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Trusts • Trustee Liabilities
TRUSTS#043
Legal Definition
Without proper precaution, a trustee is personally liable to third parties for contracts entered into with them during the course of the trust administration, unless the contract says otherwise. At common law, a trustee is entitled to indemnification from the trust assets if they acted within their powers as trustee and are not personally at fault. Under the modern view, a trustee must be sued in their representative capacity if the other party knew they acted for the purpose of the trust.
Plain English Explanation
Trustees often engage in contracts with third parties while managing trusts. From engaging with attorneys to assist with legal issues to hiring property managers to maintain rental buildings that are owned by the trust, a trustee needs to be extra careful that the contract they engage with does not result in becoming personally liable under the agreement.
The best way to accomplish this is to make extra sure the contract is super clear that the third party is engaging with the trust and the trustee is merely there to facilitate the arrangement.
The best way to accomplish this is to make extra sure the contract is super clear that the third party is engaging with the trust and the trustee is merely there to facilitate the arrangement.
Hypothetical
Hypo 1: Bob is the trustee of Sam's trust. Bob contracts with Amy to build a house for Sam on a parcel owned by the trust. Nowhere in the contract is the trust named or identified. Upon completion of the build, Amy is owed $100,000. Amy sues Bob to collect. Result: Bob is screwed. Amy has no reason to believe she isn't directly contracting with Bob, and, thus, Bob is liable to Amy. Whether or not Bob can later recover from the trust for any amount paid to Amy will depend on whether the trust had an indemnification clause in it. Bob may be on the hook.
Hypo 2: Bob is the trustee of Sam's trust. Bob contracts with Amy to build a house for Sam on a parcel owned by the trust. The contract states that it is governed by the terms of Sam's Trust. Result: This would clearly put Amy on notice, which would alleviate Bob of liability.
Hypo 2: Bob is the trustee of Sam's trust. Bob contracts with Amy to build a house for Sam on a parcel owned by the trust. The contract states that it is governed by the terms of Sam's Trust. Result: This would clearly put Amy on notice, which would alleviate Bob of liability.
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