Trust litigation often follows inappropriate conduct by the trustee. Trust beneficiaries can ask the courts to remove the trustee because of their misconduct. In some cases, they can even ask to hold an individual financially accountable for embezzling or otherwise breaching their fiduciary duty to the trust in a manner that causes financial harm.
Sometimes, trust litigation begins not because of the trustee’s actions but because of the conduct of the trustor. People with an interest in an individual’s assets can sometimes initiate litigation as a means of establishing that a transfer to a trust was fraudulent.
What constitutes a fraudulent transfer?
California has very clear state statutes regarding fraudulent transfers. Generally, any attempt to deprive creditors of appropriate compensation by transferring personal resources to a trust could lead to allegations of fraudulent transfers.
When an individual has already taken on a debt but then transfers financial resources or other valuable property to a trust to protect it from collection efforts or lawsuits, the creditor may have grounds to initiate litigation because of the fraudulent transfer. Typically, such cases involve business creditors.
However, family members often provide financial support for one another. If there is a written agreement or records of communications that clearly show that there was a promise to repay a certain amount loaned to the trustor, transferring assets to the trust and then refusing to make payments to the other party could constitute fraudulent transfers.
Recognizing that assets transferred to a trust are not always protected from litigation can help creditors and other interested parties assert their rights. Trust litigation can benefit those denied repayment by someone who had the resources to fund a trust.