In some cases, a trust document may include provisions to protect a trustee from personal liability. However, such protective or "exculpatory" clauses do not provide complete blanket protection. They are valid and enforceable only if placed in the trust instrument without any overreaching or abuse by the trustee of any fiduciary or confidential relationship with the settlor. They are not enforceable in cases of trustee violations of duty committed in bad faith or with reckless indifference to the interest of the beneficiary.
Trustees in many contexts face personal liability for violations of the various duties they owe to beneficiaries and also can be liable for trust liabilities to other persons. Liabilities can include unpaid taxes, losses from improper investments or misallocated funds. Trustees of irrevocable or non-revocable trusts must file annual state and federal tax returns for the trust, which can be burdensome for a nonprofessional trustee. Trust documents should at a minimum authorize the trustee to hire and pay necessary accountants. In many cases, trustees who do not realize they are obligated to file tax returns for the trust are held liable personally for penalties and interest.
In conclusion, the points discussed illustrate how the intersection of friendship, affection, money and loyalty in a trust can be dangerous for any trustee. If a client deems it entirely safe to accept the role of a novice private trustee, he should think again. Before doing anything, he should read the trust instrument fully. If at all in doubt, he should consult with a professional advisor. If he still has any doubts about his qualifications to serve as trustee and accept the risks it entails, he should regretfully decline.
Paul Boylan is a Boston-based shareholder in national law firm LeClairRyan. He has over 30 years of experience in complex civil litigation and trials. He can be contacted at [email protected].