Trustee Liability: What Trustees Should Know

Trustee liability is the flip side of the crucial role of trustee. When someone accepts control over a trust, they also accept legal duties—and consequences if things go wrong. In plain terms, trustee liability arises when a trustee’s actions (or inaction) breach those duties and cause harm to the trust or others.

Trustee liability comes in two forms: 

1. To beneficiaries. For breach of trust (e.g., poor investing, self‑dealing, or failing to inform and account).
2. To third parties. For contracts or torts connected to trust property. The Uniform Trust Code (UTC §1010) generally shields trustees from personal liability on properly disclosed contracts, but tort liability can attach if the trustee is personally at fault. 

Understanding the core duties of being a trustee makes liability easier to spot:

• Duty of loyalty. No self‑dealing, no undisclosed conflicts, and no using trust assets for personal gain.
• Duty of prudence. Investing and managing as a prudent investor would. Under the Uniform Prudent Investor Act (UPIA), that includes diversification unless special circumstances justify concentration.
• Duty of impartiality. Treating current and future beneficiaries even‑handedly.
• Duty to segregate and safeguard assets. Keeping trust property separate and properly titled.
• Duty to inform and account. Providing information and periodic reports so beneficiaries can see what’s happening. 

Common Actions That Can Create Exposure

Commingling Funds

Example: A trustee deposits rent from a trust duplex into a personal checking account “just for a week.” A beneficiary later challenges several withdrawals. Courts often view commingling as a serious breach and can order reimbursement plus interest (a “surcharge”). 

Failure To Diversify

Example: A trust holds a large position in a single stock gifted by the grantor. The trustee leaves it untouched. The stock drops 50%. Unless the trust expressly permits concentration or special circumstances justify it, UPIA expects diversification; lack of action can trigger trustee liability. 

Self-Dealing or Conflicts

Example: A trustee buys a trust‑owned cabin “at a fair price” without beneficiary consent. Even at market value, undisclosed self‑dealing can be a breach of loyalty that invites damages or removal. 

Late or Inaccurate Tax Filings

Trusts with income generally file Form 1041, and beneficiaries may receive Schedule K‑1. Missing filings or misreporting income can create penalties for the trust and fallout for beneficiaries—both fertile ground for trustee liability claims. 

Property and Tort Issues

Example: A visitor is injured on trust‑owned property. Under UTC‑style rules, a trustee isn’t personally liable for torts unless personally at fault (e.g., ignoring obvious hazards). Liability is typically pursued against the trustee in a fiduciary capacity, tapping trust assets first. 

Poor Communication

Silence breeds suspicion. Trustees who ignore reasonable requests for information invite court‑ordered accountings and, sometimes, reductions in compensation. 

The Consequences of Trustee Liability

When courts find a breach, available remedies are broad under UTC‑style statutes:

• Surcharge (money damages) to restore losses or disgorge gains.
• Orders to perform or injunctions to stop a threatened breach.
• Accounting and records turnover.
• Reduction or denial of trustee compensation.
• Removal of the trustee and appointment of a successor. In some settings, fee disgorgement or even punitive‑style remedies can come into play. 

Quick snapshot: A trustee who failed to diversify and then refused to answer emails for months could face a surcharge for losses. They could also be ordered to produce a full accounting, have their fees reduced, or be removed.

Personal Vs. Fiduciary Capacity (and Why Wording Matters)

A frequent question in trustee liability disputes is whether the trustee is on the hook personally or only as trustee. It depends.

Contract Signature

If the trustee signs “Jane Smith, Trustee of the Smith Family Trust,” UTC §1010 typically avoids personal liability on that contract (unless the contract says otherwise). The claim proceeds against the trustee in a fiduciary capacity, reaching trust assets. Omit that fiduciary title, however, and the trustee may personally guarantee the obligation. 

Torts and Property Control

Personal liability for torts or obligations arising from ownership/control of trust property (including environmental issues) usually requires personal fault. Think negligent maintenance, ignored safety issues, or willful violations. 

Taxes: A Quiet Source of Trustee Liability

For trusts that earn income, trustees must file Form 1041 and issue K-1s reflecting taxable amounts to beneficiaries. Trustees also ensure that any combined or elective filings allocate and pay the correct share of tax. Missed filings, misallocated income, or unpaid balances can spiral into penalties and disputes with beneficiaries. 

Example: A trustee fails to issue K‑1s on time. Beneficiaries file late and incur penalties. They then seek reimbursement from the trust—and potentially a surcharge against the trustee—for administrative missteps.

Practical Ways Trustees Reduce Risk

These aren’t legal directives—just common, low‑drama habits that tend to keep trustees out of hot water:

• Titling everything correctly. Signing contracts and open accounts with the full fiduciary title.
• Documenting decisions. Noting the goal, options considered, and why the trustee chose a path—especially for investment and distribution calls.
• Diversifying thoughtfully. 
• Separating and reconciling with no commingling. Maintaining ledgers and bank statements that tie out.
• Communicating on a cadence. Setting expectations for reports and responding to reasonable questions. 
• Minding deadlines—including tax filing dates, property tax due dates, insurance renewals, and distribution schedules—to avoid avoidable penalties. 

A Final Word on Trustee Liability

Trustee liability isn’t about perfection. It’s about process. Trustees who act loyally, document carefully, communicate clearly, and meet routine obligations put themselves on solid ground. But if something does go wrong, courts have a wide range of tools—from injunctions to surcharge to removal—to bring a trust back on course.