Considerations in Changing Trustees: Liability/Accounting
Today’s blog is the third in my series this week dealing with considerations to take into account when changing trustees.
Whether a trustee or co-trustees have properly administered a trust is obviously a crucial factor in negotiating the removal and replacement of a trustee, and will effect the manner in which a new trustee may be appointed.
In considering a trustee’s potential liability in respect of his or her administration of the trust, the trustees and beneficiaries ought to consider the trustee’s conduct, whether that conduct met the standard of care required, and if not, whether the conduct is exonerated by statute or the terms of the trust.
When a trustee breaches his duty, he may be liable to the beneficiaries for any losses that occur as a result of the breach. When such a breach occurs, the Court, further to s. 35 of the Trustee Act, has the discretion to relieve the trustee of liability in cases where it believes that the trustee acted “honestly and reasonably, and ought fairly to be excused.”
Trustees, outgoing and incoming alike, ought also to carefully review the terms of the trust as the trust may contain provisions that limit the liability of the trustee.
Exculpatory clauses may limit the extent of the trustee’s personal liability to the value of the assets of the trust instrument and/or may protect the trustee by raising the level of culpability required to be found personally liable.
A trustee should be cautious, however, if he or she is relying on an exculpatory clause in a trust to exonerate him or her from liability as such clauses may be held to be invalid, especially where they are broad, or attempt to completely exonerate any and all conduct of the trustee, including liability for acts of gross negligence, intentional wrongdoing, fraud or dishonesty.
The best way, however, for an outgoing trustee (and new trustee) to limit any liability that may be visited upon him or her as a result of the administration of the trust to the date of the retirement, removal and replacement is for the outgoing trustee and his or her co-trustees, if any, to pass their accounts. Assuming the accounts are passed, not only will the new trustee know the “starting numbers” and the assets/liabilities for the future administration of the trust (that is start with a clean slate), but the outgoing trustee will have been afforded the proper protection of the Court order.
Thanks for reading. Craig