One of the most common additions to a well-rounded and comprehensive estate plan is a trust. While there are a number of different types of trusts, one thing all trusts have in common is the need to appoint a Trustee to manage trust assets and administer the trust terms. If you have been appointed as the Trustee of a trust, and you have never served as a Trustee before, you likely have a number of questions relating to your duties and responsibilities. One of the most important of those questions will likely be “Is a Trustee personally liable for mistakes made during trust administration?” If you risk personal liability as the Trustee you undoubtedly want to know that before accepting the position.
A trust is a legal agreement created by one party (the “Settlor”) that allows another party (the “Trustee”) to hold assets for the benefit of a third party (the “Beneficiary”). Trusts are divided into two basic categories – testamentary and living trusts. Trusts are further divided into revocable and irrevocable trusts. A revocable trust can be modified or revoked for any reason, and at any time, by the Settlor whereas an irrevocable trust cannot be modified or revoked by the Settlor. All trusts require the Settlor to appoint a Trustee whose job is to manage and invest assets held by the trust and administer the trust according to the terms established by the Settlor.
A Trustee’s Fiduciary Duty
The Trustee of a trust owes a fiduciary duty to the beneficiaries of the trust. A fiduciary duty arises when one party has power or discretion over the interests of another person. In the case of a Trustee, the fiduciary duty arises by virtue of the fact that the Trustee actually holds the legal title to trust property; however, the beneficiaries have an equitable interest in the trust property. Therefore, the Trustee is required to use the trust property for the benefit of the beneficiaries. Because the beneficiaries of the trust are in a vulnerable position, the law imposes a fiduciary duty on the Trustee. The fiduciary duty requires the Trustee to make decisions based on the best interest of both current and future beneficiaries. When investing trust assets, a Trustee is also required to use the “prudent investor standard.” In essence, this standard calls for a Trustee to use the utmost care and avoid risks when investing trust assets.
One of the most common mistakes people make when creating a trust is to simply appoint a spouse, friend, or family member as the Trustee without giving much thought to whether or not the individual is actually a good choice for the position or not. Consequently, people often accept the appointment without having a firm understanding of the duties and responsibilities of a Trustee. All too often, for example, a Trustee is unaware that a Trustee can be held personally liable for a breach of trust to both third parties and/or to the beneficiaries of the trust. An action for breach is brought against the Trustee personally, putting the Trustee’s personal assets at risk. Common situations that might give rise to a Trustee’s liable to a third party include:
- Breach of a contract entered into with a third party
- Tortious conduct that injures a third party
- Debts incurred by the trust and owed to a third party
A Trustee can potentially be held liable to a beneficiary for both intentional and negligent breach of duty. This could arise in a number of ways, including:
- Making a mistake in a distribution
- Exceeding the authority of the Trustee
- Investing in risky ventures with trust property
Protecting Yourself during Trust Administration
If you have been appointed the Trustee of a trust one of the most important steps you should take is to consult with an experienced estate planning attorney before you even accept the appointment. If you do decide to accept the position as Trustee of the trust, it is in your best interest to continue to consult with your estate planning attorney to ensure that you are not breaching your duty throughout the administration of the trust. By seeking experienced legal advice now you may avoid personal liability down the road.
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns regarding trust administration, contact the experienced Massachusetts estate planning attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.