Trustees Face Big Liability

By Christopher Troisi and Daniel B. Herbert | December 20, 2010

Why Clients Need Errors and Omissions Coverage

An attorney, family member or friend asked to serve as trustee faces a big responsibility as well as significant liability. Trustees are often called upon at a challenging juncture in the life of an individual or family; it’s not unusual for a trustee to be plunged into a contentious situation. This puts them in a perilous position.

Many trustees who are sued today are uninsured and exposed to large potential losses. Attorneys acting as trustees may find that their malpractice insurance doesn’t cover them. Errors and omissions insurance is essential for anyone acting as a trustee.

Trustees often face challenging accounting, financial and other estate issues while family members or beneficiaries scrutinize and critique their every move. The one thing of which you can be certain, whether it’s a huge multi-million dollar estate for a public figure or a small family trust, if you’re acting as a trustee, you can be sued and need to protect yourself.

The trustee, as a fiduciary, has a legal duty to administer the trust with skill, care and caution, solely in the interest of the beneficiaries. The trustees’ many other duties include the sometimes conflicting duty to make the trust productive.

Claims that may be submitted against a trustee are many, but include:

  • Improper accounting;
  • Mishandling of assets;
  • Self-dealing and deliberately causing financial harm to beneficiaries;
  • Conflict of interest; and
  • Failure to obtain most advantageous tax savings.

The cost to litigate even basic trustee disputes can easily exceed $100,000. Larger disputes, or those vigorously prosecuted out of spite, can cost much more to defend. Litigation is more common and settlement increasingly difficult in cases where familial tensions are involved.

In addition, the trustee may also be left holding the bag when the claims are asserted only after the trust has been fully distributed, leaving the trustee without trust funds to defend himself, much less to compensate himself for the additional trustee services that will be required. In this case, the trustee is especially disadvantaged, defending himself out of his own pocket against the aggressive claims of the well funded beneficiaries who may be disappointed solely because they thought they would be receiving more in the end.

Mom and Pop Trusts

The most basic, and by far the most common type of trust is the standard mom and pop family trust, set up by a married couple for their own benefit, and for the benefit of their children and other relatives after they pass on. These trusts nearly always hold the family home and whatever properties and other assets the couple has accumulated over the course of their lives, including financial accounts and investments. Many times it also includes a family business, which can be substantial. The value of these trusts is the usual measure of potential damages against the trustee.

The family trust situation presents special risks for the trustee. Family members are often unsophisticated about business matters and finances, but they can be the quickest to complain about financial issues related to the trust. Emotions run high in the case of conflict, and animosities are often deep-seated, tracing back to childhood.

The trustee, who is also a beneficiary, as will typically be the case with the surviving spouse, is especially vulnerable. This is not just because of family animosities. More importantly from a legal perspective, it’s because the surviving spouse as a trustee has divided loyalties and built-in conflicts of interest. The trustee is responsible for allocating various assets among the various subtrusts, not all of which will have the same beneficiaries. Beneficiaries will object to allocations they find unfavorable, and it may be impossible to please all of them. When the surviving spouse is also a step parent of the beneficiaries her chance of being sued increases substantially. Other trustee/beneficiaries will be similarly criticized if there is any perception they are favoring their own interests, or the interests of some beneficiaries over others.

While damages for intentional torts are usually not covered by insurance, the insurer’s duty to defend remains an extremely important safeguard. Other damages can result from something as simple as inadvertently missing any one of the many tax and legal deadlines associated with the administration of the trust. These can be statutory limits on the time within which the trustee may pursue claims against others, or the times that certain tax elections or filings must be made. Damages for a blown statute can be in the millions, and they can be caused purely by accident. The trustee will nonetheless be liable for them.

Available Coverage and the Right Questions to Ask

Most trustee errors and omissions coverage will be available on a claims made or claims made and reported basis. Limits of up to $10 million or more may be available depending on the market and the trustee’s individual needs. Policies will normally provide a defense for intentional conduct, fraud and criminal activity (most will have final adjudication language). The policy should always include coverage for unintentional misappropriation or misallocation of the trust funds. You should start by speaking with a knowledgeable expert to assist in obtaining the appropriate coverage. Depending on the unique circumstances presented by each trust situation, discuss these options:

  • Coverage for a trustee who is also a beneficiary of the trust.
  • Defense costs outside the limits (for high profile or complex trusts that could yield high-profile or complex litigation).
  • Adequate policy limits depending on the size of the trust.
  • Attorneys should check to determine whether their legal malpractice policy covers their actions as a trustee. Otherwise, consult with your broker regarding a standalone professional liability policy.

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Insurance Journal West December 20, 2010
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