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When Is A Trustee Liable To The Trust Beneficiaries?

By: John A. Rodgers, III, Esq.
Tel: 704-618-8062
Email John A. Rodgers, III, Esq.


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When Is A Trustee Liable?

In the dispute resolution process concerning personal trust relationships quite often the question of trustee responsibility and potential liability is raised and litigated.

When Is A Trust Created?

If the transferor of property imposes no enforceable legal duties on the transferee then no trust is created. See Restatement (Third) of Trusts, Section 13, cmt. d. But, if a trust is created then the duty to act in good faith and in accordance with the purposes of the trust may not be waived by the settlor. See Uniform Trust Code,   Section 105 (b)(2).  A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements and other circumstances of the trust. In satisfying this standard the trustee shall exercise reasonable care, skill and caution. See Uniform Trust Code, Section 804.

What is the trustee’s relationship with the beneficiaries?

The trustee assumes a “fiduciary relationship” with the beneficiaries. See Restatement (Second) of Trusts, Section 171, cmt. A. This relationship is created when a special confidence  is reposed in one who is bound to act in good faith and with due regard to the interests of the one reposing confidence. The fiduciary will act on  behalf of the beneficiary in a transaction and is bound by the terms of the parties agreement as well as additional duties imposed by the law. A fiduciary relationship is either created by law or based on the circumstances underlying the relationship between the parties and the nature of the transaction. 

A trustee stands in a fiduciary relationship to the beneficiaries of the trust and therefore is under a duty personally to perform the responsibilities of the trust relationship, except as it would be prudent to delegate to agents the making of decisions or the performance of acts of administration.

Trustee liability.

When we speak of trustee’s liability we deal with the consequences of a breach of duty. The trustee is liable to the beneficiaries for injury caused by negligent and intentional breaches of trust. The trustee is also liable to the beneficiaries for injury to the beneficiaries’ equitable interest occasioned by the trustee misconstruing the nature and extent of the trustee’s powers. See Restatement (Second) of Trusts, Section 201, cmt. b (1959) The trustee is not liable to beneficiaries for investment losses and poor investment performance, unless there is a breach of trust, however, see Uniform Trust Code, Section 706, cmt.

Elements of a Breach of Fiduciary Duty cause of action and threshold considerations regarding a Breach of Fiduciary Duty claim.

An actionable Breach of Fiduciary Duty claim requires 3 elements:

  1. A fiduciary duty does exist.
  2. The defendant breached that duty.
  3. The breach by the defendant was the actual and proximate cause of the injury to the plaintiff.

When contemplating a breach of fiduciary duty claim, plaintiffs should consider 4 questions:

  1. What are the parameters of the defendants fiduciary obligations?
  2. By what standards will the defendant’s fiduciary obligations be measured?
  3. Who has the burden of proof?
  4. Are there any documents or facts altering the fiduciary obligations?

For a list of fiduciary duties and responsibilities, along with a list of actions commonly pled in conjunction with a breach of fiduciary duty claim,  see John Rodgers & Associates ”The Fiduciary Duties and Responsibilities of a Trustee and Executor."

Conclusion

Assuming the role of trustee carries with it considerable responsibility and potential liability.  In fact, mistakes as to the law and in the interpretation of the terms of the trust is no excuse from personal liability! See Restatement (Second) of Trusts, Section 201, cmt. b (1959). Good luck!


John A. Rodgers, III, Esq. has over 40 years of experience in various positions in the field of Trusts and Estates. For more than 15 years, he has been providing fiduciary litigation consulting, dispute resolution, and expert witness services for cases involving: Trusts-Estates-Investment Management.

Hopefully, you will find the above material useful in your practice. Please contact Mr. Rodgers at: 704-618-8062, or email him at: jarodgers3@aol.com in the future if he can provide any assistance in the form of fiduciary litigation consulting or expert witness services.

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By: John A. Rodgers, III, Esq

A trust relationship brings with it 5 fundamental duties: 1) duty to be generally prudent, 2) duty to act and carry out the terms of the trust, 3) duty to be loyal to the trust – honesty and good faith, 4) duty to give personal attention to the trust, 5) duty to account to the beneficiaries.

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