Negligence Is Not Enough To Remove Trustee
One of the first questions you will be asked when you decide to engage an East Greenwich, RI will lawyer to design a Trust for you is who you would like to designate as your Trustee. While the answer to this question may seem straightforward enough from the onset, it is important that you carefully consider this decision. It is important that you select a Trustee who is financially responsible and willing to act in the best interest of your Trust and beneficiaries according to your wishes.
While a trust can simplify estate planning, the consequences of selecting an incapable or untrustworthy Trustee are best evidenced by the recent Rhode Island Superior Court case Santoro v. Salvadore. In this case, the Rhode Island Superior Court removed a Trustee after finding that “the [T]rustee…failed to perform his duties through more than mere negligence.” Santoro v. Salvadore, No. PC-2022-06623, at *20 (R.I. Super. May 8, 2024).
Background
In the case of Santoro v. Salvadore, a successful business owner, herein known as the Settlor, created a Trust for the benefit of his wife and children. Id. at *2. Shortly after creating the Trust, the Settlor became ill, and his wife became his caregiver. Id. While sick, the Settlor assigned many of his business interests to the Trust. Id.
When the Settlor passed away, the designated Trustee that succeeded him was an attorney that had served as the Settlor’s legal counsel for various business entities for over twenty (20) years. Id. Furthermore, the Settlor’s Trust documents required that the assets within it were to be divided into a marital trust for the Settlor’s Wife and a family trust for the Settlor’s Wife and Children (Wife and Children, collectively, “Beneficiaries”).
One year after the Settlor’s passing, the Beneficiaries filed a petition to remove the Trustee claiming that the Trustee breached his fiduciary duty, failed to provide an accounting, breached his duty of loyalty, and created conflicts of interest. Id. at *2-3.
Trustee Breached Fiduciary Duty To Beneficiaries
In finding that the Trustee breached his fiduciary duties to the Beneficiaries “through more than mere negligence”, the Court noted that the Trustee did not investigate or ensure that all Trust assets were collected into the Trust. Id. at *10. This finding was demonstrated by Trustee’s lack of knowledge as to whether $2.6 million in Trust assets included a 401K and other assets and how long it took Settlor’s widow to receive income from the Trust. Id. at *10-11.
Trustee never examined the Widow’s personal financial situation to determine if she would need access to the principal of the Trust. Id. at *11. Additionally, despite agreeing to pay the Widow $15,000 per month, Trustee only paid the Widow $3,300 per month. Id. at *11.
Furthermore, the Trustee also served as counsel to numerous LLCs, of which the Beneficiaries shares were held in Trust. Id. at *2. The Trustee allowed shares in a company held by the Trust to be sold without notice to the Beneficiaries, who were supposed to hold the shares. Id. at *11. Moreover, the Trustee never consulted with Beneficiaries or brought to a vote any decisions or distributions involving the LLCs in which the Trust had an interest Id. at *12. This was particularly problematic given that the Trustee unilaterally decided to stop disbursing monthly profits to shareholders when the companies had previously distributed monthly profits to the members. Id. at *12.
The Trustee charged $20,000 to file estate tax returns, but two-and-a-half years after Settlor’s death, the tax filings remained incomplete and inaccurate due to the Trustee improperly recording the Settlor’s date of death. Id. at *5, *11.
The Trustee also breached his fiduciary duty by “failing to create even minimal value for the Trust” by permitting over $11 million in Trust assets to sit in a non-interest-bearing checking account for years. Id. at *12. This is particularly problematic where all Trust assets are in a single bank account well in excess of the Federal Deposit Insurance Corporation’s standard maximum deposit insurance amount. Id. at *13.
Finally, the Trustee caused monetary loss to the beneficiaries by failing to properly administer the Trust. Id. at *14. Specifically, the Widow receiving less than her agreed distributions, the Settlor’s issue not being able to exercise or weigh in on their rights with respect to the LLCs, failing to properly file taxes, and letting millions of dollars sit in non-interest-bearing accounts. Id. at *14. On top of it all, the Trustee paid himself substantial fees every month without ever sending an invoice when Rhode Island estate and probate law prohibits a percentage-based model as a starting point for a Trustee’s fee for general administration services. Id. at *13.
Conflicts Of Interest
In addition to breaching his fiduciary duty, the Superior Court of Rhode Island also found that the Trustee had created a conflict of interest as “[T]he express language of the Trust does not allow Trustee to engage in representation that would be averse to the Trust.” Id. at *15. While representing the LLCs held in Trust, the Trustee drafted cross purchase agreements which allowed for a member to be bought out of their interest after death. Id. at *2. The Trustee assisted the Settlor’s brothers with using the cross-purchase agreements to purchase the Settlor’s membership interest despite the Beneficiaries holding those shares. Id. at *11. The Trustee, however, did not notify the Beneficiaries of their ability to exercise a cross-purchase agreement, thereby, valuing his legal representation of the brothers over the Beneficiaries. Id. at *15.
Furthermore, the Trustee represented the Widow while advising the LLCs on cutting her ability to receive income from the LLCs after the Settlor’s death. Id. at *15. The Trustee did not disclose his conflict to the Widow. Id. at *15. The Trustee further advised the LLCs to distribute as little as possible to the Widow through the Trust despite the LLCs owing the Trust money. Despite his history as the “family attorney”, the Trustee was obligated to disclose his conflicts of interest and obtain consent from the Beneficiaries. Id. at *16.
Failed To Keep Proper Accounting
Additionally, the Trustee did not provide a detailed accounting when requested. Id. at *16. He failed to keep accurate records. Id. at *16. The Trustee could not recognize files supplied to him as an official accounting of the Trust assets, nor could he identify bank statements of Trust funds and investments. Id. at *17.
Friction between Trustee and Beneficiary impaired the proper administration of the Trust and could not be prepared.
During the trial, the Trustee behaved aggressively towards the Widow at one point leaving her in tears. Id. at *18. Furthermore, the Trustee stated that he “did not think it was his business” to ask the Widow about her financial needs. Id. at *18.
He even told the Widow that she was not a beneficiary of the family trust when indeed she was. Id. at *19. Such a breakdown of the relationship “taken together with the Trustee’s other derelictions of duty, is the straw that breaks the camel’s back.” Id. at *19. The Trustee, therefore, was removed pursuant to orders of the Superior Court of Rhode Island. Id. at *20.
While “mere” negligence is not enough for Trustee Removal in Rhode Island, Trustees need to pay particularly close attention to conflicts of interest and take the time to properly understand a beneficiary’s personal and financial situation to be able to fulfill their fiduciary obligations. Understanding the full duties of a Trustee is crucial when you begin the estate planning process and start to consider who you want to designate as the Trustee of your Trust. Choosing the wrong Trustee can not only deplete the assets of your estate but can cause significant emotional and financial distress on your beneficiaries which can lead to family disputes that your family does not need while grieving.
Aptt Law LLC is here to help you make these important estate planning decisions or to provide additional information regarding trustee removal in Rhode Island. In fact, Geoffrey M. Aptt, Esq. — the founder of Aptt Law, LLC — has served as private counsel to high-net-worth families with over $300 million in business and real estate assets and serves in a fiduciary capacity for a high-net-worth family’s descendants in a real estate investment LLC. With over a decade of experience, our firm is ready to put our knowledge to work for you.
