I am on a personal mission to eradicate the use of exculpation clauses. Your Bay Area Trust may have an exculpation clause, but I bet you have no idea (1) the clause is even in your Trust, and (2) the absolute damage such clauses cause to Trust beneficiaries. Allow me to explain.
Under Probate Code section 16461, the Settlors are allowed to include a provision in a Trust that says the Trustee is NOT liable for any harms or damages he or she may cause so long as the Trustee did not act intentionally, in bad faith, in gross negligence, or recklessly. In other words, the Trustee gets a free pass for all (or nearly all) bad acts. Even if a Trustee does incur losses due to bad faith, gross neglicence, or recklessness, you better believe that the Trustee will argue that they acted merely negligently and therefore cannot be held liable because of the exculpation clause included in the Trust.
The Impact of Exculpation Clauses on Trust Beneficiaries
The good news is that Trustee exculpation only appies if the Trust document contains such a clause. The bad news is that many Trusts do contain such a clause. If you had the world’s best Trustee, and the worlds worst beneficiaries, then maybe an exculpation clause is right for you. But if you don’t, then run for the hills next time you see one of these clauses.
The problem is that exculpation allows a Trustee to violate some of the most basic duties he or she has to protect Trust assets, properly invest Trust assets, and property distribute Trust assets to the rightful beneficiaries. This is all basic stuff that we expect from any Trustee. When a Trustee violates one or all of these duties, he or she should be held liable for any damage that is caused. Yet an exculpation clause prevents that from happening. Worst yet, exculpation clauses provides a bad Trustee with a viable argument as to why he or she should not be held liable even for egregious wrongs.
Why You Should Avoid Exculpation Clauses in Trusts
Why would you place Trust in a person on the one hand, and then take away the beneficiaries ability to enforce that Trust on the other hand? It sounds good in theory, but it is an utter disaster in practice.
Many people do not know their Trust contains such a clause because it is not something that is well understood. Plus, most Bay Area Trusts have a lot of general provisions at the back of the document that few people have the time to read. Some estate planning lawyers strongly believe in using these clauses to protect Trustees, or believe that the clause will prevent litigation. But in my opinion, exculpation clauses cause far more harm than good. And unless you have thought out all of the potential future effects of such a clause, you should steer clear of using them.
The law of Trusts provides a great set of rules, expectations and liabilities for Trustees to follow. As long as the Trustee follows the rules, exculpation is not needed. So don’t use an exculpation clause.
