Though once used almost exclusively by the very wealthy to protect and pass down that wealth, trusts have evolved to the point where they are now found in the average estate plan. One thing that all trusts have in common is the need to appoint a Trustee to oversee the administration of the trust. If you were recently notified that you were chosen to be the Trustee of a trust for the first time, you may understandably be a bit nervous. You may also be worried about the ramifications of making a mistake. Can a Trustee be held personally liable for mistakes? The trust administration attorneys at DeBruyckere Law Offices discuss personal liability for mistakes made by a Trustee during the administration of a trust.
Trustee Duties and Responsibilities
If you have never served as the Trustee of a trust, it helps to first gain a general understanding of your duties and responsibilities. Overall, a Trustee’s job is to protect and manage the assets held by the trust and administer the trust using the terms created by the Settlor in the trust agreement. Some of the specific duties and responsibilities a Trustee has include:
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions
- Distributing trust funds to beneficiaries
- Approving or denying distributions if given discretionary authority
- Keeping detailed trust records
- Preparing and paying trust taxes
Trustee Liability for Mistakes and Errors
As a first-time Trustee, one of your biggest concerns is probably making a mistake. You are hardly alone. All too often the Settlor (creator) of a trust appoints the Trustee without giving the matter sufficient thought. As a result, a spouse, best friend, or family member ends up in the position of Trustee despite having zero experience that would qualify him/her for the position. Successfully administering a trust is best accomplished by someone with a financial and/or legal background. Like other Trustees in the same position, you undoubtedly have the best intentions; however, your lack of experience could increase the likelihood of making mistakes during the administration of the trust – and you could be held personally liable for those mistakes.
Mistakes made during the administration of a trust could result in the Trustee’s liability to a third party and/or to the trust’s beneficiaries. As the Trustee, you will have to interact with third parties on a regular basis, particularly regarding 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 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
There are several things a Trustee can do to try and limit the possibility of personal liability for mistakes. For example, when any Trustee invests trust assets, the “prudent investor standard” must be used. The prudent investor standard requires the Trustee to only invest in risk-averse options and to consider retention of the principal to be the most important consideration when making investments. 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 Londonderry Trust Administration Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions about your liability as the Trustee of a trust, contact our estate planning attorneys in our North Andover, Woburn, and Beverly offices at (978) 969-0331. Our Londonderry and Nashua, New Hampshire office can be reached at (603) 894-4141.
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