Page 48 - Investment Advisor - December 2021

WEALTH & RISK

By Steven F. Goldman

How Trustees Can Protect Themselves

Against Beneficiary Claims

Check the document fine print and get liability insurance as any lawsuit

would hit trustee personally.

ecent economic uncertainties Transparent record keeping and due
and tax reform implications diligence can identify issues of ambigu-
R have provided an impetus for ity that could give rise to potential alle-
certain individuals to reconsider the gations and trustee liability exposure.
importance of preserving one’s legacy of Equally important is Trustee Liability
owned assets through the formation of Insurance, which is specifically designed
one or more trusts. to help protect the trustee, shielding the
The grantor collaborates with legal insured trustee’s personal assets from
advisors and wealth managers to establish potential exposure. Coverage provides
a trust and selects the trustees to undertake defense and indemnity protection solely
fiduciary responsibility in adhering to the for any trustee accountable for holding,
trust. A trustee serves at the behest of the managing and allocating trust assets on
grantor to act in the best interests of the against alleged losses to beneficiaries behalf of the beneficiaries.
beneficiaries, in accordance with the trust from the trustee’s actions or inactions. The claims-made, annually renewable
document and in compliance with the law. A recent claim highlights the complexi- liability policy provides insurance to the
While these prerequisites may be ties surrounding alleged wrongdoing. In named individual or group of individuals
well-known to financial professionals, this claim, the assets of a named trust were serving as a trustee and is not intended to
the notion that an individual trustee can managed by an advisor under the trustee’s protect any financial professional or firm
be held personally liable for actions or role as administrator. Both the advisor and serving in such capacity. Wealth managers
inactions while carrying out responsi- trustee were sued by the beneficiaries when and/or legal advisors should recommend
bilities is often overlooked. Trust docu- the trust asset values declined substantially the trustee consult with a licensed insur-
ments may have some limited indemnity due to investment decisions of the advi- ance agent or broker to arrange appropri-
provisions benefitting the trustee; how- sor. Allegations against the trustee asserted ate insurance coverage for such trustee at
ever, each trust document is unique and failure to properly select and supervise the the outset of the trust document creation.
should be reviewed to determine the advisor to ensure that assets were invested Many trust documents may have provi-
trustee’s potential personal liability. in accordance with trust objectives. sions incorporated in the language, stipu-
Claims against any trustee can involve lating that trust assets pay for the coverage.
allegations such as mismanagement of BEST PRACTICES TO REDUCE The trustee then can assume designated
funds, failure to diversify assets, poor TRUSTEE RISKS responsibilities with protection of insur-
selection of professionals, accounting/ Best practices can offer advisors guidance ance for personal liability with respect
tax errors, unfair or improper distribu- on mitigating exposure to any individual to negligent mismanagement allegations
tions and conflict of interest. A trustee acting as a trustee. For example, docu- and, in some instances, claims of fraud.
also can be sued by creditors, charities mentation should state the purpose of the Remember: Trustee liability insur-
or government agencies acting on behalf trust, trustee qualifications, trustee com- ance can instill motivational inducement
of the beneficiaries. pensation and procedures for the appoint- and offer peace of mind for any indi-
Also, perceived breach of trust asser- ment, removal or replacement of a trustee. vidual assuming the role of trustee.
tions for resultant financial loss are Trust language also should delineate
brought against the trustee personally. clearly the duties of a trustee and the Steven F. Goldman is division president of
Unlike an employee of a professional ser- terms of distribution of held assets that Chubb’s North America Financial Lines divi-
vices organization, the trustee is typical- may include equity/fixed income invest- sion. He can be reached at steven.goldman@ Adobe Stock
ly not afforded protection or indemnified ments, real estate or other property. chubb.com.

46 INVESTMENT ADVISOR DECEMBER 2021 | ThinkAdvisor.com