Protecting the Non Professional Trustee

Most trusts name family members, typically the settlor’s child(ren), as successor trustee, who have no relevant professional qualification or experience for the job. These non-professional trustees are still fiduciaries and as such have fiduciary duties and their attendant standards of care (standards for performance of duties). Failure to perform duties according to the relevant standard of care is a breach of fiduciary duty. Breach of duty can result in liabilities, including damages and a surcharge (penalty). Most settlors, especially parent, do not want to put their family (especially children) in such jeopardy.

Most parents as settlors want to protect their child when serving as trustee from exposure to fiduciary liabilities if the child as trustee accidently breachs a fiduciary duty to the trust beneficiary. This is particularly relevant when the parent foresees difficulties during the administration between the trustee and a particular beneficiary. For example, the parent may pick their daughter to be trustee knowing that she will have to contend with her brother who has a tendency to see fault in his sister. What can be done?

First, the trust can say that, “we do not want the Trustee to be personally liable for his or her good faith efforts in administering the trust estate.” The provision would further say that so long as the trustee is acting, “in good faith” in performing or not performing a duty that the trustee shall be “held harmless” for any damages incurred by the trust. Such “good faith” protections, however, pertains only when the trustee is acting in a manner that he or she “reasonably believes” to be within the scope of his or her authority and in the best interest of the trust and its beneficiaries. The foregoing limitation excludes, therefore, actions or inactions by the trustee that are blatantly reckless or intentionally harmful (malicious). Hence, persons who might be reckless or malicious should never be appointed trustee.

Second, the trust can authorize the trustee to rely upon professional advice and to delegate responsibility for certain duties to professionals. So long as the trustee reasonably selects appropriate professionals, overseas their work, and acts based on their recommendations that trustee is generally protected from liability when things do not turn out as intended. For example, the trustee may delegate investment decisions to a qualified financial advisor, whom the trustee interviewed and monitors his performance. If the trustee follows the investment advise then the trustee is protected when the investments perform poorly.

Third, the trust may provide for a special trustee to manage special assets, e.g., such assets that require special licenses or skills. The trust can say that the special trustee alone is responsible for control and management of special assets. The settlor’s child as general trustee would not be responsible for the special trustee’s actions, generally speaking.

Fourth, the trust may provide that the trustee is not responsible for failure to obtain insurance. This is of particular concern nowadays in California with many insurance companies refusing to insure homes in particular geographic locations and other reasons. That way, if the real property is damaged and is not insured the trustee is protected from liability against accusations that the trustee did not act responsibly to insure the property.

Fifth, the trust may also provide that the trustee may provide the trustee with absolute discretion to make decisions concerning distributions and valuation of assets. This is not without its limitation. In California, a trustee even with absolute discretion cannot act arbitrarily but must act reasonably in furtherance of the trust’s purpose and not unreasonably. Also, the trustee still cannot proceed to act when there is a conflict of interest, such as self-dealing. However, with absolute discretion the trustee is not held to the fiduciary standard of reasonable behavior. That is to say, that the trustee must act in good faith but may err and act negligently.

Finally, a trustee should generally speaking seek the guidance of a qualified trusts and estates lawyer at the very outset. A non-professional trustee does not know what they do not know about trust administration and so should never assume that they can do the trust administration on their own.

The foregoing brief discussion is not legal advice. For legal guidance consult a qualified attorney. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.