Trustees Breached Duty by Not Distributing Assets in a Timely Manner

A trust is an instrument that many people use in conjunction with a will to handle wealth management after their death. However, just as disputes can arise between family members over a will, disputes can also arise over administration of a trust.

Trustees designated to manage the trust have duties, rules and regulations they must adhere to, or else a family may find itself embroiled in a court proceeding. The Indiana Court of Appeals case of In re Eiteljorg provides an example.

Dispute between trustees and beneficiaries

A father established a testamentary trust to be effective upon his death. His second wife was designated as the sole beneficiary. His two sons were named as the “remainder beneficiaries”-that is, the people who would be entitled to support from the trust after the wife died. The trust ultimately had three co-trustees: one of the two sons, another stepson and an accountant.

After the wife’s death, the four men met to discuss distribution of the trust property. At that time, the trust was valued at $6.5 million. One son requested a distribution of $2 million for him and his brother. The accountant thought dispensing that much would be imprudent. By his accounting, the trust might still owe upwards of $2 million in additional taxes on the wife’s estate. The stepson also opposed the distribution, as he was the executor of the wife’s estate and would be responsible if the trust were left with insufficient liquidity. The stepson and the accountant suggested distributing a total of $1 million. One son pressed for a greater distribution, but the accountant refused. The son stormed out of the room. No trust property was distributed and further attempts at negotiation proved unfruitful.

The sons later filed a lawsuit, alleging, among other grounds, that the stepson and the accountant had breached their duty to administer the trust according to its terms, and, specifically, for failing to distribute a portion of the trust assets in a timely manner.

Failure to timely distribute the property

The Court of Appeals noted that a “breach of trust” is defined as a violation by the trustee of any duty which is owed to the beneficiaries. Here, the trust agreement required the trustees to divide and convey the trust property to the sons promptly after the wife’s death, subject only to an appropriate tax holdback.

When the wife died, the trust filed $6.2 million in estate taxes, leaving it with $6.5 million, including $3.2 million in liquid reserves. Even if the parties disagreed as to how much money should be kept for future tax liability, the trustees could distribute at least $1 million in available liquid assets, and yet declined to do so. They did not petition the probate court for instructions until six months later, nor did they distribute any property until compelled by a court order two years after the wife’s death.

The court held that, in this estate litigation, the stepson and the accountant failed to timely distribute the trust property and thus breached their duties to administer the trust according to its terms, subjecting themselves to compensatory damages and attorney’s fees.

Ensure you comply with requirements

Whether you are a trustee or a beneficiary, disputes can arise from a trust-or from many aspects of administering an estate. There are numerous duties, rules and regulations that govern trustees, administrators and executors. If you are an administrator, executor or trustee, you should work with an experienced estate attorney who can ensure you comply with all the necessary requirements.