Living Trusts provide many advantages when properly drafted and administered. However, they can be misused. A dishonest trustee can cause great harm when the trustee embezzles the trust assets. What can be done to minimize the risk and to reduce the harm if embezzlement occurs?
A settlor should avoid nominating clearly unfit candidates as trustee: When the settlor of a trust nominates a person(s) to act as their successor trustee the settlor should carefully consider whether the person(s) they nominate is likely to fulfill his or her duty faithfully and competently. The settlor should make an informed and considered decision.
A suitable candidate is successful in their own life, has demonstrated good judgment and a trustworthy character. Conversely persons whom you never want to consider include persons who are described by any of the following characteristics: scraping by in life, cannot pay their debts, are addicted to drugs, alcohol or gambling, are dishonest, or cannot resist temptation.
If a suitable candidate is not available then the settlor should consider a professional private fiduciary – and in the case of much larger estates (with liquid assets of at least $500,000) a trust company (such as a bank’s trust department). In California many private fiduciaries can be found through the Professional Fiduciary Association of California (“PFAC”) organization whose mission is, “to advance excellence in fiduciary standards and practices.” Before selecting a fiduciary it is good practice to get references, look them up on the internet, and require (in the trust document) that the trustee have a fiduciary bond.
A fiduciary bond protects the trust estate if the trustee embezzles or otherwise harms the trust estate in a way that is protected under the bond. The bond company will replace what the trust lost in value due to the trustee’s covered bad acts.
Nonetheless, sometimes unfit persons are still chosen as trustee. Why? The settlor may have been vulnerable and wanting for assistance and social support. The person may have befriended the settlor and/or provided him or her with care and support. The settlor thereby came to rely upon and trust the advice of the friend as the “go to” person in the settlor’s life. The settlor would then for emotional reasons — and not rational reasons — select the friend as trustee.
How can this situation be avoided? If true friends and family remain close to dependent adults they can monitor their social contacts to prevent unscrupulous persons (interlopers) taking advantage. They should encourage dependent adults to seek a qualified estate planning attorney to be prepared in the event of their incapacity and death.
Once a settlor is incapacitated or deceased, the beneficiaries of a trust should enforce their right to be kept informed by the trustee regarding the trust administration. If the person acting as Trustee is not properly administering the trust the beneficiary may petition the court for instructions, for an accounting and for the removal and replacement of the trustee.
If a dependent adult (i.e., a person who cannot provide for his or her necessities of life) becomes incapacitated and/or cannot resist undue influence then interested persons may petition the court for a conservatorship in order to prevent or to end abuse of the dependent adult. A conservatorship can also be used to do estate planning for the conservatee’s estate by substituted judgment.
If a trustee is caught embezzling trust assets, the trust beneficiaries can petition to recover what was embezzled and also to impose a surcharge (penalty) due to harm caused by dishonest acts of the trustee. The beneficiaries can also go to the district attorney’s office to seek criminal prosecution and restitution.
“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”
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