What Is a Misappropriation of Funds?

CPA calculating misappropriation of funds of a trust account.When someone is appointed the trustee, it signals a great deal of confidence in their integrity and commitment to ensuring a trust is managed and administered per the trustor’s wishes. Unfortunately, sometimes, trustees will exploit their position and use trust funds and assets for their own gain. This violation known as a misappropriation of trust funds. Here is what to know about this offense and why you need the help of a CPA:

What Constitutes a Misappropriation of Funds?

Misappropriation of trust funds occurs when a trustee intentionally uses funds illegally for their own use or an unauthorized purpose when administering a trust.

Misappropriation is a severe breach of fiduciary duty and a punishable offense, and it is important to understand what qualifies as misappropriation. Ultimately, there are several examples of what constitutes misappropriation, including when a trustee:

  • Uses trust assets for personal reason
  • Intentionally diverts and/or uses trust cash for a purpose other than intended
  • Creates bills and receipts for activities that did not occur and uses the cash for personal expenses or overcharges a trust for legitimate services
  • Destroys records and pockets the cash
  • Distributes funds prematurely (before they pay all debts and taxes)
  • Pays themselves too much for their trustee fees
  • Hides or lies about assets
  • Acts negligently when managing the trust 
  • Makes loans to themselves or others using trust funds
  • And much more

In the end, the misappropriation of funds can take many forms. It is imperative to read the trust instrument thoroughly to understand what the instructions are before taking action. Still, to determine if a trustee is misappropriating funds, contacting an experienced CPA.


Related Article:
What are the Responsibilities of a Professional Fiduciary?

What Can You Do When There Is Misappropriation of Funds?

If you suspect misappropriation of trust funds, the first step is to demand an accounting. An accounting is the best way to understand how a trustee is managing a trust. 

When you request an accounting, the trustee must supply it within a reasonable amount of time, and if they try to stall, this is a red flag and cause for concern. The trustee should be recording all financial transactions of a trust.

However, due to the financial minutiae of this process, interpreting a trust accounting can be incredibly difficult without the help of a detail-oriented CPA. Worse yet, attempting to do so alone can result in significant oversight and the failure to protect a trust and its assets. 

After determining a trustee has committed misappropriation, it is critical to contact an attorney to investigate, take the right legal actions, and prepare a court case. In some instances, this may include demanding documents or conducting depositions.

Depending on the severity, a trustee may even face criminal charges. Fortunately, if a trustee is misappropriating funds, there is recourse. The options at your disposal include:

  • Discharge: Misappropriation of funds can result in the court discharging them from their station, which means they lose power to administer and manage the trust. Afterward, a new trustee must be appointed.
  • Discovery: Beneficiaries of a trust can bring a proceeding for Discovery, and if the court grants it the trustee must return all property they wrongfully transferred. 
  • Waiver of Trustee Fees: If a probate court finds a trustee guilty of misappropriation of trust funds, a penalty can be to revoke their right to receive trustee fees they would ordinarily receive for their services.
  • Surcharge: If a trustee takes more than they are entitled to, beneficiaries may ask the court to surcharge them. If the trustee is a beneficiary, the court can surcharge their trust share and distribute it among other beneficiaries. 


Related Article:
Court Accounting vs. Trust Accounting

Get Help Today Evaluating a Trust Accounting to Catch a Misappropriation of Trust Funds 

If you suspect a trustee is misappropriating funds, acting immediately is crucial to preserve the integrity of the trust and secure assets within a trust. However, understanding whether or not a trustee is violating this duty requires the help of an expert CPA

Fortunately, with Marcia Campbell CPA, you receive trust accounting services to assess the financial state of a trust and address any violations. Contact us with any questions to get started. 

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