Exploring Trustee Liability: What You Need to Know

A trustee, whether an individual or a corporate entity, is appointed to manage and oversee the assets held within a trust for the benefit of the beneficiaries. The trustee role carries significant responsibility and potential legal liabilities.

Understanding trustee liability is essential for anyone serving as a trustee or considering taking on this role. This knowledge helps navigate the complexities of trust administration and ensures fiduciary duties are met. Missteps can lead to severe legal consequences, including personal liability, financial loss, and emotional or reputational damage. Being aware of the responsibilities and potential risks involved is crucial for protecting oneself and the beneficiaries served.

Understanding Trustee Liability

Trustee liability can arise from various actions or inactions that breach fiduciary duty, which includes obligations like the duty of loyalty, duty of care, and duty to act impartially towards beneficiaries. Failure to adhere to these duties can result in legal action against the trustee.

It’s important to distinguish between trustee liability and personal liability. Trustee liability relates to the obligations and potential legal consequences involved in administering a trust. Personal liability, however, occurs when a trustee’s actions, cause harm or loss to the trust or its beneficiaries. Trustees can be held personally liable if they fail to perform their fiduciary duties or if they engage in willful misconduct or negligence.

Several Scenarios Can Lead to Trustee Liability:

  • Mismanagement of Trust Assets: Mismanagement occurs when a trustee fails to properly invest or protect trust assets. This can include poor investment decisions, lack of diversification, or neglecting to monitor investment performance. Such actions can lead to significant financial losses, reducing the value of the trust for beneficiaries. Trustees are expected to act prudently, and failure to do so can result in legal action by beneficiaries seeking compensation for losses.
  • Conflict of Interest: A conflict of interest arises when a trustee makes decisions or engages in transactions that benefit themselves at the expense of the trust. This could involve using trust assets for personal gain, engaging in business transactions with the trust, or prioritizing their own interests over those of the beneficiaries. Such actions undermine the duty of loyalty, which requires trustees to act solely in the best interests of the trust and its beneficiaries. Trustees found guilty of self-dealing or conflicts of interest can be held personally liable for resulting damages and may face removal from their position.
  • Failure to Distribute Assets: Trustees must distribute trust assets according to the terms of the trust. Failures can include unjustified delays, not following the trust’s specific instructions, or misinterpreting its terms. Such failures can harm beneficiaries. Trustees must understand and adhere to the distribution schedule and requirements set forth in the trust. Beneficiaries may seek legal recourse if they believe the trustee has failed to fulfill their distribution duties, potentially leading to personal liability for the trustee.

Ways a Trustee Can be Held Personally Liable


Misconduct Leading to Trustee Liability 

A trustee can be held personally liable under several circumstances, each involving a breach of fiduciary duties or misconduct. Key scenarios include:

Breach of Fiduciary Duty

This involves an action or inaction that goes against the best interests of the beneficiaries, failing to follow the trust’s terms, or engaging in activities that harm the trust’s value. Fiduciary duties are central to a trustee’s role, ensuring that the trustee acts in the best interest of the beneficiaries. Key fiduciary duties include:

 Duty of Loyalty

The trustee must act solely in the interest of the beneficiaries, avoiding conflicts of interest and self-dealing. Any breach of this duty can result in personal liability.

 Duty of Care

Trustees are required to manage the trust assets prudently and responsibly. This means making informed decisions, seeking professional advice when necessary, and avoiding risky investments. Failing to do so can be seen as negligence and lead to personal liability.

 Duty of Impartiality

The trustee must treat all beneficiaries fairly and without bias. Favoring one beneficiary over another or making decisions that benefit some to the detriment of others can lead to legal consequences.

Breaching any of these duties can result in the trustee being held personally liable for any resulting losses, damages, or legal actions taken by the beneficiaries. Fiduciary breaches of duty are sometimes referred to as:

Negligence

Trustees must exercise the care and prudence that a reasonably prudent person would in similar circumstances. Negligence can include failing to properly manage or invest trust assets, not keeping accurate records, or ignoring legal requirements. Such failures can lead to financial losses and legal consequences.

Self-Dealing

Engaging in transactions that benefit the trustee personally at the expense of the trust is strictly prohibited. Self-dealing includes using trust assets for personal gain, conducting business with the trust, or prioritizing personal interests over those of the beneficiaries. This breach of the duty of loyalty can result in significant personal liability.

Factors That Help Determine Trustee Liability

Courts consider various factors when determining whether to hold a trustee personally liable:

Intent

Whether the trustee acted with intent to benefit themselves or harm the trust. Malicious or self-serving intent can greatly increase the likelihood of personal liability.

Compliance with Trust Terms

Courts examine whether the trustee adhered to the specific terms and conditions of the trust. Deviating from the trust’s instructions without valid reason can lead to personal liability.

 Impact on Beneficiaries

The extent to which the trustee’s actions or inactions harmed the beneficiaries is a crucial factor. Significant financial losses or deprivation of expected benefits due to the trustee’s misconduct can result in personal liability.

Understanding these factors and the related fiduciary duties they must uphold, is essential for trustees to avoid personal liability and effectively manage their responsibilities.

What Are The Risks of Being a Trustee?

Trustees face significant responsibilities, and failure to manage these effectively can result in severe consequences:

  • Financial Risks: Trustees are responsible for managing trust assets prudently. Mismanagement, such as poor investment decisions or failure to safeguard trust property, can lead to substantial financial losses. These losses can diminish the value of the trust and harm beneficiaries, potentially resulting in personal liability for the trustee.
  • Legal Risks: Breaches of fiduciary duty, such as failing to act in the best interest of the beneficiaries or neglecting the terms of the trust, can result in lawsuits and legal action. Trustees can be held personally liable for any harm caused by their actions or inactions, leading to costly legal fees to defend themselves and potentially to pay other parties legal fees.
  • Reputational Risks: As its name states, being a trustee means having been invested with a high level of trust. Any perceived or actual misconduct can tarnish the trustee’s reputation, impacting their personal and professional life. Reputational damage can be particularly severe if the trustee is found to have engaged in unethical or illegal behavior.

By recognizing and addressing these risks, trustees can better navigate their responsibilities and protect both the trust and themselves from potential adverse outcomes.

Mitigating Trustee Liability Risks

To minimize liability risks, trustees should implement the following strategies:

Maintain Accurate Records: Proper documentation of all transactions and decisions is crucial. Detailed records provide transparency and accountability, making it easier to defend against claims of mismanagement or breaches of fiduciary duty. Trustees should document all financial transactions, communications with beneficiaries, and decisions made during the administration of the trust. Trustees should keep detailed records of the following:

Financial Transactions: Document all financial activities, including investments, distributions, and expenses, to ensure transparency and accountability.

Communications with Beneficiaries: Keep a record of all communications with beneficiaries, including emails, letters, and meeting notes, to provide evidence of clear and consistent communication.

 Decision-Making Processes: Record the rationale behind key decisions, including any professional advice sought, to demonstrate that decisions were made prudently and in the best interest of the trust.


Accurate and comprehensive documentation helps trustees demonstrate their adherence to fiduciary duties and provides a robust defense against potential legal challenges.

Seek Professional Advice

Consulting with legal and financial professionals can help trustees navigate complex responsibilities. Legal and financial advisors can provide guidance on managing trust assets, adhering to fiduciary duties, and resolving potential conflicts of interest. Professional advice ensures that trustees make informed decisions that align with legal and financial best practices. 

Here are Reasons to Seek Advice:

  •  Fulfilling Fiduciary Duties: Lawyers can help trustees understand and fulfill their fiduciary duties, ensuring that they act in the best interest of the beneficiaries and adhere to the terms of the trust.
  •  Avoiding Conflicts of Interest: Legal advisors can identify potential conflicts of interest and suggest strategies to avoid or mitigate them, helping trustees maintain the integrity of their role.
  •  Handling Disputes with Beneficiaries: Trust attorneys can assist in resolving disputes with beneficiaries, providing mediation services or representing trustees in court if necessary.
  •  Adhere to Fiduciary Duties: As we mentioned before, always act in the best interest of the beneficiaries and follow the terms of the trust. Trustees must uphold their fiduciary duties.

By consulting with legal professionals, trustees can navigate the complexities of their responsibilities more effectively, reducing the risk of liability and ensuring the trust is managed in accordance with legal requirements.

Consequences of Trustee Liability

Trustees found liable for breaches of fiduciary duty can face serious consequences, including:

  • Financial Penalties: Trustees may be required to compensate the trust or beneficiaries for losses incurred. This can deplete personal assets and cause significant financial strain.
  • Legal Fees: Defending against lawsuits can result in substantial legal expenses. Trustees may need to hire attorneys and pay court costs, adding to the financial burden.
  • Removal as Trustee: Courts may remove trustees who have acted improperly, stripping them of their role and responsibilities. This can also lead to a loss of future trustee opportunities and damage to their professional reputation.
  • Reputational Damage: A trustee’s reputation may suffer if they are found to have breached their fiduciary duties. This can affect personal relationships and professional opportunities, making it difficult to regain trust and credibility.

Examples of KJMLAW Partners’ Experience in Cases of Trust Liability Disputes :

  • We advised a trustee who had been co-mingling funds with their own assets on how to unravel the accounting and complete trust administration.
  • We represented a trustee and successfully demurred claims and had them dismissed against the trustee to have the lawsuit against her thrown out.
  • We have represented beneficiaries in a matter where the father died and the step-mom took the house out of trust and added 2 caregivers and “church friends” as joint tenants. The step-mom refused to give a copy of the trust to kids. Trustee took over for the mother after she passed away and kept everything in trust for 5 years and refused to make distributions.
  • A trustee was using trust funds for his own personal use by creating loans to himself to repay. We represented the beneficiary and filed suit against the trustee, ultimately settling and getting the trustee to agree to pay back our client and allow them to fully receive interest in trust.

By understanding these potential repercussions, trustees can better appreciate the importance of adhering to their fiduciary duties and seeking professional guidance when necessary to avoid the severe consequences of liability.

Seeking Legal Assistance

Consulting with a trust litigation attorney is crucial for navigating the complexities of trust liability. Attorneys can provide advice on fulfilling fiduciary duties, avoiding conflicts of interest, and handling disputes with beneficiaries.

KJMLAW Partners specializes in trust litigation, offering expert guidance and representation for trustees facing legal challenges. Our team of experienced attorneys can help trustees navigate complex legal issues and minimize risks.

Get in Touch with Our Trust Litigation Attorneys

Trustee liability is a significant concern for anyone serving as a trustee. Understanding the legal implications and potential risks is essential for fulfilling fiduciary duties and avoiding personal liability. Proactive measures, such as maintaining accurate records, seeking professional advice, and adhering to fiduciary duties, are crucial for minimizing liability risks. Legal support from experienced attorneys can provide invaluable guidance and protection. If you are serving as a trustee or considering taking on this role, it’s essential to understand the potential risks and how to mitigate them. 

Contact KJMLAW Partners for guidance and support in navigating trustee liability and fulfilling your fiduciary duties responsibly. Call us at 626-568-9300. Our team of experienced trust litigation attorneys are here to help you every step of the way.

Ashley, Marketing Manager