A Strong Offense
A Stronger Defense
Many trustors want to give their trustees wide berth to administer the trust. In a lot of cases that makes sense because the trustee does not need someone second guessing every discretionary act taken during the life of a trust. One way a trustor may try to give a trustee room in administering the trust is by including an exculpatory clause in the trust that relieves the trustee from liability for actions that might otherwise be considered a breach of duty. Of course, trustees appreciate these kind of clauses. Some jurisdictions defer to these clauses; some do not. In Rafert v. Meyer, the Supreme Court of Nebraska invalidated a provision in a trust that provided that the trustee had no duty to pay the insurance premiums on 3 insurance policies that constituted the corpus of the trust, had no duty to notify the beneficiaries of nonpayment of such premiums, and had no liability for any nonpayment. This exculpatory clause went too far.
Taking the allegations of the amended complaint as true on a motion to dismiss, the trustee was also the attorney who had prepared the trust instrument. It was alleged that the trustee/attorney did not meet with the grantor to explain the provisions of the trust or who would be responsible for monitoring the insurance policies that the trust owned. The issues with the exculpatory clause came up because the trust held insurance policies in the total amount of $8.5 million. It was alleged that the premiums were paid in 2009, but in 2010 the policies lapsed for nonpayment. According to the allegations of the complaint, the trustee had provided a false address to the insurer. The grantor, the trustee, and the beneficiaries did not receive notice from the insurers until 2012 that the policies had lapsed.
The trustee claimed that the exculpatory clause in the trust relieved him from liability and the district court agreed on the grounds that the terms of the trust imposed no duty on the trustee to pay the premiums, the trustee did not have to notify anyone of nonpayment of premiums, and the trustee had no responsibility for nonpayment of premiums. The Nebraska Supreme Court, however, reversed and remanded for further proceedings.
The court began its analysis by recognizing the common law floor for exculpatory clauses in trusts. An exculpatory clause will not excuse a trustee from liability for acts performed in bad faith or gross negligence. The court then turned to the Nebraska Uniform Trust Code to look at the limits of clauses relieving trustees from their duties. In Nebraska, the terms of a trust can trump the Nebraska Uniform Trust Code except for certain subjects, which include:
- the duty of a trustee to act in good faith (codifying the common law floor for exculpatory clauses and grants of absolute discretion);
- the duty to keep the qualified beneficiaries reasonably informed about the administration of the trust and of material facts necessary for them to protect their interests; and
- the effect of an exculpatory term.
Thus, while the Nebraska Uniform Trust Code provides deference to the terms of a trust, that deference will not extend to all of the trustee’s duties. The trustee/attorney, therefore, could not abrogate these statutory duties through the trust’s exculpatory clause.