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How To Prevent Trustee Embezzlement & Protect Your Trust

The best way to make sure that trustee embezzlement doesn't happen to you is to take proper steps for preventing misappropriation of funds. Learn how here.

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Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

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It’s sad, but it’s true. Trustee embezzlement is a real thing, and it happens more often than you might think. Estate planning is all about protecting your legacy and passing it on to your loved ones. 

Don’t let your efforts go to waste by leaving your Estate Plan open with weak spots. There are some practical ways to insulate it. In this guide, we’ll show you the tactics of how to best protect your Trust. Don’t let trustee embezzlement and then misappropriation of funds happen to you! Keep reading to learn: 

What is Trustee Embezzlement?

Trustee embezzlement is a type of theft that can happen to your family Trust. A trustee is the person that you put in charge of managing your Trust, and this role comes with a lot of responsibility. 

An appointed trustee can show a lapse in character and give in to temptation by finding ways to embezzle from your trust. In other words, they are stealing from you, and this is a crime. 

When on the topic of trustee embezzlement, you’ll often hear the phrase “misappropriation of funds.” This is because it is very difficult to steal directly from a Trust without being discovered. Instead, trustees will find ways to divert the funds in inappropriate ways for their own benefit. Again, this is illegal and is a criminal offense.

What Happens When a Trustee Steals?

If you’re suspicious that a trustee is stealing from a Trust, there are legal steps that you can take. First, you can ask the trustee directly for a copy of the accounting records of the Trust. If they comply, you can look through the records and see if any suspicious activity can be identified. You may want to get a financial professional involved in this step.

If they refuse to cooperate, you can get the law involved. An attorney can petition that the trust accounting is reviewed in probate court. If the accounting indicates embezzlement or misappropriation of funds, you can bet that the trustee will be in hot water.

Can a Trustee Steal from a Family Trust?

A trustee can absolutely steal from a family Trust. To be clear, a trustee cannot take funds from the Trust for themselves directly. Instead, they will find loopholes so that the funds from the trust are dispersed in a way that benefits them.

For example, you might discover that the trustee made out loans to themselves, or to friends of theirs. (These friends could be made up.) In case that the Trust includes tangible assets, you might notice that physical belongings suddenly went missing. Another common example is when the Trustee systematically overcharges for their trustee fee.

How is a Trustee Held Accountable? 

If you become suspicious that a Trustee is embezzling from the Trust, it’s time to hire an attorney. There are attorneys that specialize trust litigation specifically. As mentioned earlier, the first step they will take is to enlist a probate court to do an accounting of the Trust. If the court discovers reasonable evidence that the misappropriation of funds took place, then you can sue the Trustee. 

As you might imagine, hiring an attorney and taking someone to court can turn into a long, expensive battle. Although this process is valid and sometimes necessary, there are methods of protecting yourself to prevent trustee embezzlement from happening in the first place.

How to Protect Yourself from Trustee Embezzlement 

Discovering Trustee embezzlement can be a complete headache, and can turn into a legal nightmare. What’s more, it can bring on a lot of emotional heartache if the situation hits close to home. There are measures you can put into place to make sure your Trust is better protected from the misappropriation of funds, starting with documentation.

1. Establish sound trust documentation

First, start with what you can control by reviewing your documents. Make sure that your Trust is comprehensive, sound, and legally binding. Establishing a Trust can seem like a daunting and overwhelming task. When done sloppily, it leaves plenty of weak spots for shady people to take advantage.

The good news here is that online platforms like the one offered by Trust & Will have revolutionized the estate planning process. We make it super easy to set up your Trust, all from the comfort of your couch. Our platform is easy to navigate, helps you identify what documents you need, and makes sure that you end up with a sound and legally binding document when it’s all said and done.

2. Choose the right trustee

It should go without saying; the next step is choosing the right trustee to make sure that trustee embezzlement never happens in the first place. 

Those who commit trustee embezzlement have some serious character flaws, and that’s an understatement. Make sure no one ends up misappropriating your funds by appointing someone whom you absolutely trust. 

Everyone has strengths and weaknesses, and not everyone is cut out to make a good trustee. When weighing candidates, look for certain characteristics, such as someone who can separate their personal feelings and have good judgement. You’ll also want someone who has a strong moral compass and you won’t think could give in to temptation. Finally, seek out someone whom you trust to treat all your beneficiaries equally and impartially.

3. Take the proper action, and take it quickly

Finally, it’s good to know how to take action in the case that you end up suspecting the misappropriation of Trust funds. As we mentioned earlier, the very first thing you can do is request an accounting of the Trust. Here are some other steps you can take proactively:

  • Find your most recent copy of the Trust

  • Request bank records and asset valuations

  • Make a note of when the Trust was established

  • Take an new inventory of the estate and see if anything is missing

  • Confirm that the individual was in their right mind when establishing the Trust

  • Collect any updates and correspondents you have received from the Trustee

  • Write down why you think there was a misappropriation of trust funds

By being proactive and following the above steps, you’ll be much more equipped to build your legal case against possible trustee embezzlement. If your intuition tells you that the misappropriation of funds is happening, don’t ignore it, and look into it as soon as possible.

The swifter you take action, the more likely you’ll be able to recover any misappropriated funds. 

Again, these are steps you only want to take if absolutely necessary. You can prevent any of this from happening by making sure that your Trust is comprehensive and will hold up in a court of law. Don’t leave your legacy susceptible to crime or temptation. You can enlist the help of an online platform like Trust & Will to make sure your estate plan is safe and secure.

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