Exculpatory clause

How it works

An exculpatory clause sets limits on trustee liability within the trust instrument. Texas practitioners describe such clauses as relieving a trustee only to the extent the text clearly provides, and reports that Texas courts strictly construe them.

Some conduct falls outside those limits under the laws of particular states. Wyoming, Vermont and Utah rules do not allow a trust term to relieve a trustee for breach involving bad faith or reckless indifference. The Wyoming rule also addresses insertion through abuse of a fiduciary or confidential relationship with the settlor.

Where it shows up for owners of businesses, real estate and private investments

An exculpatory clause can appear in a trust agreement that names a trustee to manage property held in trust. For an owner placing a business interest, real estate or private investments in a trust, the clause describes limits on that trustee's liability in carrying out the role.

The clause's wording and preparation can matter under state-specific rules. Virginia treats a clause drafted or caused to be drafted by the trustee as invalid as an abuse of a confidential relationship unless the trustee proves adequate communication to the settlor. Wyoming also addresses abuse of a fiduciary or confidential relationship in inserting a clause.

Points that are easy to confuse

An exculpatory clause is part of the trust instrument, while a release is a later agreement between a trustee and beneficiary. The two are different mechanisms for addressing trustee liability.

A clause limiting liability does not have the same effect in every state or for every type of conduct. New York, California, Texas, Wyoming, Virginia, Vermont and Utah each have state-specific limits or interpretation. General practitioners say a clause may raise a claimant's burden, but that description is not a rule for every state.

Common questions