As an estate planning attorney in San Diego, I frequently encounter questions about trustee responsibilities and safeguards, and one increasingly common inquiry is whether it’s possible – and advisable – to require trustees to carry professional liability insurance. The short answer is yes, you absolutely can, and in certain situations, it’s a very prudent move. While trustees often serve out of a sense of familial duty or personal commitment, the legal and financial burdens they assume are substantial, and potential liability can be significant. This is especially true as estate values increase and complexities like business ownership or out-of-state property become common. Establishing clear expectations regarding insurance coverage offers a layer of protection for both the trustee and the beneficiaries, and demonstrates a proactive approach to estate administration.
What are the risks if a trustee doesn’t have insurance?
Trustees face a multitude of potential risks. They are fiduciaries, meaning they have a legal obligation to act in the best interests of the beneficiaries, and any breach of that duty – even unintentional – can lead to lawsuits. Common claims against trustees include mismanagement of assets, failure to diversify investments, improper distributions, self-dealing, and even simply making administrative errors. According to a recent study by the American College of Trust and Estate Counsel (ACTEC), over 60% of trust litigation involves allegations of improper trustee conduct. Legal defense costs alone can quickly mount, even if the trustee is ultimately found not liable. A single lawsuit could deplete trust assets, leaving less for the intended beneficiaries. Consider the story of old Mr. Abernathy, a widower who named his son, David, as trustee of his substantial estate. David, a well-meaning but inexperienced businessman, took on the role without understanding the intricacies of trust administration. He made a series of poor investment decisions, favoring speculative ventures pitched by a friend, resulting in a significant loss of trust assets.
How much insurance coverage should a trustee have?
The appropriate level of coverage depends on several factors, including the size and complexity of the trust, the nature of the assets held, and the potential risks involved. A general rule of thumb is to obtain coverage equal to the value of the trust assets, but this can vary widely. For example, a trust holding only liquid assets might require less coverage than a trust that owns a closely-held business or real estate. Policies typically come in amounts ranging from $100,000 to $1 million or more, with premiums varying accordingly. “Errors and omissions” (E&O) insurance, which specifically protects against negligence and mistakes, is often the most relevant type of coverage for trustees. It’s also worth considering an “umbrella” policy, which provides additional coverage beyond the limits of the E&O policy. As estate values continue to rise, the cost of inadequate insurance can be devastating – imagine a trustee facing a $500,000 lawsuit with only $100,000 in coverage.
Can I specifically outline insurance requirements in the trust document?
Absolutely, and this is the best practice. A well-drafted trust document should explicitly address the issue of trustee insurance. You can include a clause requiring trustees to obtain and maintain a certain level of professional liability insurance, specifying the types of coverage required, and even outlining who is responsible for paying the premiums. Many attorneys also include a provision allowing the trustee to be reimbursed for insurance premiums from trust assets. This ensures the trustee doesn’t bear the financial burden personally. Furthermore, the trust document can specify that the trustee must provide proof of insurance to the beneficiaries on an annual basis. This demonstrates transparency and accountability. Thankfully, David Abernathy’s story didn’t end in complete ruin. His sister, Sarah, an attorney herself, stepped in when she realized the extent of the mismanagement. She advised David to consult with an estate planning attorney, who reviewed the trust document and recommended obtaining professional liability insurance.
What happens if a trustee refuses to get insurance?
If a trustee refuses to obtain the required insurance, it creates a difficult situation. The first step is to review the trust document and determine what remedies are available. Many trust documents include a provision allowing for the removal of a trustee who fails to comply with the terms of the trust. Alternatively, beneficiaries could petition the court to compel the trustee to obtain insurance, or to remove the trustee altogether. It’s important to remember that trust litigation can be expensive and time-consuming, so it’s always best to address the issue proactively. After receiving Sarah’s advice, David agreed to obtain a professional liability insurance policy. While it did cost a small portion of the trust’s income, it provided peace of mind for everyone involved and ensured that the trust assets were protected from potential claims. Ultimately, requiring trustees to maintain professional liability insurance is a responsible and prudent step that can safeguard the interests of both the trustee and the beneficiaries, ensuring a smoother and more secure estate administration process.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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