Does an exculpatory clause protect a trustee from liability?
Key takeaway
An exculpatory clause can limit a trustee's liability, but its effect depends on the clause and the trustee's conduct. For owners who place a business, real estate or private investments in trust, court decisions describe limits involving bad faith, self-dealing, reckless indifference and fiduciary duties that cannot be waived. A clause does not erase every basis for liability.
Trustee conduct can limit the clause
An exculpatory clause does not shield a trustee from every form of conduct. A New York Surrogate's Court observed that an exoneration clause did not shield a lifetime trust trustee guilty of wrongful negligence, impermissible self-dealing, bad faith or reckless indifference.
A Texas report describes a trust provision as ineffective to relieve a trustee of liability for action taken in bad faith, intentionally adverse, or with reckless indifference to a beneficiary's interests.
Texas fiduciary duties have statutory limits
Texas statutory limits can prevent waiver of fiduciary duties. A court of appeals held that a trustee owed fiduciary duties that cannot be waived under sections 111.0035 and 114.007. The statutory changes modified an earlier holding.
The drafting trustee's role can matter
A trustee's involvement in putting an exculpatory clause into the trust can affect how the clause is treated. Practitioners describe a negative presumption against enforcement where the trustee participated in inserting the clause.
Trust and estate practitioners describe difficulty proving that the settlor understood the clause after the settlor's death.
Texas practitioners say an exculpatory clause may be attacked entirely if the drafting attorney is also trustee. Practitioners also describe a possible attack when the drafter represents the institution serving as trustee, while noting that no Texas decision addresses that point.