Liability of Trust Beneficiary Who Litigates Vexatiously or Participates in a Breach of Trust

The Restatement (Third) of Trusts, specifically §104, lists four general areas in which the beneficiary’s actions may lead to an assumption of internal liability to the trust estate: (1) A loan or advance to the beneficiary from the trust; (2) The beneficiary’s debt to the settlor that has been placed in the trust, unless the settlor manifested a contrary intention; (3) The trust suffered a loss resulting from a breach of trust in which the beneficiary participated; and (4) Liability imposed by other law, such as the law of contract, tort, or unjust enrichment.

Consider the beneficiary’s liability in tort for engaging in vexatious litigation. If a beneficiary engages in frivolous litigation against the trustee, or against the trust relationship itself, the beneficiary's equitable interest under the trust may be charged with the attendant costs. Thus, if a beneficiary engages in vexatious and burdensome litigation against the trustee and the other beneficiaries, the court may order that the attorneys’ fees of all the defendants be charged against the plaintiff-beneficiary’s equitable interest to the extent the interest is identifiable, discrete, and severable. When a beneficiary litigates vexatiously, obdurately, or in bad faith, the trustee may have a fiduciary duty to the other beneficiaries to bring an action against the beneficiary to compel the beneficiary to reimburse the trust estate for the trustee's attorneys’ fees and other litigation costs. Circumstances even may warrant that an action be brought on behalf of the trust against the nuisance beneficiary's counsel as well. In Missouri, the litigious non-prevailing beneficiary need not have engaged in intentional misconduct or litigated in bad faith to end up personally on the hook for the trustee’s attorney’s fees, at least to the extent of his distributive share. See O’Riley v. U.S. Bank, 412 S.W.3d 400 (Mo. Ct. App. 2013). Vexatious litigation being a tort, recourse need not be limited to the culpable beneficiary’s equitable property interest incident to the particular trust relationship. His or her non-trust assets should be fair game as well.

Or consider the beneficiary’s liability for participating in a breach of trust. To the extent the culpable beneficiary’s equitable property interest incident to the trust relationship can be untangled and separated out from the interests of the other beneficiaries, then “the trust” is entitled to a charge on the interest to secure payment of the beneficiary’s liability for participating in the breach. That the interest is subject to a spendthrift restraint would not be a defense. The constellation of equitable property rights of the permissible beneficiary of a fully discretionary non-self-settled irrevocable trust is an example of an interest that is so contingent and speculative that it cannot be untangled and separated out from the principal and income interests of the other beneficiaries. Of course, there is always the charging or “if, as and when” order. See generally §5.3.4.1 of Loring and Rounds: A Trustee’s Handbook (2025), the relevant portion of which section is reproduced in the appendix below. That having been said, had the culpable beneficiary also been a trustee, a protector-fiduciary, or an agent-fiduciary of some party to the trust relationship, then those aggrieved might well be entitled to a charge against any of the beneficiary’s unencumbered property that may reside outside the discretionary trust.

It is self-evident that a culpable beneficiary’s non-discretionary equitable life interest in a percentage of all trust-accounting income also would not be available to the aggrieved once the beneficiary has died. See, e.g., Holte v. Rigby, 2025 WL 1185823 (N.D. 2025), which involved an irrevocable trust. Current life beneficiaries were entitled to all net trust-accounting income, but not to principal. One co-beneficiary also was the trustee. During his tenure he misappropriated a portion of another co-beneficiary’s life interest in the trust’s equitable income stream. Upon the trustee-beneficiary’s death, his daughter became entitled pursuant to the terms of the trust to an equitable life interest in the trust’s equitable income stream equivalent to the equitable life interest her father had enjoyed. The misappropriation was discovered by the successor trustees. They endeavored to remedy the unjust enrichment by reaching and applying the equitable income interest of the daughter, who was totally innocent of the misappropriation. As there was no nexus between the innocent daughter’s newly acquired interest in the trust’s equitable income stream and the misappropriation, her equitable interest could not be reached in satisfaction of her late father’s fiduciary liability. The father was the one who had perpetrated the misappropriation, but his interest in the trust’s equitable income stream had extinguished at his death. Of course, had any misappropriated principal come into the daughter’s hands, there had been no such misappropriation, that property interest would have been reachable. And the father’s probate estate remained fair game. So also any traceable misappropriated income that had found its way into the hands of a non-BFP third party.