The trustee is expected to carry out the terms of the trust document, protect the beneficiaries’ best interest, and oversee trust asset management. However, who or what protects the trustee? Depending on the state where the trust is administered, some jurisdictions provide statutory protections. Independent review and management of liabilities helps supplement inherent legal protections and limitations.
Risk management for trustees has advantages for both the trustee and the trust. Everyone benefits when a trustee and their actions are managed effectively. Aside from prudent selection of a trustee (see our post about why practical planning may involve choosing a non-family trustee), additional safeguards can help facilitate trust administration:
- Insurance. Errors and omissions (E&O) insurance policies offer coverage for trustee defense and for losses related to a trustee’s mistakes. Trustee E&O coverage can help to minimize the impact of personal liability. A trustee who makes decisions without thorough knowledge of and compliance with the law, misinterprets the trust document, or who mishandles assets may be sued by trust beneficiaries, creditors, or other parties. An uninsured trustee could risk loss of personal savings and accounts, real property, among other assets. An E&O policy can help cover litigation costs, claim defense, and provide compensation to parties who suffered a loss due to trustee error.
- Trust Protector. A trust protector is a party named in the trust who has authority to monitor the trustee’s actions and remove or replace trustees when necessary. (Trust protectors may be granted many other powers, such as modifying the trust, adding or removing beneficiaries, and more.) When it comes to overseeing a trustee, the trust protector can review the trustee’s investment decisions, ensure biases are not affecting distributions, and that the trust terms are carried out. Naming a trust protector can also help avoid to the hassle and costs of court-ordered trustee removal and replacement selection. Learn more about trust protector services and request our current free legal guide on why to use a trust protector.
- Trust attorney advisement. Retaining the legal counsel of a trust attorney helps to identify and manage tax matters, properly interpret trust provisions, address pending legislative effects on the trust, and more. When a trustee obtains legal assistance with trust administration, it offers them peace of mind. A professional with relevant trust administration experience is able to recognize potential issues and prescribe solutions so that a trustee can move forward with the option that best suits their needs.
If you or a family member will serve or currently serve as trustee, ask your trust attorney about the above risk management efforts. A combination of the above, or all, helps to minimize the risks trustees face while simultaneously easing the flow of trust administration.