To protect themselves' from any given potential liability, trustees' best defense is to always act in the best interest of the beneficiary.
- They should read the trust thoroughly and understand their responsibilities.
- Trustees need to make sure that all of the trust property that is supposed to be part of the trust is actually registered to the trust.
- All assets—real estate, automobiles, and investment accounts—should be properly insured.
- Income taxes must be paid in a timely manner.
- Trustees should send periodic accounts—annually if not quarterly—to the beneficiary or his or her legal representative. Keeping the beneficiary informed is important.
- If a trustee has any questions about procedures or requirements, it is recommended that a qualified professional be hired to assist with the specific aspects of the trust and the needs of the beneficiary.
The Surety bond
A surety bond is insurance that protects the beneficiary if the trustee mismanages or misappropriates the trust property. Whether the trustee must post a bond, and if so, what type, is usually stated in the trust instrument. Some Special Needs Trusts excuse a trustee who is a relative of the beneficiary from giving bond, but require a professional or corporate trustee to post a bond.
Trustee's Personal Liability
When an individual agrees to be a trustee, they accept some degree of personal risk. If, as a result of their actions, the trust suffers a financial loss, the trustee may have to repay that loss out of their personal assets. Whether this will occur depends on the kind of action that caused the loss, the laws in each particular state, and any provisions in the trust that govern the trustee’s liability.
In general, a trustee is liable for any intentional act on his/her part that caused the trust to lose money.
Some trusts contain a so-called exculpatory clause. A common exculpatory clause will exempt a trustee from personal liability if he or she acts in good faith. A trustee would only be personally responsible for a loss if he or she acted in bad faith or was grossly negligent.
It is not uncommon for one or more of the trust’s investments to decline in value in any particular year. Sometimes the trust’s entire portfolio will lose money. If that occurs, the trustee in most cases does not have to make up the loss personally. Most states have a prudent investor rule that will insulate the trustee from losses as long as he or she adheres to that state’s requirements.
Most states' prudent investor rules require the trustee to invest and manage the trust property as a prudent investor would. This means that the trustee should not exercise extreme risk or extreme caution. Instead, they should consider the size, terms, and purpose of the trust, and use reasonable care, skill, and caution. Also, a typical prudent investor law requires the trustee to reasonably diversify the assets in the portfolio to meet the long term goals as well as current cash flow needs of the beneficiary.