Take Cover – Can Trustees Use Trust Funds to Defend Litigation?

Originally published by Axel Lindholm.

On occasion, a trust may be sued by a third party. This could be a beneficiary who feels that the trust is not operating the way it is supposed to, or a co-trustee who believes that the other trustee is not managing the trust properly. Typically when a trust is sued, a trustee is authorized to use trust funds to defend the lawsuit. This may happen even when it is the trustee himself who is being sued.

The Duty of the Trustee To the Trust

Trustees have a fiduciary duty to a trust. This means that they have a duty of loyalty and reasonable care when acting on behalf of the trust, and this can include the responsibility to defend the trust in litigation. If a beneficiary or a third party is attempting to change or even invalidate a trust, a trustee must usually obtain counsel to defend such litigation.

Participating in litigation costs money and trustees typically have the authority and discretion to advance the costs of attorneys fees out of the money in the trust, with the hope that this money may eventually be recovered through the litigation process. This is the case even if the trustee is himself being accused of breach of trust.

Recently the Texas Court of Appeals confirmed that this is acceptable in a case called In The Guardianship of Hollis. In that case, a lower court attempted to remove a trustee for misconduct after the trustee tried to reimburse himself from the trust for legal fees paid. The Court of Appeals reversed, finding that a trustee can be reimbursed for legal fees that occur when a trustee is reasonably defending a trust.

What About Misconduct?

While trustees may have the right to recover fees for litigation that is required to defend the interests of the trust, one important exception applies: Trustees cannot recover for expenses incurred as a result of their own negligence or misconduct. If a trustee engaged in misconduct that caused a lawsuit to occur, or a lawsuit is commenced to remove a trustee, the trustee’s reimbursement may be denied.

Certainly, this first requires that a court establish that misconduct actually occurred. Trustee misconduct can include:

• A failure to take reasonable care of assets in the trust
• Failing to follow the purposes and intent of the trust
• Diverting trust assets for personal use
• Engaging in behaviors that create a conflict of interest with the trust

While distraught beneficiaries and other beleaguered individuals may make accusations of misconduct against a trustee, this does not automatically prevent the trustee from using the trust for legal fees. Rather it must be established that the trustee has engaged in bad acts, or misconduct, and, therefore, is not representing the trustee in good faith in the litigation.

It should also be noted that any beneficiary concerned about the use of trust funds for litigation should also consult the terms of the trust itself. Many trust documents will provide guidance on how, and when, attorneys’ fees incurred by a trustee can be reimbursed.

If You’re Concerned About the Use of Trust Funds In Litigation, Consult with Romano & Sumner, PLLC

Handling a trust can be a very complicated endeavor, and it may sometimes require a trustee to defend against less than meritorious claims. However, if you have reason to believe that a trustee is misusing trust funds for the purposes of defending litigation, you should consult immediately with an attorney. At Romano & Sumner, PLLC, our trusts and estates litigators have extensive experience dealing with claims of trustee mismanagement and abuse, and are available to assist you. For more information, contact us online or at 281-242-0995.

The post Take Cover – Can Trustees Use Trust Funds to Defend Litigation? appeared first on Romano & Sumner – Sugar Land, TX Attorneys.

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