A trust may be created for a variety of reasons. It may be created for a minor, for tax benefits, to prevent a beneficiary receiving lumpsum money, and the like. By creating a trust, the settlor or creator has a say in the way money is distributed to the beneficiaries.
How are trusts formed?
A trust is created, when a person transfers his or her personal or business assets into a trust fund. A trust has many benefits, such as the settlor of trust avoids probate at death, minimizes estate taxes and assures help to the beneficiary.
However, trusts are prone to problems that may arise in funding and administering them, either before or after the death of the settlor. Trust litigation may take many forms because it can occur before or after the death of the person who created the trust. And trusts are prone to disputes since many interested parties can initiate trust litigation for a variety of reasons.
Forms of disputes
Mostly, it is the beneficiary who initiates trust litigation, as he or she may have an axe to grind with the trustee or have issues with the trust agreement or with the very creation of the trust. The typical disputes include beneficiary disputes, trustee disputes, and trust creation disputes. Let us see what they are:
- Beneficiary disputes: A family member may feel cheated if he or she is cut out of a testamentary trust, created in a will. Another reason may be that some other person is named the beneficiary and the actual beneficiary tries to prevent the benefits from going to him or her. There can also be a dispute between the trust’s income beneficiaries and the asset beneficiaries.
- Trustee disputes: The trustee may face dispute, due to issues of competence, incapacity, improper asset administration, mismanagement, fraud, misappropriation, self-dealing, material violation of terms of the trust, breach of fiduciary duty, and the like. In case the claim is upheld, the trustee is liable to compensate for the damages and face removal from trusteeship. However, the trustee is authorized to use the trust funds for his defense.
- Trust creation disputes: The very creation of the trust may become a cause for litigation. The problems that give rise to trust creation disputes pertain to the creator or settlor of the trust. For example, the settlor may fail to properly or completely transfer title to assets into the trust during his or her lifetime. For a trust to be valid, the settlor should have intended to create a trust, he or she has the mental capacity to do so and he or she must be free from undue influence. These reasons have enough loopholes for anyone to oppose the validity of the trust.
There can be other reasons too for disputes to arise and take the form of trust litigation. This is why it is important that serious thought be given regarding the creation and management of a trust, which may require the advice of a knowledgeable attorney, well versed in trust litigations.
Creating litigation trusts for bankruptcy
In case of bankruptcy, litigation trust is created by the creditors to obtain cash collaterals from the debtors. This involves securing the rights for prosecuting and acquiring any portion of the collateral as compensation for outstanding amounts due to the creditor. The trust, in this case, acts as a more secure assurance for cash recovery from the debtors in the long term.
It has been observed that in numerous Chapter 11 bankruptcy petitions, the creditors are interested in acquiring the litigation rights targeting the properties owned by the debtor. The positive aspect of litigation trust acquirement is that many disputes between the creditors and debtor have been successfully resolved.
The success of litigation trusts is due to its contractual nature that takes the consent of both the creditor and the debtor in enforcing a plan to settle outstanding debts. This arrangement, perforce, gives the crediting parties more assurance in receiving repayments from bankrupted debtors. Little wonder, litigation trusts, funded by the capital from bankruptcy estates, are becoming more popular in the legal system.
Fighting trust litigation in court
Like other forms of litigation, a trust litigation has its share of challenges. Since trust litigations can be complex, they are stressful and do affect those involved in it, both at the personal and professional levels.
However, trust litigation does resolve the problems that may include re-formation of the trust, removal or replacement of the trustee, tracking and quantifying improper transactions of the trustee’s management and resolving the dispute between the trustees and the beneficiaries.
If trust litigation becomes inevitable, it is important for those involved in it to familiarize themselves with trust related lawsuits. This way they can either enforce or preserve the existing trust rights. A coordinated team of strategists, in place of one commissioned litigator, can undertake trust litigation.