Serving as a trustee comes with significant legal responsibilities. It carries serious fiduciary obligations, and when disputes arise, trustees are often placed in the uncomfortable position of trying to administer the trust while also protecting themselves from claims of wrongdoing. Beneficiaries may demand records, challenge decisions, question distributions, or accuse the trustee of favoritism, delay, mismanagement, or self-dealing. Understanding the trustee’s duties, and the circumstances that may create personal exposure, is critical.
Below are answers to some of the most common questions in trust litigation.
Can I Be Personally Liable as a Trustee if a Beneficiary Sues Me?
Yes. A trustee may be held personally liable if the trustee breaches fiduciary duties owed to the beneficiaries.
Trustees are required to administer the trust according to its terms, act in the best interests of the beneficiaries, manage trust assets prudently, avoid conflicts of interest, and treat beneficiaries impartially.
Personal liability may arise when a trustee:
However, not every beneficiary complaint creates personal liability. Trustees who act in good faith, follow the trust instrument, maintain appropriate records, obtain professional guidance when needed, and make reasoned decisions are generally in a strong position to defend their conduct.
Am I Required To Provide Beneficiaries With a Full Accounting?
In many cases, yes.
Trustees have a duty to keep beneficiaries reasonably informed about the administration of the trust. Depending on the circumstances, that duty may include providing formal accountings showing trust assets, liability, receipts, expenses, distributions, trustee compensation, and changes in trust property.
In California, trustees are subject to specific statutory accounting obligations unless an exception applies or the accounting requirement has been waived.
Failing to provide an accounting, or providing one that is incomplete or unclear, can quickly escalate a beneficiary dispute. It may also invite petitions to compel an accounting, surcharge claims, removal efforts, and requests for attorney’s fees.
For trustees, accurate recordkeeping is one of the best forms of protection. If it is not documented, assume someone will later argue it did not happen.
Can I Use Trust Assets to Pay for My Legal Defense?
Often, yes, but with important limitations.
A trustee may generally use trust assets to pay reasonable attorney’s fees incurred in connection with trust administration, including defending actions taken in the trustee’s fiduciary capacity. This is especially true where the trustee is seeking legal advice to properly administer the trust or respond to beneficiary claims involving the trust.
However, trust funds are not a blank check. If a court later determines that the trustee breached fiduciary duties, acted in bad faith, engaged in self-dealing, or used trust assets to defend personal misconduct, the court may order the trustee to reimburse the trust.
This is why trustees should seek counsel early. The line between defending the trust administration and defending the trustee personally can become very important, very quickly.
What If a Trustee Is Also a Beneficiary?
A trustee may also be a beneficiary of the same trust. This is common, particularly in family trusts where a surviving spouse, adult child, or sibling is named as trustee.
But the dual role creates obvious litigation risk. A trustee-beneficiary must still act as a fiduciary for all beneficiaries, not just for themselves. That means the trustee must follow the trust terms, avoid self-dealing, disclose material information, account properly, and act impartially unless the trust expressly provides otherwise.
Courts closely scrutinize situations where a trustee’s personal financial interest may conflict with fiduciary obligations. A trustee-beneficiary should be especially careful when making distributions, selling trust property, occupying trust property, allocating expenses, or making decisions that affect one beneficiary more favorably than another.
The fact that a trustee is also a beneficiary is not the problem. The problem arises when the trustee forgets which hat they are wearing.
How Can I Protect Myself as Trustee?
The best protection is careful, transparent, and well-documented administration. Trustees should:
Trust litigation can become expensive and personal. Trustees facing beneficiary disputes should not wait until a petition is filed to understand their duties and potential exposure. Likewise, beneficiaries who are concerned about a trustee’s conduct should seek advice before assuming that every delay, disagreement, or unfavorable decision amounts to a breach.
Whether you are a trustee trying to administer a trust properly or a beneficiary concerned about mismanagement, experienced trust litigation counsel can help evaluate the issues, protect your rights, and avoid costly mistakes.
