Clearing the Breach – Trust Terms Cannot Help Trustee

Wills & Trusts Virginia Hammerle

Beware the exculpatory clause.

These tricky little provisions are often found in trust documents. They purport to give a trustee the ability to avoid all sorts of duties and liabilities.

Unfortunately, the clauses often go too far. After all, you can’t relieve a trustee of every responsibility because that would make the trust a sham. You might as well hand the trustee a million dollars without any strings attached.

This makes sense when you realize that the beneficiaries are the owners of the assets, and the trustee is merely the manager of the assets. There are a lot of trustees, both individual and corporate, who should be regularly reminded that being a trustee is not just a power-trip.

The good news for beneficiaries is that Texas has laws that prevent trustees from having this type of “get out of jail free” card. These laws make some types of exculpatory clauses unenforceable.
For example, a trustee always has a duty to act in good faith. A trustee can never be released from liability for breaching the terms of the trust in bad faith, intentionally or with reckless indifference to the best interests of the beneficiary. Also, a trustee who breaches the trust cannot keep the profits from the breach.

Trustees can’t use the trust instrument as an excuse to commit a criminal act, even if that type of act is expressly permitted in the trust instrument. A trust instruction to invest the funds in, say, opium production would be void. So would an instruction that is contrary to public policy, or that directs the commission of a tort.

A trustee can’t operate in secrecy

The trustee cannot avoid a beneficiary’s demand for an accounting for an irrevocable trust (one that cannot be revoked). The beneficiary can demand one at least once a year, and the trustee has to deliver within 90 days.

You might get the idea from all of these trustee restrictions that sometimes the relationship between trustee and beneficiary is rocky. That, my friends, is a magnificent understatement.

Beneficiaries and trustees are almost always at odds. The trustee has to invest and manage the assets – so does the trustee choose to maximize income or to focus on asset growth? The trust says that the income is to be distributed annually, what investment strategy is the beneficiary pushing? If there’s a different beneficiary who is to receive the assets when the first beneficiary dies, what investment strategy will that beneficiary push?

What if the trustee has discretion to make distributions to beneficiaries, but the money comes from the same pot? Will one beneficiary be happy when the trustee pays for community college, then pays tuition to put another beneficiary through a 4-year college?

So, yes, the trustee has an inherent conflict. Trouble is, the exculpatory clause is not a fool-proof safety net.

Hammerle Finley Law Firm. Give us a call. We can help.

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The information contained in this article is general information only and does not constitute legal advice.