Breach of Fiduciary Duty

Your Downside As Trustee: Damages And Surcharge

Let’s get selfish for a moment. You need an attorney to protect you. There is nothing wrong with you or any other legal actor for that matter trying to limit liability and to protect yourself from unnecessary or harmful lawsuits.

Administering a trust is, in some ways, like running a small business and it’s OK to get assistance. We live in a litigious society. And trust beneficiaries tend to be very litigious.

If you are found to have done something wrong as trustee, if you violated your duties, there is real liability, or potential liability to you, which is personal. This means that if you are found to have done something wrong by a judge, the damages which you may be ordered to pay will not come from the trust, but from your own personal funds: your checking account or savings account. Don’t have enough? You’ll have to sell some of your investments or assets.

And doing something wrong, or violating your duties, is not restricted to egregious acts of stealing or improper use of trust funds. You may be responsible for damages if you are simply not doing a good job and you should have done better. As this chapter is trying to suggest, many times individual trustees don’t even know they are doing anything wrong!

If a trustee is found liable for damages, you may be required to pay damages, reimburse the other side their costs or expenses, and even pay attorneys fees to the “winning” side. You may be surcharged or fined for your improper actions. If you used trust funds to pay your attorney, you may be ordered to reimburse the trust for those funds and in essence pay all that money back.

Still Think You Don’t Need A Lawyer?!

You May Be Prohibited From Using Trust Funds To Defend Yourself

If you act improperly, the other side may seek to prohibit you from using trust funds to pay your attorneys if there is a lawsuit. This is an important exception to the general rule which permits a trustee to hire counsel and pay from trust assets. Although many states have a rule or statute which sets out a procedure for this, it is typically limited to situations which involve some conflict of interest by the trustee or act of self-dealing. This issue would when there is a pending lawsuit and the trustee faces individual liability.

Hiring Trust Counsel

Although a trustee may hire or retain trust counsel, do so wisely. A trustee cannot frivolously hire help when it is not needed. The law works in this manner to not hinder you from reaching out for help; to assist you in obtaining good advisors to assist your administration. Counsel should be retained only when needed and not necessarily for each and every minute of trustee work. After all, you are the trustee and while a good attorney can guide you, you have to do the work. You can’t delegate to trust counsel any discretion or decision-making: that’s your job. Discretion is rarely, if ever, permitted to be delegated by a trustee. That means that you have to make the tough calls. The role of your attorney is to advise and guide. In the end, you can listen to or ignore her advice.