When can investment losses make a trustee personally liable?
Key takeaway
Trustees are not personally liable for investment losses solely because an investment fell in value or failed to earn a profit. Liability depends on whether the loss resulted from a breach of trust or a failure to meet applicable investment duties. For owners whose businesses, real estate or private investments are held in trust, the governing state's rule and the trust portfolio's overall management matter.
A loss alone is not enough for liability
Texas and Tennessee rules limit liability for loss or depreciation, or for failing to make a profit, when there is no breach of trust or failure to perform required duties.
Colorado law states that a trustee must account for profit from administering a trust even without a breach, while loss or depreciation without a breach does not create liability for the loss or for failing to make a profit.
The whole portfolio can matter
A portfolio's overall performance can matter when an investment loss is reviewed.
Rhode Island law evaluates individual investment decisions in the context of the whole portfolio and an overall strategy with risk and return objectives suited to the trust. The evaluation does not treat each decision in isolation.
The decision is judged in context
The circumstances when the trustee acted can matter. Utah law evaluates compliance with the prudent investor rule based on the facts and circumstances at that time, not with hindsight.
Practitioners describe a similar focus on the decision-making record. Investment decisions may be defensible against breach claims when they were reasonable and well supported, even if the results were unfavorable. Another practitioners say poor performance alone may not create liability where reasonable care and an appropriate strategy were used under the prudent investor rule in jurisdictions that adopted it.