Holding Trustees Accountable in Arizona: Understanding Trust Surcharge Laws
By Kent Berk on February 12th, 2025 in PROBATE LITIGATION
Trustees have a legal and ethical obligation to act in the best interests of the beneficiaries they serve. But what happens when a trustee breaches these fiduciary duties? There are consequences. Arizona’s trust laws ensure that trustees who fail to uphold their responsibilities face significant financial and legal repercussions. This article explains trust surcharge laws, how it applies in Arizona, and what beneficiaries need to know to protect their rights. Since surcharge isn’t always available or the best option, we also discuss some other options when dealing with a “bad trustee.”
What are Trust Surcharge Laws?
Although the term “trust surcharge” isn’t explicitly used in the Arizona Trust Code, it refers to financial penalties or compensatory damages imposed on trustees who breach their fiduciary duties. A surcharge typically requires the trustee to personally reimburse the trust or its beneficiaries for losses resulting from misconduct or mismanagement. This legal remedy ensures that trustees are held accountable and that the trust’s assets are protected.
Key Arizona Statutes Governing Trustee Accountability
Arizona’s trust laws provide multiple avenues to address trustee misconduct, even without explicitly mentioning “surcharge.” Here are the key statutes that beneficiaries and trustees should understand:
- Trustee Compensation (ARS § 14-10708)
Trustees are entitled to “reasonable compensation” for their services. What qualifies as “reasonable” depends on factors such as the complexity of the trust, the trustee’s experience, and the time and effort involved. If a trustee overcompensates themselves or charges excessive fees, the court can intervene, adjust the compensation, and potentially order the trustee to return the excess funds. - Fiduciary Duties and Remedies for Breach (ARS § 14-11001)
This statute outlines the legal remedies available when a trustee breaches fiduciary duties. Trustees are required to act with loyalty, prudence, and impartiality. If they fail to meet these standards, courts can impose various remedies, including:- Compensatory Damages: Requiring the trustee to repay losses incurred due to their actions.
- Disgorgement of Profits: Forcing the trustee to return any improper gains obtained through self-dealing or conflicts of interest.
- Modification or Termination of Trust (ARS § 14-10410)
In cases where a trust’s purpose becomes unlawful, impracticable, or impossible to achieve, the court can modify or terminate the trust. This provision can be crucial when a trustee’s misconduct has fundamentally undermined the trust’s operation or purpose.
>> Learn more about Trustee and Personal Representatives Powers and Duties in Arizona.
Common Trustee Misconduct Leading to Surcharge
Trustees can face financial penalties for a wide range of misconduct, including:
- Mismanagement of Trust Assets: Failing to diversify investments, making reckless financial decisions, or neglecting to monitor the trust’s portfolio.
- Self-Dealing: Engaging in transactions that benefit the trustee personally at the expense of the beneficiaries.
- Failure to Provide Information: Withholding financial reports, accountings, or other critical information from beneficiaries.
- Conflict of Interest: Making decisions that favor one beneficiary over others without proper justification.
- Unreasonable Compensation: Charging excessive fees without providing corresponding value to the trust.
Other Remedies Available to Beneficiaries
In addition to financial surcharges, Arizona law provides several other legal remedies to address trustee misconduct. These remedies are designed to protect the trust and its beneficiaries and can be pursued independently or alongside surcharge actions:
- Trustee Removal: Courts can remove a trustee who has breached fiduciary duties, demonstrated incompetence, or engaged in misconduct. Removal ensures that the trust is managed by a qualified and trustworthy individual. >> Learn more about Standards and Methods for Removal of a Trustee in Arizona.
- Injunctions and Restraining Orders: Courts can issue orders to restrain or enjoin a trustee from engaging in specific actions that could harm the trust or its beneficiaries. This remedy is particularly useful when immediate intervention is needed to prevent further damage.
- Compelling Action: If a trustee is neglecting their duties, beneficiaries can seek a court order to compel the trustee to perform specific actions required under the trust, such as providing an accounting, distributing assets, or managing investments properly.
- Seeking Instructions from the Court: When disputes arise over the interpretation of the trust or the trustee’s powers, beneficiaries or trustees can petition the court for instructions. This helps clarify obligations and prevents future conflicts.
- Suspension of the Trustee: In situations where immediate action is needed, the court can temporarily suspend a trustee’s powers while the case is being litigated. This ensures that the trust’s assets are safeguarded during legal proceedings.
- Appoint Special or Substitute Trustee: If there is a specific transaction for which the current trustee should be disqualified, the court may appoint a limited or special trustee for that transaction or may remove the trustee and appoint a substitute.
Sign Up For Our Newsletter
Contact Us Today
How Courts Calculate Surcharge Amounts
When determining the appropriate surcharge, Arizona courts are required to award the greater of:
- The amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred.
- The profit the trustee made by reason of the breach.
Courts aim to restore the trust to the financial position it would have been in had the breach not occurred. In severe cases, punitive damages may be awarded, although these are less common in trust disputes.
Steps to Take If You Suspect Trustee Misconduct
If you believe a trustee has breached their duties:
- Review the Trust and any Other Governing Instruments: Make sure you have and review all governing instruments, including the trust and any amendments, as well as any other related documents, such as last will and testament, powers of attorney or other documents, as relevant.
- Gather Documentation: Collect trust documents, financial statements, correspondence, and any evidence of misconduct.
- Request an Accounting: Arizona law allows beneficiaries to request a formal accounting of the trust’s activities. Trustees are legally obligated to provide this information, unless the trust provides otherwise.
- Consult an Attorney: Trust disputes can be complex. An experienced probate and trust litigation attorney can assess your case, explain your legal options, and help you pursue remedies.
- File a Petition: If informal resolutions fail, you may need to file a petition in probate court seeking remedies such as surcharge, removal of the trustee, or other legal relief.
Why Choose Berk Law Group?
At Berk Law Group, we specialize in probate, trust, and estate litigation in Arizona. Our dedicated attorneys have extensive experience holding trustees accountable for breaches of fiduciary duty. We understand the complexities of Arizona trust law and are committed to protecting your rights and the integrity of the trust.
If you suspect trustee misconduct or are involved in a trust dispute, contact us today. We’ll guide you through every step of the process and fight to ensure justice is served.
