Your trust agreement is a legal instrument that assigns an appointed person or entity (trustee/fiduciary) the right and responsibility to own property or assets titles for your benefit. A loved one may choose to execute a trust (instead of a regular will) to free your inheritance from considerable estate tax assessment or to eliminate the heavy burden that often follows managing a large estate.
Things, however, may go wrong once your trust springs into action—the testamentary document may hold ambiguous terms, the trustee may breach his/her/its fiduciary duties, or disagreements may arise regarding estate asset management. In other words, when you and your trustee do not see eye to eye, trust litigation often follows.
What is trust litigation in Iowa?
Trust litigation resolves legal disputes between beneficiaries and trustees. Here, you would file a complaint in District Court as a plaintiff who holds beneficiary standing to sue the trustee responsible for managing and distributing your inherited assets and property.
Most trust litigation cases in Iowa address the following legal actions:
Breach of Fiduciary Duty – a claim alleging your trustee improperly or ineffectively managed your inheritance.
Estate Accounting Claims – a complaint contending your trustee has not delivered or performed accountings according to the terms of the trust agreement or an equity action sought to force an accounting of trust assets.
Undue Influence – an allegation holding your trustee has asserted his/her/its apparent authority over a vulnerable beneficiary or grantor with the intention of obtaining an improper favor from the estate.
Testamentary Capacity – a claim declaring your loved one did not hold legal mental capacity to execute the trust agreement.
Tortious Interference with an Inheritance – a harmful interference with a trust claim, brought when all other legal remedies have failed and when you want to hold the trustee personally liable for the harmful act.
Trust Defense – defense of your inheritance arising when unnamed third parties or other beneficiaries make claims against your trust property and assets.
Iowa District Courts provide remedies for the above trust disputes. But as you know, any time you go to court, you’ll have to retain an attorney to represent you. Cost is therefore a legitimate concern when considering trust litigation action.
When does the trust pay legal fees in trust dispute litigation?
Regardless of whether you’re a beneficiary taking legal action against a trustee, or whether you’re a trustee defending a beneficiary’s property or defending your management performance, Trust Code in Iowa provides the guidelines concerning payment of legal fees in trust dispute litigation.
Trustees may accordingly use trust assets, under Iowa Code § 633A.4507 or under the terms of the trust agreement, to pay attorneys when defending claims against your inheritance or to litigate good faith claims that “benefit the estate.” This means the courts technically can order trust assets to pay attorney’s fees on both sides when the cause of action, as a whole, benefits the entire trust.
When does a lawsuit benefit the entire trust?
If a claim and its remedy reflect the grantor’s actual intent, the court will often hold the lawsuit benefits the entire trust.
Claims brought for the “benefit the trust” may include:
- Equity action to compel your trustee to perform, or not perform, some action.
- Fiduciary or trustee removal and replacement proceedings.
- Petitions asking the courts to clarify ambiguous terms found in your trust agreement.
Remember that protecting the grantor’s intention is not the same as defending the trust as a whole—the granting of attorney’s fees for both sides is therefore not always intuitive.
What are trustee duties of care?
Iowa Trust Code imposes heavy fiduciary duties on trustees. Some of those legal obligations include a duty of loyalty and a duty to act with reasonable care when managing the trust—obligations that compel the trustee to defend the trust when another person attacks it.
For example, say a beneficiary or third party tries to modify or even revoke your trust in court; the law accordingly obligates your trustee to obtain counsel to defend your interests.
Trust litigation is also expensive, and the law does not expect trustees to use their own personal funds to defend another beneficiary’s inheritance. Typically, a trustee will withdraw cash from the trust account to pay attorney’s fees and costs, hoping the account would ultimately be indemnified through the litigation process.
Also note that the court may allow trustees to use trust funds to reimburse his/her legal fees when the trustee reasonably and successfully defends trust actions against his/her performance.
When can trustees use trust funds in trust dispute litigation?
Third party individuals or other beneficiaries named in the trust agreement may seek legal action against your inheritance at any time. For example, a trust beneficiary who feels the trust agreement is unfair may claim the document is unreasonable, or an entity that believes the trust owes it money/property may place a lien on estate assets.
When third party legal action against your trust occurs, the terms of your trust agreement most likely will allow your trustee to use estate assets to defend the lawsuit. And as mentioned above, your estate may end up paying the trustee’s defense council even when you sue the trustee himself/herself for negligence or for fiduciary removal.
Does the trust pay when trustees engage in misconduct?
Trustees cannot use trust funds to pay their legal fees when the courts find said trustees engaged in negligence or wrongdoing. Accordingly, the courts will deny trustee reimbursement when a fiduciary loses fiduciary removal and replacement action against him/her/it.
Keep in mind that the individual who brings misconduct claims against a trustee bears the burden of proving one of the following events occurred:
- Trustee breached his/her duty to manage the trust with reasonable care.
- Trustee failed to follow the terms set forth in the trust agreement.
- Trustee used trust assets for his/her personal use.
- Trustee engaged in a conflict of interest with the trust.
The law further would allow the trustee to initially use trust fund cash to pay for legal fees while defending accusations of misconduct claims made against him/her/it. However, said defendant must reimburse the trust out of pocket if the court rules in favor of the plaintiff.
Also, note that the terms of your trust agreement will most likely yield guidance on how and when your estate assets will pay attorneys’ fees and when the trust will require restitution.