How Do You Protect Yourself As a Trustee?

Executive summary

• Trustees have specific legal protections in place to support them against removal from their role or litigation from interested parties.
• Trustees can protect themselves by understanding the trust instrument, keeping detailed accounting records, and seeking beneficiary permission for specific actions.
• Trustees may face personal liability in acts of gross misconduct, such as self-dealing, co-mingling of trust assets, and breach of fiduciary duty.
• A trustee can benefit from the support of a trust administration attorney in understanding their duties, carrying out trust administration, and avoiding potential disputes.

Introduction 

How do you protect yourself as a trustee? The first step is to take the time to learn more about what you are signing up for. Do your research, ask questions, consult a trust attorney, and ensure you understand the duties and obligations that need to be fulfilled as trustee. You may face significant legal liability if you don’t take the time to understand the risks and responsibilities involved in serving as a trustee.

To ensure you are protected, you must fulfill your legal duties and obligations. If you violate your duties to the trust and its beneficiaries, you can be removed as trustee, or, in some cases, sued. 

A few steps you can take to protect yourself as a trustee include reading, understanding, and complying with the terms of the trust instrument while also keeping records of trust transactions, how you spend your time, and the reasons for your decisions. Retaining a trust attorney to assist with the administration of the trust can be valuable in ensuring you uphold your responsibilities as a trustee.

Understanding your role as a trustee 

A trustee is responsible for carrying out all necessary functions to protect the health of the trust and see to it that beneficiaries receive their rightful inheritance. These functions include the following: 

• Managing investments with trust funds
• Paying property taxes
• Selling trust property as specified in the trust instrument
• Distributing trust assets to identified beneficiaries

Throughout this process, the trustee should closely comply with the terms of the trust, keep accurate records of all transactions, and maintain consistent communication with all beneficiaries. 

While carrying out these actions to administer the trust, a trustee has a fiduciary duty to act with care, loyalty, and good faith to the trust. All of the trustee’s duties boil down to one key responsibility—a trustee is expected to act in the best interest of the trust and its beneficiaries while preserving the wishes of the trust’s creator. 

What legal protections exist for trustees?

A trustee has the protections afforded under the trust and at law, such as the right to indemnification from expenses required in carrying out the trust, including legal fees. Trustees can also be protected from liability as long as they seek court approval for actions or rely on professional advice. 

These protections exist as long as the trustee is acting in good faith. However, if you are found to be in breach of trust, or if you violate your fiduciary duty to trust beneficiaries, you can be held personally liable for any loss. 

Generally, if a trustee is acting with the best interests of the trust and its beneficiaries in mind, they will be protected from legal consequences. For example, if a trustee seemingly takes too long to distribute trust assets and beneficiaries raise a claim against the trustee, the judge will likely rule in favor of the trustee if the trustee can prove that they were working diligently to prepare for asset distribution.

As a trustee, you must follow the terms of the trust. If you violate the trust, even accidentally, you might find yourself on the wrong end of a lawsuit. Trustees may also be sued for issues like mismanaging trust property, conflicts of interests, embezzlement, or even failing to account or keep beneficiaries informed. 

To protect yourself as a trustee, you should work with an experienced trust attorney to ensure you are following your legal duties and acting within the best interests of the trust. 

Can a trustee be held personally liable?

Although there are some legal protections in place for trustees, a trustee can be held personally liable in acts of gross misconduct. For example, in the event that a trustee commits an act of self-dealing that results in significant financial loss, they may be held liable for restoring any losses to the trust.

Either intentionally or inadvertently taking the following actions could lead to personal liability: 

• Self-dealing – If a trustee abuses their position to take, use, or sell trust assets for their own personal gain.
• Co-mingling of personal and trust assets – All trust assets should remain separate from a trustee’s personal accounts or assets, or the trustee may be accused of co-mingling.
• Breach of fiduciary duty – A breach of fiduciary duty that involves negligence or irresponsible actions that result in losses to the trust may leave a trustee personally liable for compensating the trust for these losses. 

When trustees face legal action, the trust will generally cover a trustee’s legal fees to minimize personal liability. However, if you are found guilty of any of these acts, you will be financially liable for the legal fees and damages. 

Although California Probate Code §15602 does not require trustees to personally obtain a surety bond for their role, some trust instruments require that you do. In the event of any financial damages to the trust resulting from trustee wrongdoing, this bond will be in place to insure the trust against losses.

If you are accused of any of the above acts, it’s crucial that you seek the support of a trust litigation attorney as soon as possible.

Steps to protect yourself as a trustee

Even with some built-in legal protections in place to prevent legal action against trustees, you should always take action to protect yourself. By taking your role seriously and being proactive in your efforts, you are less likely to run into a legal contest. 

The following steps can help protect you against beneficiaries pursuing legal action: 

• Read and understand the trust instrument – Closely understanding the trust instrument will ensure that you follow and minimize the risks of disputes
• Keep detailed records – Maintaining detailed records of trust accounting and transactions can be used to protect you in the event that there are any concerns or disagreements surrounding your actions. 
• Retain a trust attorney – A trust attorney provides a valuable resource by guiding a trustee through the legal ins and outs of the trust administration process.
• Avoid self-dealing – A trustee should always keep trust assets and personal assets separate and avoid acts like using trust assets for personal gain, as this could result in removal or legal action. 
• Communicate with beneficiaries – Communicating with beneficiaries throughout the trust administration process and sharing detailed accountings of transactions will provide beneficiaries with peace of mind and minimize conflicts. 
• Seek beneficiary consent – Notifying beneficiaries of your actions and seeking their approval reduces the chance of them raising concerns over your decisions. Trustees can provide beneficiaries with 45-day notice before taking certain actions to ensure that beneficiaries cannot contest decisions after the fact. While this method can provide the trustee with some security in knowing certain actions cannot be disputed later, the types of actions that can be approved by this method are limited under Probate Code Section 16501.

The key to protecting oneself in the role of a trustee is to maintain clear communication and recordkeeping throughout the trust administration process. If you have any concerns about taking these steps, you should consult an attorney as soon as possible.

What happens when a trustee does not follow the trust?

If a trustee does not follow the trust, they may be subject to removal from their role for breach of trust or even legal action in the event of gross misconduct.

Under California Probate Code §15642, a trustee may be removed as provided for in the trust, usually where beneficiaries have a right to remove and replace a trustee, or the probate court can remove a trustee on its own motion or upon the request of a settlor, co-trustee, or beneficiary.

Breach of trust

Breach of trust is one of the most common reasons that trustees are removed. Under California Probate Code §16400, a breach of trust may occur when the trustee violates one of their duties, such as: 

• The duty to comply with the terms of the trust instrument.
• The duty to treat beneficiaries fairly and act in their best interest.
• The duty to maintain trust property separate from personal property.
• The duty to avoid using trust property for their own benefit.

If a trustee has failed to meet one or more of these obligations, they may be subject to legal consequences such as removal from their position and replacement. 

Beneficiary harassment of trustees 

In cases where beneficiaries harass trustees, the trustee must be careful to navigate the situation without breaching their duty to the trust. Harassment may be common in scenarios where beneficiaries harass trustees to provide them with a greater portion of an inheritance. 

However, a trustee should not use this as a reason to remove or unjustifiably withhold the beneficiary’s inheritance, or on the flipside, cave into beneficiary harassment and follow their wishes to disregard a trust. Regardless of any pressure they face, you must remain in compliance with the terms of the trust instrument, otherwise you may lose credibility and can be removed from your role. 

A skilled lawyer can help you navigate these situations while ensuring that you remain in compliance with the trust document. 

Trustee harassment of beneficiaries

On the other side of the coin, there are instances where a trustee may harass beneficiaries as well, and undermine their own position. This can occur in instances when a trustee is a family member who takes advantage of the power granted to them by the trust instrument and flaunts this power in front of their family members.

This may lead to additional issues, such as the trustee taking advantage of this power and commingling assets or self-dealing. In these cases, beneficiaries or a co-trustee may also seek removal of a trustee on the grounds that they are breaching their fiduciary duty by failing to uphold the wishes of the trust creator.

Removal and surcharge of trustees

If a trustee has failed to meet one or more of their obligations, a beneficiary or another trustee can petition the probate court to request that the trustee be removed and surcharged for any damage caused by the breach of their fiduciary duty. 

This process involves these key steps:

• Filing an official petition for trustee removal with the probate court
• Once the petition for removal is filed (often preceded by a petition for suspension if warranted), the court will schedule a hearing to determine whether the trustee should be removed. 
• At that hearing, all interested parties – i.e. beneficiaries, heirs, co-trustees, and/or successor trustees – have an opportunity to state their position.
• Depending on the gravity of the allegations and evidence, the judge may suspend the trustee and appoint a replacement trustee pending determination on the removal petition at a later hearing or trial.

If the misconduct resulted in financial losses to the trust, the court may also order the trustee to pay financial damages to the trust or the beneficiaries in some situations, as well as legal fees and court costs—this repayment is known as a “surcharge”.

When should I contact a trust litigation attorney?

You do not need to be facing an immediate issue to benefit from having a trust attorney. Many trustees choose to have a trust administration attorney on retainer so they have a resource to consult regarding their duties and how to navigate any conflicts.

The best way to protect yourself is to contact a probate lawyer or trust attorney as soon as you consent to serve as trustee. An experienced trust lawyer can help you ensure you fulfill your legal obligations and avoid taking actions that could subject you to personal liability. 

Even if you didn’t retain an attorney when you began serving as trustee, a trust litigation lawyer can help you any time an issue arises. If you’ve been accused of wrongdoing such as breach of trust, self-dealing, or failing to uphold your responsibilities, you should contact a trust litigation attorney as soon as possible. An attorney will help you discuss your legal options and, possibly, avoid or at least manage your potential liability. 

Secure your role as a trustee: Consult with a trust attorney today

Although there are some protections in place for trustees, a trustee should be mindful to act in a way that prevents them from potential liability and removal from their role. A trustee should be sure to act in the best interests of the trust and its beneficiaries and maintain their duty of care. If you have accepted the role of a trustee, you should be proactive in protecting your position by seeking the support of an attorney as soon as possible. 

Our trust litigation attorneys at RMO Lawyers have decades of experience in trust administration and disputes. We’ll support you in all aspects of your role, from offering guidance regarding your duties to helping you navigate potential legal disputes and managing potential liability. 

Schedule a consultation with our team at RMO Lawyers to discuss your case and how we may be able to help you avoid liability.