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Trustee liability means a trustee has committed a breach of trust concerning his or her duties to a beneficiary. When a breach of trust occurs, a beneficiary may take legal action against a trustee. Trustee liability may also arise when there is no breach of trust. For instance, if a trustee makes a profit stemming from his activities administering a trust, a beneficiary may hold the trustee accountable. Trustee liability, however, does not arise for losses or depreciation of the trust property or for failure to make a profit, unless a beneficiary can show that there was a breach of trust.
To avoid trustee liability, a trustee may show that he relied on the terms of the trust instrument. A trust instrument is a document that provides specific instructions to a trustee concerning the administration of a trust. Further, a trustee is only obligated to act with reasonable care to find out about particular events that affect how he is supposed to administer a trust. This means that trustee liability will not arise for any losses that are a result of a trustee’s lack of knowledge concerning an event. This concerns events such as death, educational performance, marriage, or divorce.
Trustee liability will not arise from a breach of trust if a beneficiary consents to the trustee’s actions that resulted in the breach. A beneficiary may also choose to release or ratify the trustee’s activities, which eliminate trustee liability. A release essentially means a beneficiary is choosing not to pursue a claim of breach of trust. A beneficiary who ratifies the trustee's actions is specifically approving of the trustee’s conduct or action after the fact. A trustee may not engage in any improper conduct to get a beneficiary to give a consent, release, or ratification.
Language in a trust instrument to eliminate or reduce trustee liability for a breach of trust is not necessarily enforceable. A court will examine the circumstances of the breach of trust. If the court finds a trustee acted in bad faith concerning the purposes of the trust, then the court may disregard or invalidate the language to eliminate or reduce trustee liability. In general, bad faith means the trustee acted intentionally to mislead or deceive a beneficiary. A court will also invalidate such language if it finds that it was included because of the trustee abusing his relationship with the settlor, the person who creates and establishes the trust.