Why do I need trustee liability insurance?
Many people who agree to become trustees are unaware that trustee liability insurance is available, or for that matter, the reasons they may need it. So, before describing what trustee liability insurance is and the important protection it provides, let’s first review the obligations a professional trustee has to the trust’s beneficiaries.
Simply put, a trustee is charged with safeguarding assets/monies left to beneficiaries, and making certain that these assets are used according to the wishes of the grantor, that is, the individual who set up the trust. Grantors often appoint individuals with whom they are close as trustees—people they can, well, trust. So, a person may think, “I was friends with Bob Smith for 30 years. I helped raise his son, Bob Smith Jr. I’d be happy tobe his trustee.”
But what people may not understand or anticipate when they agree to assume this responsibility is that these situations can go sideways. For example, the trustee might think: “Bob Jr. has plenty of money, as it is. I’m justmanaging the rest of it according to his father’s wishes.” And that’s true enough. Indeed, Bob Smith Sr., like most grantors, likely chose to allow his assets to be disbursed at the sole discretion of the trustee—that is, you.
But beneficiaries sometimes disagree with their trustee as to what constitutes good management or timely disbursement of those assets; and when they do, they may file suit.
Trust beneficiaries sometimes disagree with their trustee as to what constitutes timely disbursement and may file suit.
For example, the trustee may invest money in a five-year CD. But that could make the money unavailable to the beneficiary, who needs cash now to invest in a business. Or, the funds may be available, but the trustee decides against a beneficiary investing in a nightclub at age 25 because he or she has no prior experience in the entertainment or nightlife industries. And, so, to get the funding, the beneficiary brings suit against the trustee for failure to disburse funds.
In short, even with a highly professional trustee, error or omission lawsuits can and do happen. What trustee liability insurance does is protect the trustee and anyone who assisted him or her, in the event of a suit. Typically, this insurance covers both court costs and any settlements, up to the amount of the policy.
The next question, then, is, if you become a trustee, how much coverage is enough for you? Trustee liability insurance is available up to $25 million. Of course, the size of the assets in the trust drives the level of the limits purchased. Most common are limits from $1 million to $3 million. Trusts at the $10 million level are usually complex, multi-million dollar trusts involving such matters as the liquidation of a large company to pay off creditors, or large pay-out trusts being monitored by the government (think: BP oil spill).
As to what trustee liability insurance costs, our minimum premium is around $5,000, and that is only for the smallest of trusts. Usually, a $1 million limit carries a $10,000 retention, and pricing falls between $7,000 and $10,000. When the assets amount to $75 million to $100 million, premiums may rise above $10,000. However, whatever the asset levels, if a grantor creates multiple trusts, say, for children and grandchildren, and appoints only one trustee, a single policy will suffice.
Should a good friend call on you to become his or her trustee, we would not discourage you from accepting the honor. But we would encourage you to be realistic about the possibility of conflict with beneficiaries and to be prepared with suitable trustee liability insurance.
Mitchell Freedman is providing insurance services through NFP Property & Casualty Services, Inc., doing business in California as NFP Property & Casualty Insurance Services, Inc., License # 0F15715.
This article was originally published in the April/May 2016 issue of Worth.