Trustee Liability

TRUSTEE LIABILITY 2/13/10

Kim: Recently an Ohio Court of Appeals held that the beneficiary of a trust could hold her uncle, who was the trustee liable for loss of trust assets for bad investments.

Kim: If you help manage funds for a family member can you be sued if your investment goes bad?

Mike: Yes. In this case the uncle was a trustee of a trust for his niece with over $71,000 in it and apparently lost all of the money in the dot com crash. The niece sued her uncle and won for among other things breach of fiduciary duty for the bad investments. The lesson learned here is that if you take on a family responsibility of handle investments for a family member or other beneficiary as a trustee you have to be careful or you could end up being liable for all of the losses. Trusts are valuable tools in estate planning and are used many times to protect money inherited by minors or adults who can't handle their own affairs. However the choice of trustee of the trust is important.

Kim: should an individual ever be trustees of a trust?

Mike: In many situations a bank trust or other trust company is the right choice. They have professional management to handle the investments and all of the paper work required for trusts including reports to beneficiaries and tax return. If they make a mistake they have the resources to fix it. However, if the amount of money you have in the trust is too small, it becomes cost prohibitive to use a trust. Many banks and trust companies have minimum fees that could end up sucking up all of the earnings of the trust. Typical trust fees range from 1 to 2% depending on how much you have in the trust. In situations with smaller trusts you probably should use an individual trustee.

Kim: If you are the trustee for a family member, what should you do to protect yourself so you don't incur any liability?

Mike: You should take the following steps:

  • Make sure that you invest the assets in a safe manner. Consider hiring a professional to manage the money. That way even if the trust loses money you should not be held liable since you took a prudent approach
  • Issue reports to the beneficiaries of the trust at least annually of expenses , income and profits so the beneficiaries are aware of what is happening to the trust
  • File tax returns. Don't forget Uncle Sam. Once the person who set up the trust has passed away, the trust will need to file Federal and Ohio income tax returns.

You probably should meet with a lawyer to make sure you understand the rules of how a trust works.