiaries while upholding the settlor’s original intent for the individual to continue as trustee. 

The trustee is indeed liable for losses, depreciation, lost profits, and disgorgement of any gains resulting from the breach of trust. Therefore, in cases where the breach is isolated and not severe, the trustee may argue that holding them accountable for the consequences of the breach, while allowing them to continue in their role, represents a more suitable approach to protect the trust while honoring the settlor’s intentions.

Defending Trustees in California: OC Trial Group’s Strong Legal Advocacy

Two men in an office setting smile while shaking hands

Trustees often seek unwavering legal support in the challenging landscape of removal actions. OC Trial Group emerges as a reliable ally, equipped with a team of renowned legal professionals and experts in the intricacies of trust and estate law. 

A Trusted Partner:

OC Trial Group offers more than legal representation for trustees facing removal actions; it provides a steadfast partner. The firm’s experienced attorneys are experienced in defending trustees in complex legal battles. Their deep understanding of fiduciary responsibilities and trust litigation nuances makes them a formidable force in the legal arena.

Tailored Legal Assistance:

At OC Trial Group, every removal action is approached with a unique strategy. The firm’s attorneys meticulously analyze the trust instrument and the allegations, crafting personalized defense strategies tailored to the specifics of each case. Their goal is to counter accusations and fortify the trustee’s position, ensuring alignment with fiduciary obligations.

Expert Navigation of Legal Challenges:

Navigating the legal complexities associated with removal actions can be daunting. OC Trial Group simplifies this process for trustees. The firm’s attorneys provide clear, concise legal counsel, guiding trustees through each step. Their expertise in trust law enables them to address concerns, dispel misconceptions, and present compelling arguments on behalf of the trustee.

Preserving Trustee Integrity:Recognizing the inherent value of a trustee’s reputation, OC Trial Group is committed to safeguarding legacies. With the firm’s support, trustees facing removal actions can proceed confidently, knowing they have a dedicated team working diligently to uphold their integrity. OC Trial Group’s mission is to secure a favorable resolution, ensuring that the trustee’s legacy remains untarnished.

Considerations and Conclusion

Defending a trustee against removal actions which request an order surcharging the trustee requires a meticulous approach involving legal expertise, clear communication, and a strong focus on fiduciary responsibilities. Trustees must be proactive in their defense, ensuring a comprehensive understanding of the trust instrument and relevant laws.

By acting prudently, ethically, and transparently, trustees can mitigate the risk of legal challenges and safeguard the integrity of the trust they manage. In challenging times, a well-executed defense strategy can preserve the trust’s assets, the trustee’s reputation, and the beneficiaries’ confidence in the trust administration process.

Trustees can rely on OC Trial Group’s strong legal advocacy in the face of high-stakes and challenging legal battles. The firm’s attorneys are not just defenders but advocates, ensuring that trustees receive the robust representation they deserve during removal actions.

The post Defending a Trustee Against Removal and Surcharge Action: Strategies and Considerations appeared first on OC Trial Group.