A Guide to Wills, Estate, Trust and Guardianship Litigation

In determining whether a trustee has acted in the best interests of the beneficiaries, the interests of the beneficiaries are determined by reference to the terms of the trust, not by reference to the personal preferences of the beneficiaries.  N.C.G.S. § 36C-1-103(9).  Removal for conduct detrimental to the interests of the beneficiaries is a well-established standard for removal of a trustee.  N.C.G.S. § 36C-7-706 Official Comment.

In determining whether a trustee has acted in the best interests of the beneficiaries, the interests of the beneficiaries are determined by reference to the terms of the trust, not by reference to the personal preferences of the beneficiaries. N.C.G.S. § 36C-1-103(9). Removal for conduct detrimental to the interests of the beneficiaries is a well-established standard for removal of a trustee. N.C.G.S. § 36C-7-706 Official Comment.

Not every breach of trust justifies removal of a trustee. The breach must be “serious.” This can consist of a single act or a series of smaller breaches which individually do not justify removal, but do so when considered together. Id. An appropriate ground for removal is a serious breach of the trustee’s duty to keep the beneficiaries reasonably informed as to the administration of the trust, either as required by the trust instrument or by N.C.G.S. § 36C-8-813 (duty to inform and report). Failure to comply with this duty may make it impossible for the beneficiaries to protect their interests. It may also mask more serious violations by the trustee. N.C.G.S. § 36C-7-706 Official Comment.

The lack of cooperation among trustees described in subsection (b) (2) need not involve a breach of trust. What is important is that the failure to cooperate impairs the administration of the trust. For example, the fact that there are an even number of trustees whose inability to agree has resulted in deadlock, may justify the removal of one or more or all of the trustees, even if there is no showing of bad faith. Id. Friction between the trustee and the beneficiaries is generally not grounds for removal by itself unless it results in a breakdown in communications between the beneficiaries and the trustee or appears to be irreconcilable. Id.

Subsection (b)(3) gives the court a great amount of discretion to remove a trustee for “unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively.” N.C.G.S. § 36C-7-706(b)(3). The key factor underlying all of these grounds for removal is that removal of the trustee will best serve the interests of the beneficiaries as those interests are defined in the trust. N.C.G.S. § 36C-1-103(9). “Unfitness” includes any lack of basic ability to administer the trust. “Unwillingness” can include cases in which the trustee refuses to act, as well as cases in which the trustee is indifferent to the interests of one or more of the beneficiaries. A “persistent failure to administer the trust effectively” can include a long-term pattern of consistently poor investment results when compared to other trusts.  N.C.G.S. § 36C-7-706 Official Comment.  In determining whether a trustee designated by the settlor is unfit, the courts will give deference to the settlor’s wishes, in situations where the settlor was aware of the trustee’s failings at the time of appointment. Id. The following illustration is given by Restatement (Third):

8. W’s will left her residuary estate to T, in trust, to pay “all of the net income, and such amount of principal as the trustee in his sole discretion may deem appropriate, to my husband H,” and on H’s death to distribute the principal “by right of representation to my then living descendants,” all of whom were issue of W by a prior marriage. T predeceased W, and W’s daughter D has petitioned to be appointed as trustee to fill the vacancy, for which W’s will makes no provision. Even though D is an adult with suitable skills to act as trustee, the court will ordinarily deny D’s petition because of the conflict of interest.
9. The same facts as in Illustration 8 except that, after learning of T’s death, W executed a codicil naming her daughter D as the trustee in the place of T. The court will not remove D (or refuse to appoint her) as trustee.

Subsection (b) (4) broadens the grounds for removal of the trustee by providing for removal where there has been a substantial change in circumstances, so long as removal of the trustee is not inconsistent with a material purpose of the trust. Changed circumstances justifying a removal of a trustee include a substantial change in the character of service or location of the trustee. North Carolina did not adopt the provision in the Uniform Trust Code permitting removal of the trustee at the request of the beneficiaries if not inconsistent with a material purpose of the trust. The drafters were concerned that this might provide grounds for removal that are contrary to the settlor’s intent, for it is often difficult to determine whether the settlor’s choice of trustee is a material purpose of the trust. N.C.G.S. § 36C-7-706 North Carolina Comment.

The terms of the trust do not prevail over the trustee’s duty to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. In re Skinner, 370 N.C. 126, 141, 804 S.E.2d 449, 459 (2017). Thus, a trustee can be removed for making expenditures that are of a type expressly authorized by the trust, if those expenditures constitute a waste of the trust assets. Id. at 143, 460-61.

North Carolina cases upholding the removal of a trustee include:

• In re Skinner, 370 N.C. 126, 804 S.E.2d 449 (2017) (trustee removed for spending $159,773.01 of the $170,086.67 trust proceeds in less than two months where the trustee also benefited from the expenditures);
• THZ Holdings, LLC v. McCrea, 231 N.C. App. 482, 753 S.E.2d 344 (2013) (trustee removed for transferring trust property to himself and his wife);
• In Re Estate of Newton, 173 N.C. App. 530, 539, 619 S.E.2d 571, 576 (2005) (trustee removed based on the trial court’s findings that “[the trustee’s] contempt and deep hostility which [the trustee] holds for three of the beneficiaries of the three trusts makes it impossible for him to exercise that degree of unbridled loyalty to the beneficiaries required by our law, and that the respondent’s self-interest and animosity towards the remainder beneficiaries led to his refusal to distribute the assets of the trusts and carry out the terms of the trusts.”); and
• In the Matter of the Wills ofiacobs, 91 N.C. App. 138, 370 S.E.2d 860 (1988) (trustee’s removal justified where records show the trustee paid himself excessive commissions in excess of the maximum commissions allowed by statute).

North Carolina cases in which the trustee was not removed include:

• Smith v. Underwood, 336 N.C. 306, 442 S.E.2d 322 (1994) (reversing court of appeals and upholding trial court’s order denying petition to remove trustee).Underwood was a trustee for over 30 years, during that time the trust distributed income to the beneficiaries while the corpus greatly increased in value. Under these circumstances, the clerk’s ruling denying the petition to remove should not be disturbed, even though there was evidence that Underwood had failed to file proper accountings and had refused to give pertinent information to the beneficiaries of the trust; and
• Woodward v. Mordecai, 234 N.C. 463, 67 S.E.2d 639 (1951) (upholding trial court’s order denying petition to remove trustee, where the trust gave the trustee discretion to convey portions of the trust corpus to beneficiaries free of trust, the trustee could not be removed for making a reasoned decision not to make such a conveyance).