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When Trustees & Personal Representatives Steal; Victims' Rights & Remedies.

In the following hypothetical fact-pattern, Mr. & Mrs. X transfer legal title of their home and other assets to a trust they established called “The X Family Trust”. The terms of their trust specify that all income derived from trust assets (and the principal if necessary), shall be used for their health, education and welfare while they’re alive; All four of their sons are listed as “remainder beneficiaries”, each entitled to 1/4th of the trust’s remaining assets when Mr. & Mrs. X die.

They also name themselves as trustees (the only persons with the power to control trust property), and designate their eldest son (“Toby”) as successor trustee (i.e. when Mr. & Mrs. X die, or if they become legally incompetent, Toby will become trustee, and assume all the powers his parents had over trust property.)

 

Tragically, Mr. X dies of a heart attack, and Mrs. X is diagnosed with Alzheimer’s; Despite Mrs. X’s diagnosis, the law presumes all persons to be of sound mind, and if adults, capable of managing their own affairs. In re Guardianship of Carlsmith, 113 Hawai‘i 211, 232, 151 P.3d 692, 713 (2006).

"Testamentary capacity has been defined as the ability to know: (1) the nature and extent of the testator or testatrix's estate; (2) the identity of the beneficiaries and their relationship, whether by blood or other circumstances, to the testator or testatrix (i.e., the objects of his or her bounty); (3) the disposition that the testator or testatrix is making; and (4) how these elements relate so as to form a rational and orderly plan for the disposition of the testator or testatrix's estate. See 1 Page on the Law of Wills § 12.21, at 606-09, 614-15 (William J. Bowe and Douglas H. Parker, eds., 1960) (Page on Wills); Wills, Trusts, and Estates, at 149; see also Estate of Adams, 234 N.W.2d 125, 127 (Iowa 1975); Evans v. Liston, 116 Ariz. 218, 568 P.2d 1116, 1117 (Ariz. Ct. App. 1977);"

In re Estate of Herbert, 90 Hawai‘i 443, 454-55, 979 P.2d 39, 50-51 (1999).

In this instance, two psychiatrists declared that Mrs. X digressed to the point where she no longer has testamentary capacity. Toby therefore becomes trustee with plenary powers over trust property.

 

As a fiduciary, Toby is legally obliged to manage the assets of the trust (often referred to as the “res” or “corpus”), solely for the benefit of his mother for the rest of her life (see Hawai’i Revised Statutes (“HRS”) § 554D-813 (a)), and ensure the remainder is divided evenly between himself and his brothers when she dies, according to the trust’s terms. Unfortunately, he’s a troubled man with myriad financial problems, and the temptation to misappropriate trust assets for his personal benefit becomes irresistible; Over the next eight years, Toby commits multiple breaches of trust  (see generally Estate of Dwight, 67 Haw. 139, 146, 681 P.2d 563, 568 (1984)). He transfers $4 million dollars of trust property to himself; By the time Mrs. X dies, there’s only $60,000 left in the trust.

 

At their mother’s funeral, Toby tells his brothers  that most of the trust’s assets were used to pay for their mother’s medical care, and they’ll only be getting $15,000 each. The brothers are shocked; They can’t understand how she could have incurred medical bills of $4 million dollars when she was fully insured. Over the next several months, they repeatedly ask Toby to show them receipts and other documents but he refuses.

 

By refusing to disclose pertinent information to his brothers, Toby violated HRS § 554D-813 (b), which requires in pertinent part,  “[] a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. . . “; (see also In re Elaine Emma Short Trust Agreement, 147 Haw. 456, 472, 465 P3d 903, 919 (2020)). A trustee is duty-bound to provide relevant information to a beneficiary upon request. In re Trust Created Under the Will of Damon, 140 Haw. 56, 67, 398 P.3d 645, 656 (Haw. 2017).

 

Toby is also a beneficiary like his brothers. It’s improper for him to use his powers as trustee, to advance his beneficial interests ahead of other beneficiaries. HRS § 554D-803 mandates, “If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests.”

 

Out of desperation, the brothers hire an attorney who sends Toby a demand letter. Instead of acceding, Toby hires an attorney for the purpose of stonewalling his brothers; Toby's attorney does not realize his primary duty is to the trust, not Toby, and does not advise him to cooperate. Sadly, they’re forced to file a petition in probate court, beginning a process that could take years and cost hundreds of thousands of dollars to resolve.

 

Life isn’t fair in general, but it’s particularly unfair to victims who’re cheated out of their inheritance by unscrupulous fiduciaries.

 

The brothers face an uphill battle; Toby’s hiding the very financial documents and other evidence his brothers need to pursue their claim. Moreover, Toby’s malfeasance left him with a substantial war-chest to use for legal fees; In addition to unjustly enriching himself with millions of trust dollars, as trustee, he also has control of the $60,000 left in the trust.

"A trustee is entitled to employ counsel and be reimbursed from the funds of the trust for reasonable sums paid for the services of such counsel whenever it is necessary to the proper administration, preservation or execution of the trust." In re T.H.G., 2014 Haw. App. LEXIS 36 at 4, 131 Haw. 253 (Haw. 2014). However, attorney’s fees and expenses are properly payable out of a trust only if they are to benefit the trust. Midkiff v. Kobayashi, 54 Haw. 299, 338, 507 P.2d 724, 746 (Haw. 1973).“’An allowance of counsel fees may be refused where the services for which the allowance was claimed were unnecessary in connection with the performance of the duties of the representative.’” In re Estate of Lalakea, 26 Haw. 243, 255, 1922 Haw. LEXIS 46 at 21 (Haw. 1922).

 

To determine whether or not a trustee should be denied compensation, the Hawai'i Supreme Court enumerated the following factors:

"(1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or negligent or without fault; (3) whether the breach of trust related to the management of the whole trust or related only to a part of the trust property; (4) whether or not the breach of trust occasioned any loss and whether if there has been a loss it has been made good by the trustee; (5) whether the trustee's services were of value to the trust.’"

Steiner v. Hawai'ian Trust Co., 47 Haw. 548, 574—75, 393 P.2d 96, 111 (1964).

As trustee, Toby is entitled to a rebuttable presumption he acted in “good faith”. Initially his brothers shoulder the burden to produce evidence sufficient “to overcome the presumption. . . .” whereupon the burden shifts to Toby “to justify his action[s] . . . “  In re Estate of Campbell, 42 Haw. 586, 607 (1958).

 

If the brothers can prove Toby committed breach of trust, and is using trust funds to make frivolous legal defenses, he’ll be personally liable to them for legal expenses incurred to enforce their rights, in addition to replenishing the assets he stole from the trust; (see e.g. Restatement (Third) of Trusts: Liability of Trustee for Breach of Trust § 100, Comment b(2) (Am. Law Inst. 2012).

A “constructive trust” is an equitable remedy the court will impose upon Toby if his brothers can prove breach of trust. “A constructive trust arises where a person holding title to property is subject to an equitable duty to convey it to another.” Kam Oi Lee v. Fong Wong, 57 Haw. 137, 139, 552 P.2d 635, 637 (Haw. 1976).

 

Toby could also be liable for pre and post-judgment (simple) “statutory” interest at the rate of 10% per Anum ( HRS § 478-2), because they’ve lost the “time value” of any assets he misappropriated. The Hawai'i Supreme Court upheld the Probate court’s surcharge of a trustee for pre-judgment interest, for a reasonable time after the trustee became aware of his potential liability for an improper distribution, because he benefited from personal use of the funds. Nepage-Fontes v. Nepage, 2013 Haw. App. LEXIS 371 at 10—13, 129 Hawaii 450 (Haw. 2013).

 

The brothers may also be entitled to receive punitive damages to impose “punishment and deterrence, [where] such damages are awarded only when the egregious nature of the defendant's conduct makes such a remedy appropriate. Thus, ‘[w]here the defendant's wrongdoing has been intentional and deliberate, and has the character of outrage frequently associated with crime . . .’“ the victim is entitled to punitive damages. Masaki v. General Motors Corp., 71 Haw. 1, 6, 780 P.2d 566, 570 (Haw. 1989).

 

However, the brothers must produce a sufficient quantum of “clear and convincing” evidence” before the court will find that Toby was "unjustly enriched", impose a constructive trust and "disgorge" his assets. In re Ishida-Waiakamilo Legacy Trust Dated June 27, 2006, 138 Haw. 98, 103, 377 P.3d 39, 44 (Haw. 2016).

 

Until the brothers can meet their evidentiary burden, there’s nothing to stop Toby from using the trust’s res to pay his attorneys; Even worse, since ¾ of the $60,000 left in the trust belongs to his brothers, ¾ of every trust dollar Toby spends on legal fees is actually paid for by his brothers; In other words, in addition to paying 100% of their legal fees, the brothers will in-effect be paying ¾ of Toby’s legal fees until they can prove their claim. Toby may also raise frivolous counterclaims, forcing his brothers to expend even more resources to defend themselves.

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