Trusts are very useful in estate planning. Many families in California use them as a way to ensure that assets are passed on quickly and smoothly after a death. However, trustees need to be aware that their role can leave them open to lawsuits. That’s true even if they’re a professional, like a lawyer, who carries malpractice insurance. Understanding the risks is a great way of protecting against them.
The structure of a trust
Trusts have a three-way structure. They are set up by a grantor, who puts assets into the new instrument. They are managed for a beneficiary, who will one day receive the assets in the trust. The management is done by a trustee, who has a fiduciary responsibility to put the beneficiary’s needs before their own.
In family estate planning, sometimes these roles overlap. One of the children who is a beneficiary of the trust may also act as the trustee. This is a genuine conflict of interest. Even if the trustee does succeed in putting their own concerns aside, they still may be the target of second-guessing by other family members. Suspicion and bad feelings in a family can eventually lead to estate litigation.
Even when the trustee is a professional with insurance, they too might make missteps. Professional trustees may mishandle assets, fail to be as tax-efficient as possible or even deliberately mismanage a trust. And they won’t be protected from these claims by their malpractice insurance. When gauging how knowledgeable a possible trustee is, it’s a good idea to ask if they have errors and omissions insurance.