Fraud Committed by Trustee Against Trust Fund Beneficiary

Inevitably, where there is money, there is greed.  With greed, unfortunately, comes the threat of fraud.  In the case of a trust fund, this threat is further magnified by the fact that a trust fund by definition is held by a third party who is neither the grantor nor the beneficiary.  This third party is called the trustee. 

Fraud committed by a trustee against the beneficiary of a trust fund is far from uncommon.  In the case of a child’s trust fund, the threat of fraud is exacerbated by the fact that the beneficiary has no legal rights and may lack sufficient understanding of the trust or its terms to be aware of the fact that fraud is occurring.  Consequently, many policing or watch-dog organizations exist to ensure that the child of a trust fund receives his or her legal rights. 

While a grantor may specify certain desires in the terms of the trust, it is the trustee who ultimately manages the funds.  If the trust is invested in stocks, bonds or other fluctuating assets, it is at the discretion of the trustee to choose these investments.  Because there is ultimately no correct answer, it can be difficult for the trustee to select the assets that maximize the investment return.  Moreover, it can be difficult to prove whether or not the trustee is acting in the best interest of the beneficiary.

One rule that is fairly clear in these transactions is that the trustee must avoid conflicts of interest.  Simply stated, this means that the trustee must not stand to profit from the investments of the trust.  For example, if a trustee were to invest a beneficiary’s trust dollars into stock in a company owned or partially owned by the trustee, it can perhaps be assumed that he or she is committing fraud – even if the company stock goes up and ultimately makes money for the beneficiary.

However, the laws of fraud are not that simple.  In certain cases, a conflict of interest is not necessarily punishable by law provided that it was disclosed prior to the transaction, that the conflict of interest was allowed in the terms of the trust, that the trustee had received consent and agreement from the beneficiary, or for several other reasons.  Of course, consent and agreement from a minor beneficiary is actually consent from his or her parent or guardian, who is frequently the grantor of the trust.

Among the more devious types of trustee fraud is misappropriation of funds or embezzlement.  A trustee that either attempts to sell off assets in a trust, who fails to properly report them in an effort to “skim off the top”, or who simply pockets the assets for personal use is committing embezzlement.  He or she can be subject to removal from the trust and legal auditing, and if found guilty can face prosecution.  The consequences of this can include both jail time and freezing and confiscation of personal assets – even those unconnected to the trust in question.
 
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