9.6 MANAGING FIDUCIARY RISK
9.601 Surcharge Litigation.
Surcharge litigation, in which a beneficiary attempts to "surcharge" or assert a claim against a trustee, has become more common. In addition to traditional surcharge and other causes of action against fiduciaries, new causes of action are developing that may result in judgments that far exceed the actual damages suffered. Among the reasons for the rise in beneficiary claims and litigation are rapidly changing tax laws, increasing beneficiary expectations, complexity of investment products and investment volatility, and increased aggressiveness by lawyers. Generally, a claim by a beneficiary against a fiduciary will involve an alleged breach of a duty the fiduciary owes the beneficiaries. Specific areas of risk to fiduciaries include claims that arise out of:
1. Conflicts of interest;
2. Improper tax planning;
3. Improper investments;
4. Difficult assets; or
5. Difficult beneficiaries.
9.602 Assessing Risk.
Fiduciary risk should be evaluated both before the appointment is accepted and throughout the administration, especially when a significant transaction or distribution is contemplated. An attorney should consider declining appointment as a trustee if the fiduciary risk appears unacceptable.
9.603 Basics of Managing Risk.
In addition to the tools provided under the VUTC, the trustee should be mindful of common sense and well-established practices for managing potential risks, which include:
1. Reading the governing instrument carefully and often, and seek a legal opinion or court guidance for unclear or novel provisions;
2. Communicating with beneficiaries and co-fiduciaries, and obtain consents and releases as appropriate;
3. Using "tickler" systems to avoid missing tax or other deadlines;
4. Considering carefully the timing of distributions and the use of refunding agreements;
5. Being careful where co-fiduciaries are involved;
6. Being mindful of the identity of the purchaser of trust assets;
7. Being sensitive to conflicts of interest;
8. Not being afraid to seek court approval or guidance for protection;
9. Consulting with experts and counsel;
10. Carefully monitoring investments;
11. Maintaining detailed records; and
12. Considering resignation of the trusteeship if appropriate. 1099
9.604 Managing Fiduciary Risk Under the VUTC.
The VUTC provides several additional tools for managing fiduciary risk.
A. Nonjudicial Settlement Agreements.
Interested persons may enter into nonjudicial settlement agreements with respect to any matter involving a trust that does not violate a material purpose of the...
