When a trustee breaches his or her fiduciary duties, there are various remedies available to the beneficiaries. For instance, if a trustee makes an unlawful disbursement of trust funds and these funds are traceable, there may be a proprietary remedy. In other cases, when the funds are not recoverable, the beneficiaries may have recourse to a personal remedy against the trustee.
These types of claims are most often channeled through the obligation to account. In requiring a trustee to provide a full and complete accounting, the beneficiaries are able to review transactions and determine whether any of them go beyond the trustee’s parameters. This is why a trustee must always be prepared to provide records and account details if requested by the beneficiaries.
In reviewing a trustee’s accounts, the beneficiaries are accorded with a great deal of discretion with respect to accepting or rejecting any unlawful transactions. For instance, if a trustee breaches his or her fiduciary duty by engaging in an unlawful act which results in a financial loss, the beneficiaries can disallow the disbursement and it will not form part of the trust accounts. They can then seek a remedy to have the missing funds replaced – either through tracing or by the trustee personally. This may occur in a situation where a trustee uses trust funds to make an imprudent investment that s/he did not have the authority to make. If the investment does not succeed, the beneficiaries can strike it from the accounts.
Alternatively, if the same investment results in a profitable outcome, the beneficiaries can choose to adopt the act and reap the benefits, notwithstanding the fact that the initial act itself was unlawful. In this case, the proceeds of the transaction are treated as trust property or if the trustee no longer has the funds, he or she can be required to restore the value of the proceeds to the trust.
This mechanism provides the beneficiaries with the best of both worlds. Even if there is one profitable act and another that is not (resulting in the trust assets breaking even by cancelling one another out), the beneficiaries can choose to adopt the profitable act and disallow the other. This can cause a windfall gain in some situations. The fact that the beneficiaries have this choice showcases that the law in this area can be very beneficiary-oriented.
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