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Financial Planning > Trusts and Estates > Trust Planning

How Trustees Can Protect Themselves Against Beneficiary Claims

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What You Need to Know

  • The notion that an individual trustee can be held personally liable for actions or inactions while carrying out responsibilities is often overlooked.
  • Also, perceived breach of trust assertions for resultant financial loss can be brought against a trustee personally.
  • Wealth managers and/or legal advisors should recommend the trustee consult with a licensed insurance agent or broker to arrange appropriate insurance coverage.

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.

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Trust language also should delineate clearly the duties of a trustee and the terms of distribution of held assets that may include equity/fixed income investments, real estate or other property. Transparent record keeping and due diligence can identify issues of ambiguity that could give rise to potential allegations and trustee liability exposure.

Equally important is Trustee Liability Insurance, which is specifically designed to help protect the trustee, shielding the insured trustee’s personal assets from potential exposure. Coverage provides defense and indemnity protection solely for any trustee accountable for holding, managing and allocating trust assets on behalf of the beneficiaries.

The claims-made, annually renewable liability policy provides insurance to the named individual or group of individuals serving as a trustee and is not intended to protect any financial professional or firm serving in such capacity. Wealth managers and/or legal advisors should recommend the trustee consult with a licensed insurance agent or broker to arrange appropriate insurance coverage for such trustee at the outset of the trust document creation.

Many trust documents may have provisions incorporated in the language, stipulating that trust assets pay for the coverage. The trustee then can assume designated responsibilities with protection of insurance for personal liability with respect to negligent mismanagement allegations and, in some instances, claims of fraud.

Remember: Trustee liability insurance can instill motivational inducement and offer peace of mind for any individual assuming the role of trustee.

Steven F. Goldman is division president of Chubb’s North America Financial Lines division. He can be reached at [email protected].