Trustee’s duties to manage trust can lead to liability
The purpose of a trustee is to manage and administer a trust in accordance with its terms and for the benefit of the trust’s beneficiaries. Here’s a breakdown of the trustee’s role:
1. Fiduciary Duty
A trustee has a fiduciary duty, meaning they are legally obligated to act in the best interests of the beneficiaries. This includes duties of loyalty, prudence, and impartiality. When a trustee is not acting in the best interest of the trust, then liability could increase.
2. Administration of the Trust
The trustee is responsible for:
- Managing trust assets (e.g., investments, real estate, cash)
- Keeping accurate records
- Filing tax returns on behalf of the trust
- Distributing assets to beneficiaries as outlined in the trust document
3. Following the Terms of the Trust
The trustee must strictly follow the instructions laid out in the trust agreement, such as when and how to distribute funds or property.
4. Communication
Trustees are expected to keep beneficiaries informed about the trust’s administration and may be required to provide accountings or reports. These communications can lead to miscommunication that leads to beneficiaries who believe the trust is being mismanaged and result in claims against the trust and trustee.
5. Protecting the Trust Assets
A trustee must safeguard the assets, which includes prudent investing and avoiding conflicts of interest.
In summary, the trustee is the person (or institution) legally appointed to carry out the trust’s instructions, manage its property, and protect the interests of the beneficiaries.
When you take into consideration all the responsibilities placed upon a trustee, then errors, mistakes, and other acts can lead to potential claims against the trust and trustee.
Trustee’s Need to Be Protected From Personal Liability
Trustee liability insurance is commonly purchased to protect trustees from personal financial risk related to their role. What do I mean by personal financial risk? This term simply means your person assets may be exposed if a lawsuit were to occur and the underlying trust assets are insufficient to defend and resolve the claim. This is worth repeating, the trustees personal assets are at risk by being a trustee of a trust.
The most common reasons a trustee buys this type of insurance include:
Disputes Among Beneficiaries – If there’s potential for conflict, insurance helps protect against claims of favoritism, mismanagement, or negligence. Beneficiaries between siblings is wonderful if everyone gets along. When siblings don’t get along is when it could become litigious.
Personal Liability Protection – To cover legal costs and damages if they’re sued for a mistake, oversight, or breach of duty in managing the trust. Most trust documents will have a indemnification clause meant to protect the trustee from lawsuits. This means the trust’s assets are resources used to pay for claims. Once these resources are exhausted, then where does the trust obtain additional resources?
Peace of Mind – Knowing they’re protected reduces the stress of making decisions, especially in complex or high-value trusts.
Legal Requirement or Recommendation – Sometimes the trust document or legal counsel recommends or requires this coverage. This is an idea situation and relieves the trustee from being personally liable.
Complex Trust Assets – If the trust holds businesses, real estate, or investments, the risks increase, making insurance more attractive.
How To Evaluate if Living Trust Insurance Should Be Purchased
Trustees should trust their gut. If they sense the various relationships between trustee, beneficiaries, and other parties are contentious, then living trust insurance might offer peace of mind. If the trust incorporates complicated assets this could be a another red flag, the trustee should consider living trust insurance.
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Living Trust Insurance Advisor is an AI educational tool created by Greenpoint Insurance Advisors, LLC. It helps users understand the role of insurance in living trusts, including trustee liability, fiduciary duties, and asset protection. The GPT provides clear explanations, comparisons of coverage options, and general guidance on risk management—but does not offer legal or personalized product advice.