Keeping Beneficiaries “Happy” Leads to Punitive Damage Award

In April 2017, I was made aware of a case arising out of Mississippi where a corporate trustee was the trustee of a trust left for the benefit of a widow. The case discussed at length how far the trustee went to conceal from the trust beneficiary the fact that the trust corpus was being consistently eroded from fees and ill-advised disbursements, so much so that the trust would certainly not last the widow’s entire life, contrary to the intent of the trustmaker. The trust officer for the trustee admitted that he made no effort to ascertain what the widow’s needs actually were, and merely gave her money whenever she asked for it. The trustee did not track how much of the principal was being invaded to satisfy the beneficiary requests, and even though it was policy to perform an annual needs analysis, this was never done.

The trust lost income of nearly $1,000,000 over a twelve-year period of mismanagement of rental properties, and the principal disbursements brought the trust down to nearly zero. The trustee’s defense was that it was trying to keep the beneficiary happy. The court addressed that by slapping the corporate trustee with a $2,477,615 damage award, complete with a punitive damage claim of $1,000,000 plus 8% interest.

The lawsuit was brought by the widow herself, and joined by her children. When she finally realized she was out of money, it was too late. She tried to sell what she had, and even performed maintenance on the 35 rental duplexes herself, but the losses due to the trust mismanagement were too great. Throughout the trust administration, the trustee had no idea how the money was being spent or whether it was truly being used for the articulated purposes of the trust. Instead, the beneficiary would request money and the trustee would merely transfer it to the beneficiary’s checking account. There was no accounting of how much principal was being disbursed. The court found that such monitoring was the trustee’s responsibility as opposed to the beneficiary’s.

The court found the trustee’s conduct “reprehensible,” and awarded damages in an effort to not only correct the mistake but also deter similar conduct for other trusts it was handling. Overall, a pattern of reckless management was subsequently covered up by a pattern of concealment. The court paid strong attention to what exactly is a trustee’s job. It must ask questions and find answers, it must act prudently and in the best interest of the beneficiaries, and it must keep detailed accountings. What its job is NOT, is to merely keep everybody happy until the well runs dry.

Therein lies the lesson. Trust beneficiaries often call because they believe the corporate trustee is being too strict, asking too many questions, and not trusting their stated needs in the face of a request. What some may not understand, however, is that the duties of the trustee to those same beneficiaries are so strong that not to act in such a manner could lead to disaster and punitive liability. Fiduciary duties are owed by the trustee to the trust beneficiaries, and often that duty is accomplished by saying, “No.”