The landscape of the American economy changed dramatically in the last decade, particularly due to the 2008 financial crisis. America’s largest commercial banks were forced to sell assets, reorganize, shake-up top management positions, and/or close altogether. As a result, trusts managed by corporate trustees experienced high turnover among trust officials and changes in corporate ownership. While there are many advantages to hiring a corporate trustee, unsatisfied beneficiaries find it difficult to remove them, absent a flagrant breach of duty or express language in the trust document.
While many corporate trustee relationships are positive, some beneficiaries become frustrated by a lack of control when confronted with mediocre investment performance and/or poor customer care. Some trust documents designate a “power holder” (also commonly referred to as a “trust protector” or “trust adviser”) to minimize those issues. A power holder’s sole responsibility is to oversee trust management, with the power to fire a trustee or change the investment manager. Even with these protections, removing a corporate trustee can be a hassle, sometimes leading to a grueling and costly court battle.
The American legal system is particularly reluctant to give trust beneficiaries free reign to change corporate trustees. Long-standing precedent in trust litigation provides great deference to, and zealous protection of, the trust settlor’s intent. Courts view a modification of trust management as a significant change that can contravene a material purpose of the settlor. For that reason, it is more difficult to remove a trustee named by the settlor than a trustee named by the court, particularly ‘if the settlor at the time of the appointment was aware of the trustee’s failings.”[1] However, if circumstances change so greatly that it becomes impossible to abide by the settlor’s intent, modifications must be made to adapt to such changes.
So, what must the beneficiaries prove in order to remove a corporate trustee? North Carolina adopted the Uniform Trust Code (“UTC”)[2], which authorizes trustee removal for particular acts of misconduct. The most obvious causes for removal are serious breaches of trust or lack of cooperation among co-trustees such that the administration of the trust is substantially impaired.[3] A breach of trust is considered serious when “a single act [ ] causes significant harm or involves flagrant conduct.”[4] A series of smaller breaches can also be considered together to justify removal.[5]
Unfitness, unwillingness, or persistent failure to administer the trust effectively can also be cause for removal.[6] According to the statutory comments, a “long-term pattern of mediocre performance, such as consistently poor investment results” can demonstrate “persistent failure,” whereas “a pattern of indifference to … the beneficiaries” can be used to show “unwillingness.”[7] Removal in these cases is only proper if it serves the best interests of the beneficiaries.
Finally, a trustee can also be removed if there has been a substantial change of circumstances.[8] Changed circumstances may include a substantial change in the character of service or location of the trustee.[9] However, the statute comments clearly state, “[a] corporate reorganization of an institutional trustee is not itself a change of circumstances if it does not affect the service provided the individual trust account.”[10] (emphasis added). When considering removal for changed circumstances, the court must always determine “that removal is not inconsistent with a material purpose of the trust, that it will best serve the interests of the beneficiaries, and that a suitable co-trustee or successor trustee is available.”[11]
Removing a trustee can be a very burdensome and fact-intensive investigation. Even in amicable situations, it can cost considerable time and money. If a beneficiary is dissatisfied with their current trust officer, a good first step is to meet with the head of the corporate trust department to discuss concerns and investigate solutions. If those efforts fail, the beneficiary should contact a qualified attorney for advice on how and whether to proceed with petitioning for removal of the trustee.
[1] Restatement (Third) of Trusts § 37 cmt. f.
[2] Unif. Trust Code § 706 (2001) [hereinafter UTC].
[3] N.C. Gen. Stat. § 36C-7-706(b)(1)-(2).
[4] N.C. Gen. Stat. § 36C-7-706(b)(1) cmt.
[5] Id.
[6]N.C. Gen. Stat. § 36C-7-706(b)(3).
[7] N.C. Gen. Stat. § 36C-7-706(b)(3) cmt.
[8] N.C. Gen. Stat. § 36C-7-706(b)(4).
[9]N.C. Gen Stat. § 36C-7-706(b)(4) cmt.
[10] Id.
[11] Id.
