If you were recently informed that you are the Trustee of a trust and it is the first time you have served as a Trustee, you may be a little intimidated at the prospect of acting as Trustee. You might also be worried about your responsibilities and potential liability for errors. To better explain where you stand, the Port St. Lucie trust administration attorneys at Kulas & Crawford explain when a Trustee can be held personally liable for mistakes.
How Does a Trust Operate?
A trust is a separate legal entity that owns and holds property for the benefit of one or more beneficiaries. A trust is created by a Settlor, also referred to as a Grantor, Trustor, or Maker, who transfers property to a Trustee appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries. All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, as the name implies, does activate during the Settlor’s lifetime.
What Does the Trustee Do?
The primary reason that people often appoint the wrong person as their Trustee is that they do not 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 makes 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?
Settlors often appoint the Trustee without actually giving the matter sufficient thought. As a result, a spouse, best friend, or family member ends up in the position of Trustee despite lacking the type of experience that would qualify him/her to be the Trustee. Successfully administering a trust is best accomplished by someone with a financial and/or legal background. Despite having the best of intentions, a Trustee’s lack of experience 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 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 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 prevent being held personally liable for mistakes you might make. 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, 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 the Port St. Lucie Trust Administration Attorneys
To learn more, please join us for an upcoming FREE seminar. If you have additional questions about serving as Trustee, please contact the experienced Port St. Lucie trust administration attorneys at Kulas & Crawford by calling (772) 398-0720 to schedule a consultation.
