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By: Scott Grossman on March 19th, 2024

Can a Trustee Withhold Money From a Beneficiary?

When it comes to managing a trust, trustees have a fiduciary duty to act in the best interests of the beneficiaries. This duty includes many responsibilities, including the obligation to distribute trust assets to beneficiaries in a timely fashion. But can a trustee withhold money from a beneficiary? Let’s explore this question in more detail.

Resolving a trustee and beneficiary dispute

Disagreements between trustees and beneficiaries can arise for various reasons, leading to conflicts and potential withholding of funds. Understanding that these disputes can have significant implications for all parties involved is essential. It’s crucial to have a clear understanding of the respective rights and obligations of trustees and beneficiaries.

Can a Trustee Withhold Money From a Beneficiary?

In certain circumstances, a trustee may have valid reasons to withhold funds from a beneficiary. However, it’s important to note that trustees cannot arbitrarily withhold funds without proper justification. Trustees must abide by the terms of the trust and act per applicable trust laws.

Some reasons a trustee may withhold funds from a beneficiary include:

  1. Non-compliance with trust terms: If a beneficiary fails to meet certain conditions specified in the trust document, such as completing a specific milestone or meeting certain requirements, the trustee may withhold funds until those conditions are met.
  2. Suspected misappropriation: If a trustee has reasonable grounds to believe that a beneficiary is misusing trust funds or engaging in fraudulent activities, they may withhold disbursements until a thorough investigation is conducted.
  3. Dispute resolution: In cases where there is a legitimate dispute between the trustee and beneficiary, such as a disagreement regarding the interpretation or execution of the trust, the trustee may withhold funds pending resolution of the conflict through legal means, such as mediation, arbitration, or court proceedings.
  4. Protecting other beneficiaries: In some situations, a trustee may need to withhold funds from a beneficiary to protect the interests of other beneficiaries. For example, if a beneficiary threatens themselves or others, the trustee may withhold funds to prevent potential harm.

Trustee duties

Trustees have a range of duties and obligations towards beneficiaries, and withholding funds should only be done within the boundaries of these duties. Some fiduciary duties of a trustee include:

  • Duty of loyalty: Trustees must act in the best interests of the beneficiaries and avoid conflicts of interest.
  • Duty of prudence: Trustees must manage trust assets responsibly, skillfully, and cautiously.
  • Duty of impartiality: Trustees must treat all beneficiaries fairly and impartially.
  • Duty of disclosure: Trustees must inform beneficiaries about trust administration and provide necessary information.
  • Duty to follow trust terms: Trustees must adhere to the terms and provisions outlined in the trust document.

Trustee Liability

While trustees have the power to withhold funds under certain circumstances, they must be aware of their potential liability. Trustees can be personally liable if they breach their fiduciary duties or harm the beneficiaries.

If a trustee wrongfully withholds funds from a beneficiary without proper justification, the beneficiary may take legal action to enforce their rights. In such cases, the court may order the trustee to release the funds, impose penalties, or even remove the trustee from their position.

Both trustees and beneficiaries must seek legal guidance when facing disputes regarding withholding funds. An experienced trust and probate law firm can provide valuable advice and assistance navigating these complex matters.

In conclusion, trustees have a fiduciary duty to act in the best interests of the beneficiaries and manage trust assets responsibly. While trustees can withhold funds under certain circumstances, they must do so within their duties and obligations. Disputes regarding withholding funds should be resolved through proper legal channels, ensuring fair treatment for all parties involved.

20 Trustee Duties 

Being a trustee carries with it a range of important duties and responsibilities. These duties are essential to ensure the proper administration of a trust and the protection of the beneficiaries’ interests. Some of the critical duties of a trustee include:

  1. Duty to Not Delegate Tasks
  2. Duty not to become a Trustee of a second Trust if that second trust has some conflict with the First Trust
  3. Duty to administer the trust according to its terms
  4. Duty to account
  5. Duty to separate and identify Trust Property
  6. Duty to deal impartially with all Beneficiaries
  7. Duty to invest and manage Trust Assets
  8. Duty of compensation not impacting the Standard of Care
  9. Duty to use special skills
  10. Duty to diversify Trust assets
  11. Duty to Review Trust Assets
  12. Duty to adhere to a strict standard of care
  13. Duty to manage Trust Property Productively
  14. Duty to Protect and Preserve Trust Property
  15. Duty to avoid conflict of interest
  16. Duty to Loyalty 
  17. Co-Trustee’s Duties 
  18.  Duty not to demand a release of liability 
  19. What is the Prudent Investor Rule? 
  20. Beneficiary’s right to get a copy of the trust

These duties require a trustee to act diligently, prudently, and follow the trust terms. Failure to fulfill these duties can result in legal and financial consequences for the trustee.

Is your trustee following through with their duties?

A trustee has a range of responsibilities that they must diligently carry out, ensuring the effective administration of a trust. These responsibilities include:

  • Identifying and managing the trust assets
  • Gathering and organizing all necessary financial and legal documents
  • Evaluating and managing the trust’s investments
  • Addressing any outstanding debts or liabilities of the trust
  • Distributing the trust assets to the beneficiaries as directed
  • Maintaining accurate records of all trust transactions
  • Providing regular accountings to the beneficiaries
  • Communicating with the beneficiaries and keeping them informed about the trust’s administration
  • Filing tax returns and paying any taxes owed by the trust
  • Resolving any disputes or claims against the trust

These responsibilities require a trustee to thoroughly understand the trust agreement and the applicable laws and regulations governing trust administration. Trustees must also possess strong organizational and communication skills to effectively fulfill their responsibilities and obligations.

More on your Trustee breaching their fiduciary duties

If you would still like more information on trust litigation and removing a trustee, check out our complete overview of California trust litigation, available on our website. If you have more questions about your rights as a beneficiary and what you should know moving forward,

It’s best to reach out as soon as possible. The longer you take, the more damage your Trust could take. Please call us at (888) 443-6590, and we would be more than happy to see if we can assist you.

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