Are Trustees Liable for Paying Trust Debts?

As estate planning attorneys that both help establish trusts and administer them after death, an understandably common concern we hear is about how to handle outstanding debts. Is the trustee ever personally liable and what if there just isn’t enough money in the estate to cover various debts?

Who is Liable for Trust Debts?

To begin, trustees are not personally responsible for the debts of a trust such as a mortgage on a trust property, outstanding loan from a promissory note or even medical and utility bills. You, as trustee, do not have to pay these bills personally. As one would likely guess, the trust itself is responsible for its own debts. The trustee’s role is to manage the trust, not personally bankroll it. That means, so long as the trust has cashflow, then those funds are to be used to address the trust’s debts and expenses, with the trustee writing the checks.

What if the Trustee Cannot Access Trust Money?

However, the complications arise when the trust itself doesn’t have cashflow – either because the trustee has yet to gain access to accounts or there simply isn’t enough liquid cash in the trust as the bulk of the estate is tied up in something else like real estate. This is a case where we’ll have to approach each situation differently. If the problem is simply that some regular bills are coming due – like a monthly mortgage or utility bill – but the trustee has yet to gain access to bank accounts with cash in them, then the trustee can pay for these bills personally, and receive a reimbursement for covering those bills.

There are a few understandable reasons a trustee might not be able to access funds straightaway which mostly center around a trustee becoming trustee after the death of the prior trustee. In that case, the lag is typically due to waiting on a death certificate or waiting for banks or brokerage firms to get their paperwork in order. However, this situation is relatively easy because there are funds, just not readily accessible yet. The true complications arise when the trust assets mainly consist of a house and a few thousand or even a few hundred dollars in the bank.

Read more: What Goes Into a Trust?

What if the Trust’s Only Asset is Real Estate?

In a case where the only real asset is a house yet there are ongoing bills and debts, a calculation will need to be done – are the proceeds from the sale of the house going to cover the outstanding debt and still allow for some inheritance to take place? It is very rare, but we have seen cases where a house was allowed to go into foreclosure because there simply wasn’t going to be enough money to cover all the debts and thus the house was let go to allow the creditors to high amongst themselves.

However, in most cases where there is only a house to speak of, the sale of the house will create liquidity in the trust estate. Essentially, converting the house to cash allows for the trust estate to have money to cover debts and reimbursements. That means a trustee or a beneficiary, could pay ongoing necessary bills like the mortgage and utilities on a property, and receive a reimbursement for those personally paid bills once the net sales proceeds from the house are paid to the trust.

The Trustee’s Duties

Two points to keep in mind however, a trustee has legal duties they must follow when serving as trustee, and a trustee is not obligated to personally cover or guarantee any trust debts. To address two relevant trustee duties, a trustee has a duty of care and a duty to safeguard trust assets. These are technically separate duties, but we consider the duty to safeguard a trust’s assets to be under the umbrella of a trustee’s general duty of care. A duty of care is that a trustee is obligated to act with the same degree of care, skill and prudence which would be exercised by a reasonably prudent person in managing similar property and the trustee is under a fiduciary duty to act for the benefit of the trust and the beneficiaries thereof. Under this general duty is the duty to safeguard trust assets, entailing the obligation to preserve those assets, which the law considers keeping bills current as a method of preservation.

All that legal jargon simply means the trustee is not obligated to be conservative, but to be reasonable when managing trust property, not take unnecessary risks, and above all, put the interest of the trust and the beneficiaries above one’s own. The trustee is not obligated to personally pay the trust’s debts, but they are obligated not to benefit to the detriment of the trust (such as buying trust property below fair market value). Additionally, so long as there is a way for a trust to cover its own debts, a trustee is obligated to work towards making that happen, short of, again, personally paying (although they can be reimbursed for doing so).

BETHEL LAW CORPORATION
ESTATE PLANNING | ELDER LAW | BUSINESS PLANNING

CLICK HERE OR CALL US AT 909-307-6282 TO SCHEDULE A FREE CONSULTATION.

Featured