United States: Is There A Trustee Get Out Of Jail Free Card? The Use Of Exculpatory Clauses In Trust Documents In Texas

I. INTRODUCTION

Settlors, trustees, and beneficiaries in Texas often insert clauses into trust documents that benefit the trustee and free the trustee to take certain actions without potential liability. For example, a settlor may want to limit a trustee's liability for negligent actions, especially where the settlor designates himself or herself as the initial trustee. The beneficiaries may want to relieve the trustee for any risk associated with maintaining a family business or farm as an asset in the trust even though doing so may violate a duty to diversify. There are many different scenarios where parties may want to insert clauses to limit a trustee's duty or liability

This article is intended to describe the use and enforceability of exculpatory clauses in Texas. The use and enforceability of this type of clause is somewhat controversial in that a trustee owes high fiduciary duties to beneficiaries. Removing liability for certain conduct or removing certain duties may transform a trustee position into something less than a fiduciary relationship. Public policy may not allow that to happen.

This article explores the historical enforcement of exculpatory clauses in trusts in Texas, the current Texas statutes that impact their enforcement, procedural issues that arise in litigating exculpatory clauses, and recent precedent applying those clauses to disputes. ¹

II. TRUSTEES' FIDUCIARY DUTIES

To understand whether exculpatory clauses should be enforced between a trustee and a beneficiary, one has to understand the broad scope of the fiduciary relationship. A trustee is held to a high fiduciary standard. Ditta v. Conte , 298 S.W.3d 187, 191 (Tex. 2009). The fiduciary relationship exists between the trustee and the trust's beneficiaries, and the trustee must not breach or violate this relationship. Slay v. Burnett Trust, 143 Tex. 621, 187 S.W.2d 377, 387-88 (Tex. 1945); RESTATEMENT (SECOND) OF TRUSTS § 170 CMT. A (1959); G. BOGERT, TRUSTS AND TRUSTEES § 543, at 217-18 (2d ed. rev. 1993). The fiduciary relationship comes with many high standards, including loyalty and utmost good faith. Kinzbach Tool Co. v. Corbett-Wallce Corp., 160 S.W.2d 509, 512 (Tex. 1942). At all times, a fiduciary must act with integrity of the strictest kind. Hartford Cas. Ins. v. Walker Cty. Agency, Inc., 808 S.W.2d 681, 687-88 (Tex. App— Corpus Christi 1991, no writ). The Texas Supreme Court has described the high standards that a trustee owes the beneficiaries of a trust: "A trust is not a legal entity; rather it is a 'fiduciary relationship with respect to property.' High fiduciary standards are imposed upon trustees, who must handle trust property solely for the beneficiaries' benefit. A fiduciary 'occupies a position of peculiar confidence towards another.'" Ditta, at 191. A trustee owes a trust beneficiary an unwavering duty of good faith, loyalty, and fidelity over the trust's affairs and its corpus. Herschbach v. City of Corpus Christi, 883 S.W.2d 720, 735 (Tex. App.—Corpus Christi 1994, writ denied) (citing Ames v. Ames, 757 S.W.2d 468, 476 (Tex. App.—Beaumont 1988), modified, 776 S.W.2d 154 (Tex. 1989)). To uphold its duty of loyalty, a trustee must meet a sole-interest standard and handle trust property solely for the benefit of the beneficiaries. Tex. Prop. Code §117.007; InterFirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 898 (Tex. App.—Texarkana 1987, no writ). A trustee has a duty to refrain from self-dealing with trust assets. Tex. Prop. Code Ann. § 113.053(a).

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Footnote

1This article discusses the use of exculpatory clauses in trust documents that impact a trustee. There is uncertainty in Texas regarding whether an exculpatory clause in a will that purports to protect an executor or administrator of an estate is viewed the same as a trust. See Devillier v. Leonards, No. 01- 20-00223-CV, 2020 Tex. App. LEXIS 10485 (Tex. App.—Houston [1st Dist.] December 31, 2020) (dissenting opinion on court's refusal to accept a permissive appeal).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.