|Shield = protection (I try to be creative)|
When a person has been told that they have been nominated as the successor trustee of a living trust, they often ask "what are my responsibilities" and "how much risk or liability is involved?" The former question was addressed in a previous blog post. As for the latter question, many prospective trustees would like to insulate themselves from liability because humans are fallible and thus mistakes will occur. One method that a prospective trustee can be shielded from liability is through an exculpatory clause found in the trust. The term "exculpatory" is legal speak for clearing somebody of liability.
The consequence of an exculpatory clause is that the trustee will generally not be held liable for the misdeeds or errors they commit while trustee. However, there are limitations as to what mistakes a trustee will be held accountable. California law prohibits clauses "relieve the trustee of liability (1) for breach of trust committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary, or (2) for any profit that the trustee derives from a breach of trust." Prob C § 16461. The following examples distinguish between what an exculpatory clause would apply to and what it would not.
Samuel, a widower, drafted a trust for the benefit of his son and daughter, Sven and Donna. Samuel is unsure about Sven and Donna's temperament and decides to name his long-time neighbor Theo as the successor trustee. To assure Theo that he will not be undertaking a perilous position, Samuel has his attorney write into the trust a sweeping exculpatory clause that reflects Prob C § 16461. When Samuel passes away years later, Theo steps into the shoes of the trustee. The sole trust asset is the family home that Theo is to hold in trust for Samuel's kids until they reach age 35
Years go by and the pool falls into disrepair. Theo decides to fill-in the pool by using a licensed contractor instead of renovating it. Sven and Donna become very agitated over this because they have fond memories of their youth swimming in that pool. They tell Theo that they intend to sue him for breach of trust because removal of the pool will adversely affect the amount of rent the house can reap. Theo counters by saying that a pool is a difficult amenity to manage and that the cost to renovate the pool will not be off-set by the increase in rent of a house with a pool, as opposed to without a pool, will garner. Unfazed by Theo's sensible arguments, Sven and Donna sue Theo for breach of trust. Ultimately Theo prevails because he cites the exculpatory clause in the trust and the judge agrees. That is, the judge concurs that this was a reasonable decision by Theo because pools are expensive to maintain, renovation costs would be appreciable and he used a licensed professional to complete the job.
Now assume the same facts as above but now Theo follows a different path for removing the pool. Instead of using a licensed contractor, Theo retains the help of his handyman friend, Al. Al lost his contractor's license years ago and Theo is unaware of this. Al tells Theo that if he hires a licensed contractor, removal will require a permitting process and city ordinances require removal of the pool debris, a cost of roughly $15,000 in Al's mind. However, Al tells Theo that he can "remove" the pool through other means. Instead of removing the pool, Al will fill-in the pool with concrete and spread dirt over the top to conceal it. Theo is concerned by this unlawful procedure but thinks that the planning department will never find out about it. Theo hires Al to complete the job for $3,000 and Al kick back $500 to Theo for hiring him in tough economic times. Eventually, Sven and Donna become aware that Theo used an unlicensed contractor to perform the job and sue Theo for breach of trust. Again, Theo introduces the exculpatory clause into evidence to prove his innocence. However, the judge is not so forgiving this time around. Here, the judge holds that a prudent person would not hire an unlicensed contractor and would not to remove a pool without permits after being told it would be required, and to cap it off, the trustee received a profit from his misdeed. Thus, the judge would find, despite the exculpatory clause, that Theo committed a breach of trust for intentionally hiring an unlicensed contractor, not obtaining required permits and profiting from this collusion.