Liability of a Trustee
Every trust has a trustee, which is a person that manages the trust according to the instructions of the trust document. In Florida, a trustee has many duties and responsibilities. Those duties and responsibilities come with potential liabilities.
Once a trustee accepts their role, he or she must take it seriously because the trustee can only resign under the terms of the trust, with the consent of the beneficiaries, or court approval. The trustee is typically appointed by the settlor at the time the trust is created or sometimes the trustee may be appointed under the terms of the trust document or by the court.Understanding the Liability of a Trustee and the Duties of a Trustee
A trustee has many duties and responsibilities, and if the trustee fails to act correctly, he or she may become personally liable to the trust’s beneficiaries. So what are some of these duties and the liabilities of the trustee?Duty to Invest can Create a Liability for the Trustee
Many trusts often hold many types of assets. In some cases, the value of these assets can be so large that it is considered wasteful not to invest the assets because this large amount of funds could be generating income and increasing the trust’s principal. Perhaps then a trustee’s primary duty is the duty to invest trust assets as a prudent investor. This means a trustee must exercise a certain level of skill when investing, and if the trustee does not have this skill, then he or she should delegate this task to a person that does.
The good news is that a court will not find liability of a trustee based on a single bad investment. According to Florida Statute Section 518.11, a Florida probate court will not review any single investment decision in isolation. The judge in a probate court will look at all circumstances surrounding the investment decisions at the time. However, a court does have a duty to diversify. All of the trust’s assets should not be invested in the same place, which can place the assets at risk if the investment goes south.
We recommend trustees form an investment portfolio, which considers factors such as the current general economic conditions, rates of inflation, costs, expected total returns, and the role of each investment within the portfolio.Too Much Compensation
The Florida Trust Code states a trustee may be compensated for his or her services. If the compensation of the trustee is not specified in the trust document, then the trustee must be paid “reasonable compensation.”
Reasonable compensation is a rather vague term, but there are several factors a court will consider. In a case between West Coast Hospital Ass’n v. Florida National Bank of Jacksonville, 100 So.2d 807 (Fla. 1958), the Florida Supreme Court listed the following factors:
- The amount of capital and income of the trust;
- The compensation of agents for performing similar work in the community;
- The success or failure of the administration;
- The trustee’s skill;
- The amount of risk assumed by the trustee;
- The time involved in the administration;
- The character of the work of the trustee.
We also recommend that trustees protect themselves from future litigation by asking the trust’s beneficiaries to consent to the trustee’s compensation. This consent may prevent a beneficiary from later claiming the compensation was unreasonable.Conflicts of Interest can Create Liability for a Trustee
A trustee in Florida or subject to Florida Law has a duty to administer the trust solely for the benefit of the beneficiaries. Florida courts do not allow the trustee to permit any sale, encumbrance, or other transaction involving trust property that also benefits the trustee. A court will presume the trustee has breached his or her conflict of interest if the trustee enters into a contract with the trustee’s spouse, relatives, an employee of the trustee, or any other entity the trustee has influence over.Not Keeping Beneficiaries Informed can Create Liability for a Trustee
Once the court appoints a trustee, the trustee must give notice to all of the qualified beneficiaries within 60 days. The trustee has a duty to provide trust accounting to these qualified beneficiaries annually, and Florida law requires these reports to be quite detailed. The law requires the trustee to inform the beneficiaries of all the cash and property transactions, as well as any gains and losses realized during the accounting period. The accounting should also identify and value the trust’s assets, as well as any of the trust’s liabilities.
These are just a few of the trustee’s duties and are not meant to be a comprehensive list. While being a trustee can be straightforward in most cases, larger trusts can make a trustee’s duties much more complicated. A trustee’s failure to properly perform his or her duties can make this person personally liable to the trust’s beneficiaries. This is why we recommend all trustees to consult a Jacksonville estate planning lawyer.