The Importance of Indemnification and Protection From Legal Liability When Becoming a Trustee of a Trust (Part 1 of a 2 Part Series)

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Breach of Fiduciary Duty Attorney

An unpublished opinion from the Appellate Division of our State Court highlights one of the issues a trustee must be aware of before accepting an appointment as a trustee.  Is there a provision in the trust that allows the trustee to be legally exempt from liability for making investments if there is a conflict of interest, also known as breaching the duty of loyalty?  If not, and the trustee invests trust money into an organization that he or she partially controls or has a relative that controls it, he or she could be on the hook if that investment goes bad.  While he or she might be a trustee for a family that he or she knows and gets along with, things change. A trustee can still be sued.  And it’s amazing how the loss of money, particularly in the case of losing your family’s money, by making poor investments can deteriorate relationships with others.  In the case I am about to discuss, In the Matter of the May 1, 1992 and December 29, 1992 Mark Family Trusts, the trustee is kicking himself for not looking into this issue further.

Here the Petitioner created 2 irrevocable trusts for the benefit of her three children. She named a trustee for both trusts.  This person then created 3 sub-trusts with the money, with each trust benefitting one of the petitioner’s 3 children.  The funds from each individual trust were given to a son, to invest in his hedge fund.  This son had no formal experience related to trading securities, yet he took the money and took a 2% management fee from the total value of the trust investments and 20% of all the profits generated.  In 2010, the hedge fund made a return of 14.53%.  This led the trustee to increase the investment amount in the hedge fund.  Before doing this, he informed the owner of the trust funds what he was doing and then disclosed that his son ran the hedge fund.  The following year the fund suffered a 14.16% loss, decreasing the total contribution by $336,010.  Between January 2012 and November 2014, $869,702 of the money invested was lost.  Nonetheless, the value of the trusts grew by about $6 million dollars through continued donations by the trust creator.  By 2015 the Grantor wanted the trustee to pull the money out of the fund, but the trustee refused.  She then sought his removal as trustee.

In my next post we’ll continue the story.

To discuss your NJ Trust & Estate Litigation matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.