Trustee Liability

Trustees owe duties both to the settlor (the person who created the trust) and to the beneficiaries (those intended to benefit from the trust). Regardless of to whom duties are owed, liability will result if those duties are not carried out.

The potential liabilities are numerous. If the trustee commits a breach of trust obligations (or even prior if there is reason to believe a breach might occur), there are options. First, the court might enforce specific performance, essentially requiring that the trustee perform as the trustee agreed to perform. The court might enjoin the trustee from committing a breach of trust and/or compel the trustee to pay monetary damages. Lastly, the court might suspend or remove the trustee.

If damages are the chosen remedy, it'll be important to understand how to measure them. For breach of trust, the trustee is liable to the beneficiaries for the greater of (1) the amount necessary to restore the trust property to what it would have been had the trustee not breached or (2) the trustee's profit from the breach. Stated otherwise, if the profit exceeds the value necessary to restore, then damages will be measured by profit; if the amount needed to restore exceeds profits, then damages will be measured by the amount needed to restore. Should be noted that in an action for breach of trust, minor beneficiaries may be represented by another beneficiary with substantially identical interests.

Just as it's important to understand the consequences when a trustee breaches, it's also important to distinguish when a trustee will not be liable for breach of trust. A trustee is not liable if the trustee acted in reasonable reliance on the terms of the trust or if a beneficiary consented to the conduct claimed to have been a breach. Likewise, there is no liability if prior to the claimed breach there has been a release of liability or if the transaction claimed as a breach has been later ratified. 

Exculpatory clauses in a trust are intended to shield a trustee from liability. But, as you've likely learned elsewhere, these clauses are not always valid. In this context, exculpatory clauses are void if they relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference. They are also void if they appear in the trust instrument because of the trustee's abuse of a confidential relationship with the settlor, unless the trustee can prove that the clause is fair and not influenced by that confidential relationship.

Questions might arise where there is more than one trustee. A trustee will generally not be liable for the acts of co-trustees if the trustee did not join in the action and exercised reasonable care in preventing the breach of trust by co-trustees.

The liability above all relates to liability that a trustee might have towards beneficiaries of the trust. Worth noting that a trustee may be sued on a contract or a tort by third parties as well. A trustee may be sued on a contract by a third party only if in entering the contract, the trustee failed to reveal the trustee's representative capacity. (This might bring to mind concepts learned when studying agency law.) A trustee may be sued personally in tort only if the trustee is personally at fault. Respondent superior (suing the trustee for the tortious acts of another) is not available here.