It may seem impossible to remove a Trustee, but not always. Case in point, Los Angeles Superior Court Judge Mitchell L. Beckloff recently removed the three co-Trustees of Herbalife founder Mark R. Hughes’s Trust (as reported by Emily Green in the Los Angeles Daily Journal). Mr. Hughes son Alexander, sole beneficiary of the $350 million Trust, brought numerous claims against the co-Trustees seeking their removal. But Judge Beckloff based their removal on just one of the claims, relating to the sale of real property.
Apparently, the co-Trustees sold a parcel of real property worth $23.7 million to a “poor” buyer—an entity that paid no money down and ultimately filed for bankruptcy protection. The Court ruled that is seemed “self-evident that a ‘prudent person’ exercising ‘reasonable care, skill and caution,’ would not have approved the transaction proposed” by the buyer. (See Emily Green’s Los Angeles Daily Journal article, page 7.)
There’s a lesson to be learned here. Not all cases have property sales worth $23.7 million, but the duties and obligations of a Trustee apply regardless of the size of the estate—or at least they should. Unfortunately, there are times when Courts decide that a breach of trust is too small to care about. But the law doesn’t say that.
The duty of a Trustee stems from the basic principal that they must act as a reasonable prudent person would, using reasonable care, skill, and caution. In other words, nothing risky. Trust funds are not supposed to be managed like a business. Business assets can, and should be, put at risk in order to earn a profit. Trust funds, by comparison, are meant to be cared for, protected, and preserved for the beneficiaries. Selling $23.7 million worth of real property for no money down to a buyer who can’t afford it is not the example of protecting and preserving assets the law is looking for.
So why don’t more Trustees adhere to their duties and use reasonable care, skill, and caution? Hard to say. In my experience, it’s largely a matter of ignorance—a Trustee not knowing his or her duties and obligations. You can’t adhere to rules you don’t know about. Of course, ignorance is no excuse, but it explains the conduct of Trustee who go astray.
But never forget, that Trustees are not held liable for every possible mistake. The rules require them to be reasonable, but not perfect.