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

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

In Part 1 of this post I discussed an issue that is important for a trustee to be aware of before accepting the appointment as trustee. I also discussed a case where the trustee regretted not looking into this issue prior to accepting appointment as trustee of a trust. In this post I will be reviewing the conclusion of this case in hopes that it will prevent the same thing from happening to you.

The trial court found that the trust agreement allowed the trustee to do what he did, even if the investments were made to his son’s company.  But the Appellate Court reversed.

Here’s why. Trustees are prohibited from self-dealing, and this includes transactions with a spouse, employees, and others with closely identified interests.  It found the trustees investment in his son’s hedge fund to be a self-dealing transaction.  But liability for self-dealing can be relaxed if there is a provision that allows self-dealing in the trust agreement.  It needs to be explicitly provided, and after reading the language of the agreement, the court found the agreement to be without such a clause that specifically allowed for the future to make transactions that are of a conflict of interest without incurring liability.  The clauses quoted by the trial court in finding that the trustee could do what he did was not explicit enough to relax this duty, and so the Appellate Division reversed and found the trust legally liable for the economic loss.

As a trustee, you may say this does not apply to you because you don’t have a son that runs a hedge fund that you want to invest in.  But the indemnification provides a trustee with the ability to work with some level of autonomy without having the beneficiary or the trust creator constantly looking over his/her shoulder to make sure he/she is doing the right thing.  It doesn’t mean you shouldn’t work with the beneficiary or the trust creator to ensure that you are investing the way the creator of the trust envisioned.  But having this provision allows you one less headache should you become a trustee in that you won’t always be dragged to court should you make a bad deal or decision with someone who you may have a possible conflict of interest.

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.