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A trustee can be held liable for breaching their duties to a beneficiary, even if there was no breach of trust. To avoid liability, a trustee can rely on the trust instrument and act with reasonable care. Beneficiaries can release or ratify a trustee’s actions to eliminate liability, but improper conduct is not allowed. Language in a fiduciary instrument to reduce liability may be overridden if the trustee acted in bad faith or abused their relationship with the settlor.
Liability of the trustee means that a trustee has committed a breach of trust with respect to his or her duties to a beneficiary. When a breach of trust occurs, a beneficiary can take legal action against a trustee. Liability of the trustee can arise even when there is no breach of trust. For example, if a trustee makes a profit from its trust fund administration activities, a beneficiary may hold the trustee liable. The trustee’s liability, however, does not arise for losses or depreciation of trust property or for lost profits, unless a beneficiary can prove that there has been a breach of trust.
To avoid trustee liability, a trustee can demonstrate reliance on the terms of the trust instrument. A trust instrument is a document that provides specific instructions to a trustee regarding the administration of a trust. Furthermore, a trustee is obligated to act with reasonable care only to discover particular events affecting how he should administer a trust. This means that the trustee’s liability will not arise for any losses that are the result of a trustee’s lack of knowledge regarding an event. This concerns events such as death, school performance, marriage or divorce.
Liability of the trustee will not arise from a breach of trust if a beneficiary consents to the actions of the trustee which led to the breach. A beneficiary may also choose to release or ratify the trustee’s assets, which eliminates the trustee’s liability. A release essentially means that a payee chooses not to pursue a breach of trust claim. A beneficiary who ratifies the trustee’s actions specifically approves the trustee’s conduct or action ex post. A trustee may not engage in any improper conduct to persuade a beneficiary to give consent, release or ratification.
Language in a fiduciary instrument to eliminate or reduce the trustee’s liability for a breach of trust is not necessarily applicable. A court will look into the circumstances of the breach of trust. If the court finds that a trustee acted in bad faith regarding the purposes of the trust, the court may override or invalidate the language to eliminate or lessen the trustee’s liability. In general, bad faith means that the trustee acted intentionally to mislead or deceive a beneficiary. A court will also invalidate such language if it believes it was included because the trustee abused its relationship with the settlor, the person who creates and establishes the trust.
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