Trustees assume many responsibilities when they agree to serve as the administrator of a trust. They (often) are subject to the demands and threats of unhappy beneficiaries and the creditors of beneficiaries and must be careful how they invest trust resources and keep current with required tax filings. Even decisions that are in the best interest of the trust are called into question by those who do not understand the reasons for the trustees’ decision or just outright disagree. Being a trustee can be challenging.
Sometimes beneficiaries want to challenge the terms and provisions of the trust, overturn trustee’s exercise of discretion under the trust, or think the financial details of the trust as disclosed by the trustee are inaccurate or lack sufficient detail; sometimes they want a trustee to recover a gift made by the trust maker prior to death because he/she thinks it shouldn’t have been made. Interested persons have questions surrounding the creation of beneficiary designations and “pay on death accounts” that have funded all or a portion of the trust and their demands appear irreconcilable.
That’s where Hanlon Niemann & Wright comes in.
Trust Law & Trustee Defense Attorneys
We are experienced Trust law attorneys with a strong transactional and litigation background. We focus on dispute resolution (sometimes called “mediation”) which allows us to better understand the claims and motives of all sides so that we can assist in avoiding contentious and protracted litigation. We accomplish all of this while we remain on the cutting edge of New Jersey trust law under the new Uniform Trust Code.
Trustees benefit also from our extensive estate planning practice which involves drafting wills, trusts, and estate plans. Our belief is that when representing a client in a trust case, if you need to litigate the case, you better be grounded in the real world of Estate Planning and Trust documents. Let’s use an analogy: Can you really be a lifeguard if you don’t know how to swim?
When serving as a trustee, if you face claims related to breach of fiduciary duty, breach of duty of loyalty, allegations of fraud or other issue(s), isn’t it reassuring that your attorney can serve as a trusted advisor and powerful advocate to help you navigate the trust laws in New Jersey?
Because of our significant trust and probate law experience, trustees and other lawyers will call upon us for assistance to help resolve the issues of the case.
TESTIMONIALS
I was lucky enough to have Mr. Niemann handle my affairs. He was so professional and compassionate during a very difficult time for me. My total experience was great.
– Arti Sinha, Marlboro, NJI found the members of the law firm of Hanlon Niemann to be friendly, professional, cost effective, prompt and creative. In short, I felt that I was in “good hands”.
– Daniel & Florence Donigian, Oakland, NJWhenever you use an accounting firm, or as in this case, a law firm, you expect technical excellence in the work they do. Hanlon Niemann & Wright delivers this. But to really exceed your expectations, a professional service firm has to wrap a broader service experience around the work they do, and the key elements of this experience are empathy, friendliness and an understanding of the client’s needs. This is where Hanlon Niemann & Wright truly exceed.
– Anthony Pisano, Freehold, NJ
Addressing the Issues that Confront a Trustee of a Trust in New Jersey
Being Named a Trustee But Don’t Want To Serve? What Do You Do?
Being named as Trustee is an honor but an honor you may choose not to accept. Being a trustee involves many responsibilities and there are laws that govern trustee performance. If you do not want to be the Trustee what are your options?
First, you cannot be forced to serve as Trustee if you don’t want to or can’t serve for health and/or other reasons. The Uniform Trust Code sets forth the methods and procedure for both acceptance and/or refusal to serve as a Trustee. These laws discuss how one formally accepts or declines being a designated trustee and what to do if one is uncertain. (N.J.S.A. 3B:31-46, N.J.S.A. 3B:31-47).
Here’s an unfortunate story. Mom can no longer serve as trustee of her living trust. As successor trustee, the job has fallen to her daughter who is finding it too difficult and time-consuming. She doesn’t want to do it anymore. Although her brother is named as a backup trustee, the mother named him reluctantly because he is not a responsible person. There are concerns that he is both unqualified and not up to the responsibility. The daughter wants to know if she can remove the brother from the list and designate someone else to serve, maybe a trusted cousin who is a CPA?
Well, this is a tough question. Now that the daughter is trustee from her incapacitated mother, her authority is limited by what the trust says she can do. She can appoint someone as her successor trustee only if the trust gives her that authority. But even if it does not, the daughter does not have to do all the work of trust administration. She is free to hire competent professionals to assist her. It is totally appropriate to use the services of a lawyer and/or accountant or any advisor that has the capacity to facilitate the management of the trust, including a professional money manager, investment advisor, a real estate broker, or any other relevant professional.
Before you get yourself into something you either don’t want or are not sure about and may later regret, may I invite you to give me a call. Let me explain what exactly a Trustee does and what the expectations are for that office. It will be time well spent.
Contact Fredrick P Niemann Esq., of Hanlon Niemann & Wright today to understand all of your defense options. You can reach out to me toll-free at (855) 376-5291 or email me at fniemann@hnlawfirm.com .
Defending a Trust Document Against a Challenge to its Validity or Provisions Contained Therein
No matter what anyone else may tell you, all of us have the right to write a trust with the terms and provisions we want enforced and honored.
Beneficiaries and omitted persons can claim that there is something wrong with the trust, that its creator was too old, too sick, too vulnerable to the undue influence of another and/or they were tricked into signing the document. The reasons go on and on. Then they look for “legal technicalities” to undo the trust. A forged or suspicious signature, absence of two (2) attending witnesses, handwritten notes on the original document, etc. Many times, the reasons are limited only by his/her imagination.
Their real reason for challenging the trust is the fact they are not getting what they want, and they will make allegations and accusations in hopes of getting a settlement out of the trustee. It’s a strategy I see often used.
What happens is that the challenging attorney takes the trust case on a contingency basis, meaning they get a share (typically one-third) of whatever the claimant collects. They never plan to go to trial. A trustee will feel threatened by the challenge and offer a settlement (small or large) just to make the adversary go away.
At Hanlon Niemann & Wright, we look at trust challenges objectively. We are not biased either way. Depending upon the merits of the case, as your advocate, we’ll either engage in a dialogue or fight the claim(s) and take them to trial. When the fees start to rise and they encounter real opposition, many claimants lose their combativeness and either give up the fight or settle for a much more reasonable amount.
If the objections are not withdrawn, we may file a Motion to Dismiss, which has the effect of throwing the case out of court without a trial because there is not enough evidence to successfully win at trial. If we think it’s in the best interest of the trust to offer a small settlement or no settlement at all, we’ll consider that recommendation and explain the reasons to you in plain English.
Defending Against Trustee Wrongdoing and Demand(s) for an Accounting
Time and time again, we see beneficiaries accuse trustees of wrongdoing with no basis whatsoever. Trustees are wrongfully accused of misappropriating funds of the trust, overspending on expenses, selling property too slowly and/or at too low a price; and the list of complaints goes on. In our experience, many of these claims lack a basis in fact. What beneficiaries think is the unlawful or inappropriate action(s) of the trustee is often permitted under New Jersey laws, mostly because trustees are afforded reasonable discretion in their decision making.
When accusations are made, we work with the trustee to make clear to all concerned not only the law but the reality of trust administration. We attempt to resolve all misunderstandings. Unfortunately, when a trustee as a fiduciary is accused of stealing, they have to present an accounting to the court.
An accounting is a highly regulated process that requires the trustee to list all asset(s) of the trust, disclose every expense, and disclose all income and supporting documentation down to the penny. What usually happens then is that the attorney for the beneficiary demands documents to dispute the accounting or has an independent or forensic accounting prepared. A trust accounting can consume tens, if not hundreds of pages. If not satisfied with the accounting, the attorney for the beneficiaries will file a list of exceptions to the accounting who can then examine the trustee under oath together with witnesses and other relevant parties to explain the contents of the accounting.
A trust Accounting is not cheap. You’ll need the assistance of an attorney, CPA or a forensic accountant who has experience with accounting(s). Because the trust may have to pay for this, the result is less money for the beneficiaries since an accounting is paid for by the trust. Beneficiaries are of course not happy about this added expense (which they themselves have caused), but that’s the reality.
After the accounting and all the supporting documentation and information is disclosed, it is up to the parties involved to determine if they want to proceed to trial before a chancery court judge who will make a final decision for or against the merits of the accounting.
If you are a trustee who is accused of taking advantage of the trust or failing to perform your statutory responsibilities you can contact Fredrick P Niemann Esq., of Hanlon Niemann & Wright today.
Defending Through Trustee Advocacy the Continued Service of the Trustee
Beneficiaries of trusts & estates often times have a “personal” issue with the trust Representative. They want him or her removed. They make all kinds of accusations and challenge the qualifications of the trustee including that the trustee cannot be trusted and/or relied upon. The law favors the continued service of the lawfully designated trustee because they were personally selected by the decedent and/or trust creator. A judge will not disqualify a person from appointment absent a serious breach of conduct or a real threat to the welfare of the trust and the beneficiaries.
If you are being intimidated and threatened by a Trust beneficiary, call me today. I’ll put your mind at ease. We’ll go over the facts together and analyze the real motives behind the accusations.
Defending the Trustee in the Sale and/or Transfer of a Business / Real Estate
A trustee assumes control over the ownership interest of a decedent’s business, or business interest, and real estate which is owned by the trust until it is transferred to the designated beneficiary OR transferred to a surviving business partner/LLC/Shareholder Member(s) pursuant to a written shareholder, partnership or LLC member operating agreement. During this time significant financial and operating decisions fall to the trustee to maintain profitability and structure. The beneficiaries however just want their payout. We work closely with the executor/trustee to ensure that the business operates coherently until the time comes when control and ownership is transferred. We’re practical and business-friendly in our approach. Since we represent businesses, shareholders, partners and LLCs we are familiar with succession planning agreements including buy-sell agreements, etc. Put our strong business experience to work with you as the trustee in charge of the decedent’s business affairs.
Defend Claims By Creditors and Others Against the Trust
After a person dies, many kinds of individuals and entities may make claims against the trust. The most common claimants are creditors, as well as those parties I have discussed previously, including; business partners, life partners, ex-spouses, the IRS, and Medicaid. Many times, the claimants cannot prove their allegations but even if they can, it is often overstated monetarily. We’ll evaluate the claims of creditors, Medicaid, the IRS and others who file lawsuits or liens for payment. Legitimate debts and liabilities can and must be paid. In fact, as the trustee, you can be held personally liable if you disburse funds without first taking reasonable efforts to search out known or likely creditors and priority statutory lien holders. Don’t go it alone, reach out to me today.
Introduction to Fiduciary Accountings
A formal Fiduciary accounting is time-consuming and costly. The required financial disclosures and document assembly is like an audit. Thus, for most estates and trusts a formal accounting is to be avoided. There is another simpler and less costly option called an “informal accounting”.
With an informal accounting, a fiduciary is not required to formally settle an estate or trust if the fiduciary obtains from each beneficiary a document called a release and refund bond (sometimes it’s referred to as a discharge). This document must be signed by the beneficiary or beneficiaries of the estate or trust. When all interested parties agree to an informal accounting and sign refunding bonds and releases, none of them can later compel the fiduciary to prepare a formal accounting. N.J.A. § 3B:17-13 reads:
Unless the governing instrument expressly provides otherwise, an instrument settling or waiving an account, executed by all persons whom it would be necessary to join as parties in a proceeding for the judicial settlement of the account, shall be binding and conclusive on all other persons who may have a future interest in the property to the same extent as that instrument binds the person who executed it.
However, there are exceptions to this rule. If it is later found out that the fiduciary engaged in fraud, misrepresentation, mismanagement, or undue influence, or there was a substantial misunderstanding on the part of a beneficiary which caused the beneficiary to forgo a formal accounting then, a formal accounting may be required by the surrogate of the probate court, or the probate judge.
In a difficult estate or trust where the fiduciary is fighting with or in conflict with beneficiaries, it may be beneficial to the Fiduciary to prepare a formal accounting to protect himself/herself from later accusations or claims from a beneficiary. A fiduciary has the right to settle an account formally or may be compelled to do so. N.J.S.A. § 3B:17-2. Moreover, a person with a financial interest in the estate may file a complaint with the court to obtain an order to show cause compelling a formal accounting. Legal action to compel the settlement of an account must be instituted by a person having standing i.e. a person in interest. Examples of persons in interest include beneficiaries, creditors, heirs and next of kin.
Completion Deadlines and the Filing of an Accounting
An executor or administrator is not required to file his or her accounting in court unless a court compels him or her to do so. Even then a court cannot compel an executor or administrator to settle an account until the expiration of one year after their appointment unless special reasons and/or allegations against the fiduciary are demonstrated to the satisfaction of the court prior to the first calendar year.
The same rules apply as a general matter to trusts and trustees. The first account of the trustee may be settled within one year after his or her appointment or as soon thereafter as is practicable. N.J.S.A. § 3B:17-3. This waiting period recognizes the unique circumstances that oftentimes exist in the administration of a trust and affords the trustee the flexibility needed to maximize the interest of the beneficiaries. A trustee may be required to settle his or her accounting at such times as a court requires, but this occurs only when a beneficiary has brought legal action against the trustee.
What is an Inventory of Trust Assets?
An inventory is a written disclosure listing the assets of the decedent’s estate or trust. It is required as part of an estate or trust accounting. The purpose of an inventory is to give notice to all interested parties to the estate regarding the assets that comprise the estate/trust and to disclose the values of those assets.
An inventory is required to include all of the decedents or settlor’s real and personal property, of whatever kind and nature of which the personal representative has any knowledge of its existence. The property that should be included in the inventory include(s) promissory notes, debts, and claims that can result in money to the estate which is uncollected, as well as any debts owed by the estate. N.J.S.A. § 3B:17-4. An inventory should be specific and detailed in describing the assets of the estate together with valuations or it may be rejected by the staff accountant at the surrogate’s office.
An interested party may dispute an inventory on various grounds, including the personal representative’s failure to include particular assets owned by the decedent or a claim that there are more assets in the estate than claimed by the personal representative in the inventory. The interested party has the burden of proving “with reasonable certainty” the validity of the claim. An interested party means someone or entity with an economic interest in the estate either directly or indirectly on behalf of another (i.e. divorced spouse on behalf of a minor child, collection agency on behalf of a creditor). An interested party may also claim that the valuation of the property is too high or too low.
The Fiduciary’s Legal Obligation
Maintenance and Retention of Records to Support an Accounting
Executors, administrators, guardians, and trustees are under a duty to keep and preserve accurate accounts, to give the beneficiary, at reasonable times, accurate information regarding the property under his or her control and to allow a beneficiary to inspect the records and accounting. In addition, a testamentary trustee or the trustee of a living trust is under a duty to provide a beneficiary, at his or her request, with a copy of the trust agreement and relevant information about (1) the assets compromising the trust and (2) the particulars relating to its administration – essentially, a full disclosure of all information material to the beneficiary’s interest.
When a person serves as both a trustee and an executor, the accounts for the estate and trust should each be kept separately. The fiduciary should establish a record-keeping system to monitor the activity of the funds in his or her charge. This record-keeping system should be set up in such a way as to provide the fiduciary with the financial information needed to prepare an accounting. Just how formal the record-keeping system should be established depends on a variety of factors such as the size of the fund held, the type of assets, and the number of transactions anticipated to be made during the course of the administration. In simple cases, a checkbook ledger may be sufficient to track all of the deposits and expenditures made from the estate or trust. In more complex cases, a more involved system will need to be established. In any event, the records maintained by the fiduciary should enable him or her to prepare schedules that allow for a formal accounting if necessary at the end and would include in a probate estate assets inventoried at death or upon creation of the estate or trust; subsequent receipts, investments made, disbursements made, distributions to the beneficiaries, gains and losses on sales or other dispositions income generated, changes in investment holdings, and the current balance on hand.
At times, demand for the proof(s) of payment for alleged disbursements is made. While it goes without saying payment by check, certified funds, and other methods of provable payment are generally accepted, sometimes beneficiaries want more assurance as to the bonafide of the transaction. There is a court rule that provides that receipts supporting payment in cash need only be presented at the request of a court or an interested person. If the surrogate is auditing the accounting and makes the request for production of receipts to particular changes if the fiduciary is unable to produce a receipt in support of the payment, the fiduciary can testify under oath with respect to the payment, and the fiduciary’s testimony, in the absence of the contradiction, is admissible by the court. Whether the court believes the witness is another issue.
When a fiduciary is required to create an “accounting”, he or she will sometimes seek out the services of an accountant. Sometimes accountants are unaware that a fiduciary accounting is to be prepared according to the New Jersey Rules of Court and is not the typical “double-entry bookkeeping” system popular with accountants. Fiduciary accountings are formatted to themselves and many CPAs are unfamiliar with their implementation. Before hiring a CPA to assist with the preparation of a “fiduciary accounting”, you should ask the CPA about his/her familiarity with judicial accountings.
Exception to a Trust Accounting; What Happens When There is Opposition to the Accounting?
NJ court rules address the procedure to settle an account; any interested party must file written exceptions to any item or omission from the accounting. An exception(s) is/are objections to the accounting or to the fiduciary’s conduct during his/her administration of the estate or trust. Our state’s court rule(s) also require that exceptions be stated with specially and by specific allegations. They must identify the item or omission being disputed, the relief being sought and the reason for the relief.
The purpose of filing an exception is to compel the fiduciary to verify and prove the validity and accounting of the funds eligible for distribution to eligible beneficiaries and every interested party to an estate or trust.
Examples of exceptions to an accounting include the following:
- Changes and allowances as to principal & income;
- Investments and assets composing of the balance of the estate;
- The value of all inventory;
- Statement of all changes made in the investments and assets from the beginning to date of filing;
- All estate and inheritance taxes;
- Payment of counsel and professional fees, commissions, and other administrative expenses;
- Any claim paid by the fiduciary is unsupported;
- Any item or items in the statement of assets that are required to be attached to the account.
Executor/Trustee Liability in an Accounting
Exceptions Regarding Breach of Duty
If a fiduciary exceeds the powers and authority granted to him or her under the will or trust, a fiduciary is deemed to have committed a breach of duty, even if the fiduciary acted in good faith or at the advice of counsel. Case law has ruled that “due care and good faith cannot justify an executor, administrator, or a trustee who, under a mistake of law, intentionally does what is prohibited or is beyond his/her powers or who intentionally fails to do what is required by law”.
If, however, fiduciary acts within the scope of his or her authority and in good faith makes a mistake of law or fact, the fiduciary is not legally chargeable if an ordinarily prudent person would have or could have made the same mistake.
To recover for a breach of duty, an interested party must prove the loss being claimed resulted from the breach and the proof should generally be persuasive but there is usually no requirement that the interested party proves beyond a reasonable doubt that the loss occurred because of the breach. In response to a claim for breach of fiduciary duty the fiduciary will have the burden of proving that there was no connection between the breach and the loss claimed by the interested party.
If a fiduciary is unsure about what to do in a given situation and to avoid liability for breach of duty, a fiduciary may seek the instructions of the chancery court, probate court before taking a particular action.
When a breach of duty occurs, the fiduciary is chargeable with any loss in the value of asset(s) as a result of the breach, any profit made by the fiduciary as a result of the breach, and any profit which would have accrued to the assets had there been no breach.
Hearings on Fiduciary Accountings
The Battle of Who’s Right and Who’s Wrong
In contested fiduciary accounting disputes, the chancery court judge has the final authority to decide the case.
Generally, in proceedings to settle the accounting of an executor or trustee administrator, the burden of proof is upon the personal representative or the challenger, depending upon the circumstance of the particular case. Thus, when a personal representative files his/her accounting and someone file exceptions, the burden is to prove the bona-fides of the accounting upon the representative to establish its correctness and not on the claims of the objectors.
The Burden of proving an exception however falls upon the objector. Our courts have ruled in many cases that the burden of showing there were more assets in an estate than disclosed by the executor in their inventory rests upon the objector, and “must be sustained with reasonably certainty.” This same general standard applies when the objector claims that the property of the estate was of greater value than is shown by the accounting. Once this burden is met, the burden then shifts to the executor to establish the accuracy of the content of its accounting to the property.
Damages, Remedies, and Sanctions in an Accounting Fight
When a fiduciary is held liable for a breach of duty, the courts have many options as to remedies. These remedies fall generally into four general categories: removal of the fiduciary, money damages, forfeiture of commissions, and other sanctions. Each of these categories is discussed below.
Removal of the Fiduciary if He or She is a Thief or Just Irresponsible
The general standards for removal of a fiduciary is set forth under N.J.S.A.§ 3B:14-21. The statute provides that the court may remove a fiduciary if the fiduciary “has embezzled, wasted or misapplied any part of the estate committed to his or her custody, or has abused the trust and confidence given to him or her under the law. Traditionally courts are reluctant to discharge an executor from office simply because (with the benefit of hindsight) the choice was unwise or improvident; still, an executor can be removed from office upon a showing that he or she became the estate representative as a result of fraud, misconduct, or breach of trust.
A removed or discharged fiduciary must deliver to his or her successor all assets as of the date of discharge generally and then he or she must prepare, file and settle his/her accounts within 60 days after entry of the judgment or within such time as the court may direct. Within 60 days after settlement of the accounts, he/she must pay over to his successor any balance due. (N.J.S.A.§ 3B:14-5. N.J.S.A.§ 3B:14-6) then provides:
A fiduciary who fails to account or who fails to comply with the provisions of any order entered by the court is liable to a fine not exceeding the amount of the estate in the hands of the court.
A Judge Can Order a Forfeiture of Statutory Commissions Against a Fiduciary
Statutory commissions for service as a fiduciary have been denied in a variety of circumstances, such as where: (1) the fiduciary fails to invest funds; (2) the fiduciary fails to keep trust funds separate; (3) the fiduciary accepts gratuities from interested parties or others doing business with trust property and employees of the trust; (4) an unreasonable delay in rendering an accounting; (5) failure to keep an account or keep an account which is obscure; (6) the fiduciary uses funds personally; (7) money is lent to one of the fiduciaries without security.
Forfeiture of Commissions: Failure to Invest
When an executor fails to keep proper records of the estate’s accounts and/or has failed to make investments according to the direction of the Will by his/her negligence has been damaged in will not be allowed commissions.
Forfeiture of Commissions: Failure to Account Executors, Administrators & Trustees
Where a trustee has failed or neglected to keep an accounting of his or her investments and of the trust as a request for the trust funds, fails to have supporting records of his receipts and disbursement of the funds from the trust, and caused or contributed to litigation, no compensation will be approved.
Finalize and Close Out the Trust
Can a Trustee of a Trust Created Under a Last Will Distribute the Trust Assets Outright to Named Beneficiaries and Then Terminate the Trust
Sometimes it makes sense to close out and terminate a trust, especially if the trust is located within a last will but, not always. The decision often depends on the language of the trust document and the intent of the trust creator. If the beneficiaries are young, reckless (aka young & stupid), spendthrifts, alcohol or drug addicts, I have serious doubts whether the trust can be terminated.
Here’s an Actual Case Discussing the Termination of a Trust Under a Last Will by the Trustee
The findings of this case will apply to trust documents that are not part of a last will but exist on their own, i.e., a “revocable or irrevocable trust.”
A family consisted of a husband, wife and 3 children: The husband survived his wife by several years. The wife’s entire estate passed to her husband when she died first. The surviving 3 children are all competent adults in their 50’s who get along with each other. Under the terms of the will, a son and one other sibling are to be appointed as co-trustees of a trust created under his will, called a testamentary trust. The trust gives the trustee broad powers to distribute income and principal to the named beneficiaries. The executor wants to keep things simple. One attorney advised that if all 3 children agreed in writing they could terminate the trust before it was funded and then have the assets of the estate used to (1) pay estate debts (which are minimal), (2) pay NJ death tax (there is none), and (3) distribute the remainder of the estate outright to the 3 children in equal shares. This proposal would avoid the need to appoint trustees, fund the trust and proceed from there. N.J.S.A. 3B:31-27.a. provides, “a non-charitable irrevocable trust may be modified or terminated upon the consent of the trustee and all beneficiaries, if the modification or termination is not inconsistent with a material purpose of the trust.” I was asked my opinion. I believe this proposal is a good one under these facts. The trust can be terminated. The law offers other reasons that will allow for the closing out of a trust which is not discussed on this page, but if you’re interested to learn more about the topic, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office. You’ll find him to be very knowledgeable in trust law and trust disputes and easy to talk to.
Fredrick P. Niemann Esq.