In my last post I discussed the fact that you are not obliged to serve as a Trustee just because you are appointed. One of the reasons you might choose not to serve is the risk of liability for errors you might make. If you are serving as Trustee of a Trust for the first time, you may be a little intimidated at the prospect. You may also be a little worried about your responsibilities as a Trustee and the potential for personal liability if you make a mistake. To make sure you understand where you stand, let me explain when and why a Trustee can be held personally responsible for mistakes during the administration of a trust.
What Does a Trustee Do?
I’ve been doing this for thirty-five years and, in my experience, the number one reason people appoint the wrong person as their Trustee (or to any other fiduciary position) is they are afraid of hurting someone’s feelings. “If I don’t appoint my son, he’ll think I don’t trust him.” Me: “but didn’t you just tell me that your son has a substance abuse problem and his spouse has a spending problem? Didn’t you also say that your son and his two sisters don’t get along?” Doesn’t that mean in effect that the client doesn’t trust the son. “But, he’ll feel bad when he finds out I don’t trust him”.
It might be that the reason these folks think this way is that they don’t have a firm grasp of the breadth and complexity of the duties and responsibilities of a Trustee. The overall job of a Trustee is to protect and manage trust assets while administering the trust using the trust terms created by the Settlor. The specific duties and responsibilities of a Trustee make for a long list. This list includes everything from investing trust assets to keeping detailed records to resolving conflicts among beneficiaries. The power and authority a Trustee has means that the Trustee contributes directly to the success – or failure – of a trust.
Can a Trustee Be Liable for Mistakes and Errors?
I sometimes worry that my clients have chosen the Trustee without giving the matter sufficient thought. As a result, a spouse, best friend, or adult child ends up in the position of Trustee despite lacking the type of temperament or experience that would qualify him/her to be the Trustee. Successfully administering a trust is best accomplished by someone who is an excellent communicator, who gets things done on time and with care. They don’t need a financial or legal background if they are good at knowing when they need advice and then also good at getting it and applying it. For a long time I’ve said the worst possible choice of Trustee is the busy lawyer who doesn’t practice in the area of estate planning. He doesn’t have time to do this well, he is used to having all of the answers and so will be the last guy to get the advice of another attorney, and will not want to admit this to anyone. Despite having the best of intentions, a Trustee’s habits, organizational skills, communication skills and temperament could increase the likelihood of making mistakes during the administration of the trust. If you are that Trustee and mistakes are made, you could find yourself being held personally liable.
What Types of Liability Might a Trustee Have?
Mistakes made during the administration of a trust could result from the Trustee’s liability to a third party and/or to the beneficiaries of the trust. As the Trustee, you will have to interact with third parties on a regular basis, particularly with regard to investments made by the trust. Consequently, you could end up liable for breaching a contract to a third party or for debts incurred in the name of the trust and owed to a third party. You might also find yourself liable to the beneficiaries of the trust for a wide range of errors or mistakes, including:
- Failing to distribute trust assets according to the terms of the trust.
- Failing to pay debts, including taxes, owed by the trust that then incur additional fines that decrease the value of the trust assets.
- Making risky investments that result in a depletion of trust assets.
- Failing to inform the beneficiaries of vital trust business that results in damage to the trust.
- Creating a conflict of interest that results in losses to the trust.
- Self-dealing
How Can a Trustee Prevent Personal Liability?
If you find yourself in the position of Trustee, you undoubtedly want to avoid mistakes and protect yourself from personal liability should an error arise. There are several things you can do to try and limit the possibility of personal liability for mistakes. For example, when any Trustee invests trust assets, it is usually subject to a generally recognized standard, such as the “prudent investor standard” or “prudent person” rule. Qualified financial advisors understand how to help the Trustee comply with these standards, and when in compliance, the Trustee is free of liability even when the results of the investments are poor. The most important thing you can do, however, to try and avoid personal liability is to utilize the advice and assistance of professionals during your time as Trustee. Consult with a financial advisor before making any investments using trust assets. In addition, retaining the services of a trust administration attorney will dramatically decrease the likelihood of any personal liability on your part because it will decrease the likelihood of making an error.
Contact Durham Estate Planning Attorneys
If you have additional questions or concerns regarding the importance of updating your estate plan following the loss of a spouse, please contact the Durham estate planning attorneys at Clarity Legal Group by calling us at 919-484-0012 or contact us online.
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