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Limited Liability in Trust Context: A Black-Letter Synopsis
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As to the parties to a trust relationship, there are two categories of limited liability
apropos trust administration: internal and external. Fiduciary liabilities of the parties vis-à-vis
one another are internal. Said parties’ legal liabilities incident to trustee’s contracts with and torts
perpetrated against third parties are external. Our fact pattern: Funded irrevocable inter vivos
trust. Settlor-donor had reserved no powers, no beneficial interest. Entrustment non-fraudulent.
Referenced handbook is Loring and Rounds: A Trustee’s Handbook (2023), available for
purchase at https://law-store.wolterskluwer.com/s/product/loring-rounds-trustees-hanbook-
2023e/01t4R00000Ojr97QAB.
Internal. A trust being a fiduciary relationship with respect to property, all fiduciary
duties run from trustee to current and future beneficiaries, as well as designated beneficiaries of
remainder in corpus, whether an equitable property interest vested or contingent. Beneficiaries
owe trustee no fiduciary duties back. §5.6 Handbook. A trustee’s fiduciary duties are extensive.
Chap. 6 Handbook. Penalties for breaches can be severe. Chap 7 Handbook. Exculpatory trust
terms purporting to cover intentional breaches unenforceable. §7.2.6 Handbook (See appendix
below). Internal fiduciary liability personal. Chap. 7 Handbook. Absent enforceable exculpation,
adverse economic consequences of a breach of trust borne by trustee, not trust estate. Beneficiary
owes other beneficiaries no fiduciary duties absent beneficiary’s participation in a breach of
trust, and vice versa. §5.6 Handbook. Whether trustee owes settlor fiduciary duties is
complicated. Chap. 4 Handbook.
External. Innocent trustees have enjoyed circuitous quasi limited liability as to third-
party claims in contract. The title-holding trustee was primarily on hook, but entitled to
indemnity from trust estate, unless thirty-party claims incident to a breach of trust. §7.3.1
Handbook. Too bad for trustee if trust estate impecunious. The trustee was/is always free
contractually to limit third-party recourse to entrusted assets. §7.3.2 Handbook. Nowadays an
innocent trustee not personally liable if fiduciary capacity had been disclosed in contract. UTC
§1010(a). As to liabilities of a USTEA “trust” (Uniform Statutory Trust Entity Act), third-party
recourse limited to trust assets. Today trust estate generally primarily and exclusively on hook
apropos tort liability, “unless trustee personally at fault.” §7.3.3 Handbook. Call this trustee
qualified limited liability.
Beneficiaries’ personal external legal liability incident to trustee’s contracts non-existent,
they not having legal title to entrusted assets. Hussey v. Arnold, 70 N.E. 87, 88 (Mass. 1904).
Trustee not their agent. Taylor v Mayo, 110 U.S. 330, 334-335 (1884). Nor are beneficiaries
personally liable to third parties for trustee’s external torts, whether or not trustee personally at
fault. Scott & Ascher §27.1. An exception to beneficiary limited liability has been when trust
terms vest in beneficiary power to control trust’s administration and disposition, e.g., revocable
inter vivos trust or nominee trust. §9.6 Handbook. Here innocent trustee’s external liability
limited. §9.6 Handbook. As to USTEA trusts, even an innocent “controlling” beneficiary’s
