Trustee actions or inactions will determine your level of risk for litigation
The comparison chart below can help a trustee determine how their behavior and circumstances assess their level of risk for being sued. A level of “low risk” takes the position of using professionals such as accountants, attorneys, and investment advisors to help transfer risk to these professionals. Transfer is a term used with insurance professionals to move the risk to another party who is more qualified to handle this type of risk.
The trustee is no longer responsible or even burdened for legal interpretation, updating legal documents, preparing financial reports, and making investment decisions. The saying this is better left to the “professionals” is appropriate.
I would add the lowest level of risk not shown on the scale would include documentation, clear communication, hiring professionals, and buying trustee insurance for additional peace of mind.
If circumstances such as a beneficiary becoming contentious, failure by a trustee to properly document decisions and interactions, then the risk level begins to increase. It would be advisable for trustees to document interactions and decisions carefully in order to reduce their risk level.
At the highest level of risk, the trustee has become careless, acts selfishly, and neutrality towards beneficiaries has been lost. The trustee may even be committing fraud. The trustee at the highest level of risk is now subjecting the trust and themselves to claims and litigation.
Risk Level Scale of Being Sued
| Risk Level | Trustee Behavior / Situation | Reason for Risk Level |
|---|---|---|
| Lowest | Hiring professionals (e.g., attorneys, accountants, investment advisors, insurance broker) | Shows prudent action and reliance on expert advice. Reduces chances of mismanagement. “Transfer” risk to professionals. Documents carefully all of their actions Clear communication. |
| Low | Regular, clear communication with all beneficiaries | Prevents misunderstandings and builds transparency and trust. |
| Moderate | Managing family trusts with contentious family dynamics. Contentious families may even increase the risk level to High or Very High Quickly | Even proper actions may be challenged due to emotional or intra-family conflicts. |
| Moderate | Failing to document decisions thoroughly | Makes it harder to defend actions if questioned. |
| Moderate | Delay in distributions or communication (without malice) | Can frustrate beneficiaries and raise suspicions, even if legally justified. |
| High | Self-dealing or conflicts of interest (e.g., benefiting oneself) | Breach of fiduciary duty is a common basis for lawsuits. |
| High | Poor investment decisions without diversification | Violates prudent investor rule; exposes the trust to unnecessary losses. |
| High | Favoring one beneficiary over others without justification | Perceived or actual bias can lead to breach of duty claims. |
| Very High | Misappropriating trust assets or fraud | Clear breach of fiduciary duty; almost guarantees legal action. |
| Very High | Ignoring trust terms or acting outside trustee powers | Acting beyond legal authority makes liability highly likely. |
Is the Trustees risk level too high?
If you risk level is uncomfortable, then a good place to start is by getting help. Understanding the terms and conditions of the trust document is a good place to start. What are your responsibilities? What are you allowed to do or not do?
If you haven’t engaged with a professional (lawyer, accountant, investment advisor, insurance professional), or haven’t reviewed your activities with your professional team in some time, then it would be prudent to review now and make the necessary changes immediately.
A contentious family dynamic or trust complexity can increase the risk level very quickly. When this happens, the trustee can become overwhelmed and burdened to the point of inaction. For example, too many living trusts have designated a family member as a trustee who happens to be a beneficiary. The trustee being a beneficiary may have other beneficiaries such as siblings who are jealous, angry, or even malicious.
Bottomline, get help if you are a trustee experiencing a higher level of risk you are not comfortable with.
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