There are three things you must do when preparing to act as a Trustee of a Trust. The first is to read the entire Trust document carefully to understand your role and responsibilities, which sort of goes without saying. The second is to document all transactions in which you are involved—which, honestly, will be mostly all of them. The third is that you must avoid any actions or inactions that could expose you to potential liability. Surprising as it may sound, this includes what a Co-Trustee does.

While there is a lengthy list of known liabilities that can put you in legal hot water, such as borrowing Trust assets for your own benefit or failing to protect Trust assets, most Trustees are unaware that they can get in trouble for each other’s wrongdoing.

Joint and Several Liability

Per Texas law, each Trustee is “jointly and severally” liable for the acts of all other Trustees. In other words, each Trustee has an incentive to monitor the other Trustees, as they could be held liable for any breach of fiduciary duty by another Trustee.

You must always be conscious of the fact that you may be held personally liable (out of your own pocket) for damages or losses to the Trust and its beneficiaries because of your failure (or the failure of a co-trustee) to exercise your individual powers properly or to fulfill your individual duties as Trustees. You may be held liable if you do the opposite of any of these duties:

• Borrowing or investing Trust assets for your own benefit (engaging in “self-dealing” or acting with a “conflict of interest”).
• Failing to invest Trust assets prudently.
• Failing to maintain, conserve, and protect Trust assets.
• Failing to make distributions to beneficiaries in the time, manner, and amounts provided for by the Trust
• Failing to properly render accounting to the beneficiaries without proper notice.
• Incurring penalties relating to erroneous or late income, gift, or estate tax returns filed by you on behalf of the Trustor and/or the Trust (or relating to your failure to file such returns).
• Paying yourself excessive Trustee fees.

Even if you follow the Trust rules to the letter of the law, the other Trustee’s actions could create liability on your end.

Ways To Limit Your Liability as a Co-Trustee

Votes on any matters should be made in writing, with the provision to be voted on carefully worded. Any dissenting Trustees who are outvoted will not be held liable if they make their objections in writing and notify all other Trustees of their objections and vote. If you have good reason to believe that an action you intend to take may somehow violate or appear to violate either Trustee’s duties or powers, you should have an attorney assist you in sending a “Notice of Intended Action” to the beneficiaries. 

If you do not receive any objections within a certain period of time, you may proceed without liability so long as you do so exactly according to the terms of your notice. In some cases, you might want to go the extra step of having the Probate Court approve your intended action before carrying it out. This gives the beneficiaries a forum to protest the action, provided they do so within a limited period of time, and makes it much more difficult for them to argue later that they were not given proper notice or did not have an opportunity to obtain their own legal counsel and timely object to the action.

What Happens If I’m Sued Anyway?

Great question! If a lawsuit does arise and escalates to a drawn-out court battle, a carefully documented file will look a lot better when presented to a jury than a poorly documented one. Also, a Trustee who seeks expert advice is likely to appear more credible than one who does not. In other words, you must prepare for a lawsuit from Day 1—even if it never happens or cooler heads prevail. It has been said that if one wants peace, one should prepare for war. 

A Trustee who is fully prepared for war, but not deliberately doing anything to start a war, is far more likely to win.

Call Leigh Hilton PLLC Today!!

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Leigh Hilton PLLC wants to be your first call every time for any estate planning need. We look forward to serving you.