A good friend has asked you to be the trustee of a trust that they’re setting up as part of their estate plan. Maybe it’s for an adult child who isn’t capable of responsibly handling a large sum of money or one with special needs. It could be a charitable trust or any number of other types.
You may be honored that they chose you. However, you’ve heard of trustees being sued by beneficiaries or others for mismanaging a trust. You can’t afford to take a chance on that.
Can a trustee be held personally liable for how a trust is handled – even if they didn’t intentionally do anything wrong? Typically, the only circumstances under which you could face personal liability is if:
- You use the assets in the trust for your own benefit (often referred to as “self-dealing”).
- You cause damage to a beneficiary or other third party in your handling of the assets.
- You violate the law.
You can significantly reduce your chances of personal liability by remembering that, as a trustee, you have a fiduciary duty to the beneficiaries and must stick to the terms of the trust. However, there are other things to keep in mind.
How else can you reduce your chances of liability?
If you’re responsible for managing a significant amount of assets with the goal of increasing their value and perhaps providing income to the beneficiaries, make sure you’re up to the job before you accept it. Find out if the terms of the trust allow you to seek assistance from financial, tax and legal professionals. Remember, though, that you’ll be the one responsible (and potentially liable) for the final decisions.
Keeping meticulous records is essential. Be sure that you share those records and other information, if allowed or required, with beneficiaries and/or other estate administrators. When people feel like they’re being kept in the dark, they’re more likely to presume that something nefarious is going on.
Generally, as long as you take reasonable care in managing the assets and act in good faith, you can avoid facing personal liability. If you’re uncertain about a decision you have to make regarding the trust, you can seek court approval. That can help limit your liability. However, if you don’t think this is for you, say so. Don’t take on a responsibility that’s going to bring you more worry and stress than satisfaction.