Surcharge in a trust account is simply a lawsuit against the trustee due to illegal or mismanagement actions of the trustee. The purpose of a surcharge action in trust is to return any losses to the trust that occurred due to improper actions of a trustee.
Trust account administration is performed by a trustee that has a fiduciary duty to act in the best interests of the trust and its beneficiaries. When trustees act improperly, a court can remove the trustee from power, but if a trustee’s illegal actions or misconduct cause a financial loss to the trust or harm to the trust beneficiaries then a surcharge action against the trustee may occur. The surcharge lawsuit attempts to recover any losses from the trustee.
Breach of Fiduciary Duty
When a trustee breaches his fiduciary duty, it means that he as not acted properly or in the best interests of the trust. Examples of breach of fiduciary duty are theft, mismanagement, treating beneficiaries unfairly, using trust property for the trustee’s personal benefit and embezzlement. Any of these actions or any other illegal activity with trust funds can create cause for a surcharge action against the trustee.
Investment management is an important part of a trust, and if the trustee is not diligent regarding investments that cause losses to the trust surcharge actions can occur to restore the lost funds. This does not mean that surcharge to a trustee happens for normal downturns in the investment market. For example, assume a trust portfolio held a large block of Enron stock and the trustee held the stock through the downfall of the company that began in 2001. Since the trustee did not properly monitor the investment portfolio and sell the stock timely based on market news, the trust sustained a large financial loss. This type of investment mismanagement can create a surcharge action against the trustee, but stock market falls across the broad market do not create a cause for action.
Any trust beneficiary that believes his trust it not managed properly or that the trustee is not upholding his fiduciary duty should retain a lawyer to protect his interests. The beneficiary should retain a trust litigator, which is a trust lawyer that specializes in trust lawsuits and can advise a beneficiary if surcharge actions against a trustee should occur.
- US Legal: Breach of Fiduciary Duty Law & Legal Definition
- PBS Independent Lens: Enron Timeline
- Legal Explanations: Fiduciary
- Fidelity Investments. "What Is a Trust?" Accessed March 6, 2020.
- American Bar Association. "Revocable Trusts." Accessed March 6, 2020.
- HG.org Legal Resources. "When to Consider an Institutional Trustee." Accessed March 7, 2020.
- AARP. "Choose the Right Executor or Trustee." Accessed March 6, 2020.
- American Bar Association. "Choosing the Executor or Trustee." Pages 10-11. Accessed March 6, 2020.
Mary Frazier began writing in 2011 for various websites and has over 20 years of experience as a bank vice president and senior trust officer. Frazier is a Certified Trust and Financial Advisor, holds a Bachelor of Arts in economics from the University of North Florida and holds a Master of Science in finance from the College for Financial Planning.