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Why do I need trustee liability insurance?

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Many people who agree to become trustees are unaware that trustee liability insurance is available to them—or, for that matter, that there are good reasons why they may need it.

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 an individual (or individuals) and making certain that those assets are used according to the wishes of the grantor—that is, the person who set up the trust.

Grantors often appoint as trustees those with whom they are close, people they can, well, trust. So, someone who’s been asked to fill the trustee role might think, “I have been friends with Bob Smith for 30 years. I helped raise his son, Bob Smith Jr. I’d be happy to be his trustee.”

But what this prospective trustee might not understand or anticipate when agreeing to assume this role is that these situations can go sideways: “Bob Jr.,” the prospective trustee thinks to himself, reconsidering the request, “has plenty of money as it is. I’m just managing the rest of it according to his father’s wishes.”

Now, that’s true enough, and Bob Smith Sr., like most grantors, likely chose to allow his assets to be disbursed at the sole direction of the trustee—that is, you.

However, beneficiaries sometimes disagree with their trustees as to what constitutes good management or timely disbursement of those assets, and when they do, they 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 might be available, but the trustee decides against the beneficiary investing in a nightclub at age 25 when he or she has no prior experience in the entertainment or night life industries. To get the funding, the beneficiary brings suit against the trustee for failure to disburse the 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 the trustee, in the event of litigation. Typically, the insurance covers both the court costs and any settlements, up to the amount of the policy.

So, 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. The most common limits range from $1 million to $3 million. Trusts at the $10 million level are usually complex, multimillion-dollar situations involving such matters as the liquidation of a large company to pay off creditors, or large pay out trusts that are being monitored by the government (think BP oil spill).

As to the cost for trustee liability insurance, 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 go as high as $75 million to $100 million, premiums may rise above $10,000. However, whatever the asset levels are, if a grantor creates multiple trusts, say for children and grandchildren, and appoints only one trustee, a single policy will suffice.

The lesson here? 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.

Risk & InsuranceWealth Management

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