Strategies to Reduce the Risk of Getting Sued by a Beneficiary
If you find yourself in the position of being the executor of a will or the trustee of a trust, and you have either been reading past issues of this newsletter or watching the news, you may be concerned about your risk of getting sued by a beneficiary. You would be right to be concerned because fiduciaries such as executors and trustees are generally held to the highest duty known in the law, and beneficiaries are held to the lowest, i.e., the duty to keep breathing. Beneficiaries are not required to be reasonable, cooperative or even civil, they just have to be living to complain about your decisions and to sue you if they think you got it wrong.
Top five strategies for lowering your risk of getting sued by a beneficiary
1. Communicate. Communicate. Communicate.
The most important thing you can do to avoid getting sued is to communicate with your beneficiary. Before you make a decision affecting the beneficiary's interests, let them know what it is that you must decide, what the options for that decision may be and what you think the best option is. Explain your thinking, and then ask them what they think before making the decision or acting on it. This kind of communication builds trust and confidence. The more communication you have, the more likely it is that you will avoid misunderstandings and distrust.
2. Disclose. Disclose. Disclose.
Perhaps the biggest mistake that a fiduciary can make is failing to disclose information regarding the money and property being managed for the beneficiary. Once a suspicion gets started, it is hard to dispel, and the beneficiary tends to assume the worst about your motivations and conduct. We recommend that from the very beginning you send the beneficiary regular reports on income and receipts, assets and liabilities, and transactions both big and small. The more information you send, and the greater frequency that you send it, the better.
Most wills relieve the executor of the duty of filing inventories and annual returns with the probate court. Some executors assume, mistakenly, that this provision means they do not have to disclose information to the beneficiary. Wrong. The will may relieve you of the duty to report to the court to save the estate time and money, but that has nothing to do with your duty to the beneficiary.
Similarly, in Georgia and some other jurisdictions, the trust may contain a provision that relieves you of the duty of making reports to some or all of the beneficiaries, and in some cases, the trust may also relieve you of the duty of notifying some beneficiaries of the existence of the trust. While the grantor or settlor of the trust may have had a good reason for this provision, we discourage trustees from relying on it. Secrets are hard to keep, and if the beneficiary learns of a trust that you have been hiding (even though you were not required to disclose or to make reports) the beneficiary may assume the worst about you and file suit for an accounting. In the litigation, the beneficiary will likely be able to obtain all the trust's financial information through the discovery process.
The statute of limitations is six years ordinarily, and that gives the beneficiary a lot of transactions to complain about. If you gave the beneficiary a report that disclosed the transaction or event that the beneficiary may want to challenge, the statute of limitations is shortened to two years from the date of the report.
The prevailing view of most jurisdictions is that fiduciaries have a duty to disclose if for no other reason than to prevent fraud. The minority view is that a grantor or settlor should have the option of keeping the trust secret from beneficiaries who might be spoiled by the knowledge of their present or future wealth. Our view is that trust fund beneficiaries already know who they are, and it is folly to think otherwise. Disclose. Disclose. Disclose.
3. Obtain The Best Expertise and Use It Wisely
We increasingly live in a do-it-yourself world. Information about every subject known to humankind is available on the internet, and you can find how-to videos on everything from building a house to investing in crypto currency. It is tempting to try to save time and money by handling the administration of the estate or trust yourself. If you want to lower your risk of getting sued, however, we suggest you take the opposite approach and employ experts to advise you. At a minimum, we recommend you employ a lawyer and an accountant. Depending on the circumstances, you may also need real estate appraisers, real estate agents, investment advisors and other professionals. Although you have the responsibility of making decisions regarding the administration of the estate or trust, that does not mean that you must do everything yourself. The better approach is to hire the right professionals to advise you on the various tasks of administration. If a problem later arises, and you do get sued, you will be in a better position to defend both your good faith and the prudence of your decisions. You will have a team of professionals who can explain what was done and why.
4. Avoid Conflicts of Interest and the Appearance of Conflicts of Interest
The duty of undivided loyalty is fundamental to any fiduciary position, and it requires that you avoid taking any action that could benefit you personally and that you avoid placing yourself in a position where you could possibly benefit personally, whether you actually do so or not. This rule means that you may not engage directly or indirectly in transactions involving the property of the estate or trust. Examples of transactions to avoid include buying, leasing, or using estate or trust property, or involving your firm, business, or family in buying, leasing, or using estate or trust property. Georgia courts have held fiduciaries liable for engaging in self-dealing transactions even in cases where there was no showing that the fiduciary benefited, or that the beneficiary was harmed. The appearance of a conflict of interest is sufficient to breach the duty of loyalty.
Conflicts of interest can arise and get you in trouble even where you have the best of intentions. Of course, there can be circumstances in estate and trust administration where it may be to everyone's benefit that you buy, lease or use estate or trust property even though you are the fiduciary. In those instances, you should obtain the consent of all interested parties or obtain court approval before you proceed.
5. Treat Equal Beneficiaries Equally
Where there are two or more beneficiaries of an estate or trust, and the will or trust provides them with an equal share of a bequest, you are required to deal with the beneficiaries impartially. You may not favor one beneficiary over the other regardless of a particular beneficiary's needs or circumstances, and you may not distribute even a dollar to one, without making an identical distribution at the same time to the other(s).
In many or most families, it is unlikely that the beneficiaries have the same needs and circumstances, and you may be tempted to help the one that needs the most help first or in a different way than the others. Despite your good intentions, you will be breaching your fiduciary duties by doing so and exposing yourself to liability.
The reasons for this rule include the fact that the property of the estate or trust is governed by the language of the will or trust instrument. If the testator or settlor provided for equal shares, then that is what you are required to distribute even if circumstances of the beneficiaries have changed. Another important reason has to do with the time value of money, and the difficulty inherent in trying to equalize distributions made at different times or in different forms. Real estate, however appraised, is not the same thing as cash. Stocks, bonds, and mutual fund values change constantly. A dollar distributed in year one of administration does not have the same value as a dollar distributed in year two, and you do not want to have to go to trial to find out what the judge or jury thinks the difference is.
Following these five strategies will not provide you with immunity from a lawsuit but use of these strategies will put you in a position to successfully defend a suit, and more hopefully, help you prevent a dispute from arising in the first place.