by Hess Verdon | Oct 25, 2023
can a trustee be personally liable
Legally, trustees have an obligation to adhere strictly to the terms of a trust and act in the best interest of its beneficiaries. Any breach, such as self-dealing or negligence that damages either the trust or its beneficiaries can lead to personal liability for them.
Is a trustee personally liable for debts of a trust
Trustees hold no personal liability for a trust’s debts, including mortgages, loans, or bills. As a trustee, your responsibility is to manage trust obligations from its assets, not your own finances, ensuring a clear separation between personal and fiduciary duties.
So what kind of issues can hold the Trustee liable?
If you are a Trustee, please note the estate is not a “piggy-bank” and cannot be used to pay for something personally even if you had intentions to pay it back the next day! Doing so can be considered embezzlement, and depending on what ramifications took place, it can open doors for the beneficiaries to go after you personally.
If you are not transparent in your dealings, for example, utilizing a contractor to work on a property and pay them an excessive amount of money could have cost way less. Should it be found that the contractor you chose is directly related to you and shown you profited from the transaction, the beneficiaries can contact you to return the assets. If you don’t, then you can be held personally liable.
Trustee? What to look out for to reduce liability
Meet with a Trust attorney to ensure you fully understand the wishes of the settlor. (Always seek advice from lawyers, accountants, advisors, etc.)
Keep your bookkeeping up-to-date.
Choose 2-3 outside professional bids to keep all activities in an arms-length transaction.
No-commingling of funds!
Do not use the estate as a piggy-bank.
Keep the beneficiaries reasonably up-to-date.
Trustee and Co-Trustee Conflict
When there is a conflict between the trustee and co-trustees, then the beneficiaries may petition to remove one or both in court, but again, it takes court action, which costs a lot of time and a lot of money. Even then, you may not know how the court will rule in the trust affairs. Therefore it may not go as planned.
Are you a Trustor?
If you are a trustor, then you may want to consider having the Trust name the co-trustees to act independently that is, act alone without both signatures. Logistically, if the trustees can work independently, then the trust administration process can be completed on time. For example, if a trustee goes out on vacation or is incapacitated, the other trustee can continue with only one signature needed to get everything completed and distribute the estate to the beneficiaries.
Take into consideration under California probate code section 15620 should be unanimous action to c0-trustees unless otherwise provided in the trust instrument. Your estate planning attorney should insert a particular language specifying and allowing for actions by one or the other co-trustee.
What is Unanimous Action
If the specific wording is not included in the original trust instrument or an amendment, then section 15620 requires “Unanimous action.” One can consider this as a majority rules clause.
How are trustees held accountable
Trustees are obligated to comply with the trust’s terms and are answerable to its beneficiaries. Personal liability may ensue if trustees engage in self-dealing with trust assets or harm a third party, as though they owned the property themselves.
When Co-Trustee Don’t Agree
What happens if the co-trustees can’t agree? If the co-trustees cannot agree, then any of them can file a petition for instructions under California probate code 17200, which will ask a judge of the superior court to guide the co-trustees. When a co-trustee petitions for instructions, all co-trustees and beneficiaries should be notified.
