How Trustees Can Protect Themselves Against Beneficiary Claims

Recent economic uncertainties and tax reform implications have provided an impetus for certain individuals to reconsider the importance of preserving one’s legacy of owned assets through the formation of one or more trusts.

The grantor collaborates with legal advisors and wealth managers to establish a trust and selects the trustees to undertake fiduciary responsibility in adhering to the trust. A trustee serves at the behest of the grantor to act in the best interests of the beneficiaries, in accordance with the trust document and in compliance with the law.

While these prerequisites may be well-known to financial professionals, the notion that an individual trustee can be held personally liable for actions or inactions while carrying out responsibilities is often overlooked. Trust documents may have some limited indemnity provisions benefitting the trustee; however, each trust document is unique and should be reviewed to determine the trustee’s potential personal liability.

Claims against any trustee can involve allegations such as mismanagement of funds, failure to diversify assets, poor selection of professionals, accounting/tax errors, unfair or improper distributions and conflict of interest. A trustee also can be sued by creditors, charities or government agencies acting on behalf of the beneficiaries.

Also, perceived breach of trust assertions for resultant financial loss are brought against the trustee personally. Unlike an employee of a professional services organization, the trustee is typically not afforded protection or indemnified against alleged losses to beneficiaries from the trustee’s actions or inactions.

A recent claim highlights the complexities surrounding alleged wrongdoing. In this claim, the assets of a named trust were managed by an advisor under the trustee’s role as administrator. Both the advisor and trustee were sued by the beneficiaries when the trust asset values declined substantially due to investment decisions of the advisor. Allegations against the trustee asserted failure to properly select and supervise the advisor to ensure that assets were invested in accordance with trust objectives.

Best Practices to Reduce Trustee Risks

Best practices can offer advisors guidance on mitigating exposure to any individual acting as a trustee. For example, documentation should state the purpose of the trust, trustee qualifications, trustee compensation and procedures for the appointment, removal or replacement of a trustee.