Can a Trustee Be Sued for Mishandling Business Assets?

Trusts are often used to protect business interests, simplify succession, and reduce estate taxes—especially in favorable jurisdictions like South Dakota. But with these benefits comes a legal burden for trustees: the obligation to properly manage and protect trust assets, including business interests such as partnerships, LLCs, or closely held corporations.

When trustees fail in this duty, beneficiaries may suffer real financial harm—and they have the right to take legal action. In this article, we explore how and when a trustee can be sued for mishandling business assets under South Dakota law.

I. Trustee’s Duties in Managing Business Assets in a Trust

Under the South Dakota Uniform Trust Code (SDUTC), trustees owe beneficiaries several key fiduciary duties:

• Duty of Loyalty: Act solely in the interest of the beneficiaries.

• Duty of Prudence: Exercise reasonable care, skill, and caution.

• Duty of Impartiality: Treat all beneficiaries fairly, especially when interests conflict (e.g., income vs. remainder beneficiaries).

• Duty to Diversify and Preserve Assets: Even if the trust contains only business assets, the trustee must ensure long-term preservation and reasonable growth.

When a trust owns a business interest, trustees may need to make decisions about management participation, hiring advisors, or selling shares. Failing to act prudently in these decisions can lead to liability.

II. Common Ways Trustees Mismanage Business Assets

Trustees aren’t expected to be business geniuses—but they are expected to act diligently and in the trust’s best interests. Common forms of trustee mismanagement include:

1. Failure to Oversee Business Operations

   • Passive trustees who ignore red flags in a family-owned business

   • Refusal to consult financial or legal advisors when needed

2. Self-Dealing or Conflicts of Interest

   • A trustee who is also a partner in the business and puts their own interests above the trust’s

   • Entering into contracts with companies the trustee owns

3. Improper Handling of Business Finances

   • Failing to distribute profits according to the trust terms

   • Reinvesting all income without justification or beneficiary approval

4. Lack of Communication

   • Refusing to provide beneficiaries with accountings or updates

   • Withholding material information that could impact the value of the business

5. Delays in Making Strategic Decisions

   • Holding onto underperforming businesses too long

   • Refusing to sell or dissolve an entity even when it’s no longer profitable

Each of these missteps can erode the value of trust assets, triggering potential claims.

III. Legal Grounds for Suing a Trustee in South Dakota

South Dakota law provides several legal theories beneficiaries can rely on when bringing claims:

• Breach of Fiduciary Duty

  • Most common and powerful claim; includes failure to act prudently, loyally, or impartially.

• Negligence

  • Trustee’s careless inaction causes loss to the trust, such as failing to consult experts or conduct due diligence.

• Self-Dealing

  • Trustee enriches themselves at the trust’s expense, which is per se a breach under SD law.

• Misappropriation or Conversion

  • Taking trust-owned business funds for personal use or improperly transferring ownership.

• Violation of the Trust Instrument

  • Acting outside the powers granted by the trust document (e.g., selling assets without required consent).

These claims can be brought in South Dakota probate or circuit court, depending on the nature of the trust and dispute.

IV. How to Prove Trustee Mismanagement in Court

Beneficiaries need to build a solid evidentiary foundation to succeed in litigation. Important forms of evidence include:

• Financial Statements

  • Business profit/loss records, trust accountings, and tax returns

• Emails and Correspondence

  • Internal discussions showing mismanagement or disregard of duties

• Witness Testimony

  • Statements from other business partners, co-trustees, or professionals involved

• Expert Reports

  • Forensic accounting or valuation experts can quantify the harm caused by the trustee’s actions

• The Trust Document

  • Proving that the trustee violated specific provisions or failed to follow required processes

South Dakota courts will evaluate whether the trustee breached their duties and whether that breach caused a financial loss.

V. Legal Remedies Available to Beneficiaries

If the court finds the trustee liable, beneficiaries may be entitled to one or more remedies:

• Removal of the Trustee

  • Common in cases of serious breach or ongoing risk

• Surcharge

  • Court orders the trustee to repay trust losses from their personal assets

• Injunctions

  • Stops a trustee from taking harmful actions, like selling a company or blocking distributions

• Compelled Accountings

  • Orders the trustee to disclose all financial activity and trust documents

• Restitution or Constructive Trusts

  • Recovers assets wrongly taken or misused

VI. Statute of Limitations for Trustee Misconduct in South Dakota

Under the SDUTC, beneficiaries generally have:

• One year to sue after receiving adequate disclosure of the breach and their right to sue

• Five years from the last breach or discovery (if disclosure was insufficient)

These deadlines make it critical for beneficiaries to act quickly once concerns arise.

VII. Defenses a Trustee Might Raise

Trustees are not defenseless. Common defenses include:

• Good Faith

  • They relied on legal or financial advisors and had no intent to harm the trust

• Consent or Waiver

  • The beneficiaries knew and agreed to the trustee’s actions

• Lack of Damages

  • Even if a mistake was made, it didn’t cause measurable financial harm

• Statute of Limitations

  • Too much time has passed since the alleged breach

These defenses will often come into play in settlement negotiations or at trial.

VIII. Preventing Mismanagement: Proactive Strategies for Settlors and Beneficiaries

Litigation can often be avoided through better planning and oversight. Consider these tools:

• Clear Trust Provisions

  • Spell out trustee powers and business management rules in detail

• Use of Co-Trustees or Trust Protectors

  • Adds checks and balances to trustee decisions

• Regular Accountings

  • Required annual disclosures keep beneficiaries informed

• Mandatory Arbitration or Mediation Clauses

  • Resolves disputes more efficiently than full litigation

• Selecting Experienced Trustees

  • Consider corporate trustees or professionals when significant business assets are involved

South Dakota is a national leader in trust administration—but even in a pro-trust jurisdiction, trustees can and do get sued for mismanaging business assets. Whether through breach of fiduciary duty, conflicts of interest, or sheer negligence, trustees who fail in their duties put beneficiaries at risk.

If you suspect a trustee is mismanaging your family’s business interests, consult with a South Dakota trust litigation attorney immediately. With timely action and proper legal representation, you can hold fiduciaries accountable and protect the legacy that the trust was intended to preserve.