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What Does Surcharging A Trustee Mean?

There are times when a Trustee causes damage to a Trust estate. When that occurs, you have the right to ask the court to issue a surcharge against the Trustee. That’s a complicated way of saying you want the court to order the Trustee to pay money back to the Trust. In other words, a damage award against the Trustee.

 

If a court finds the Trustee breach his duty, and caused harm, then the court can impose damages. The way the court measures the amount of damages is set forth under Probate Code section 16440. Under 16440, the court can impose damages in an amount that equals:

Any loss or depreciation in the value of the Trust estate, with interest,

Any profit made by the Trustee, with interest, and

Any profit that would have accrued to the Trust if the loss of profit is the result of the breach of Trust.

(see Probate Code section 16440.)

The problem many Trust beneficiaries have is they do not know the extent of the damage caused to the Trust. All too often Trust beneficiaries are kept in the dark about the Trust assets. As such, the first step many beneficiaries must take is to uncover the truth. Ask for an accounting, file a lawsuit so you can issue subpoenas to financial institutions, do whatever it takes to uncover the truth of what has occurred.

An accounting is a great place to start. The Trust accounting provides the road map for what action was taken by the Trustee, and what damages he may have caused. Even if the accounting does not show the damages, it will provide a list of accounts and other assets where you can issue subpoenas to obtain the original information directly from the source. This will allow you to obtain and review the original financial documents so you can determine for yourself what damage has been done to the Trust estate.

Once you uncover the truth, then you are in a position to file a breach of Trust lawsuit against your Trustee and ask for the appropriate amount of damages against the Trustee. If you already know what the damages are, then you can skip the first step and go right to the breach of Trust lawsuit.

For example, if you know that the Trustee bought a house from the Trust and that the Trustee paid half of what the house was worth, then you can just file your lawsuit. No need to uncover the facts when you already know the damages. Just file your breach of Trust lawsuit and ask for the money to be returned to the Trust.

Warning: there is one big out for Trustees. Under Probate Code section 16440(b), the court has the right to excuse the Trustee in whole or in part from liability. In order to do so, the court must find that the Trustee acted reasonably and in good faith under the circumstances. Plus, the court must find that it is fair to excuse the Trustee from liability under the circumstances. Why allow the court to give the Trustee an out? Remember, that the Probate Court is a court of equity. That means the court is given wide discretion to determine what is, and what isn’t, fair. If a Trustee did the best they could under the circumstances, and did not intentionally cause the Trust harm, then it might be fair to excuse the Trustee from liability. As a result, if you are suing a Trustee you better be ready to address why it would be UNFAIR to let the Trustee off the hook. You can bet that the Trustee will point to Section 16440(b) and try to get out of having to pay.

Of course, in the example above, where a Trustee buys a house for half of its value, that could not be fair or “in good faith” under any measure of fairness. Some cases are naturally more egregious than others.