When errors by a trustee cause losses to a trust, the question arises as to who should be forced to bear the weight of those losses: the beneficiaries or the trustees? On the one hand, it seems unfair that a beneficiary should lose because of the mistakes of someone who is in charge of administering the trust. On the other, there are obvious policy reasons for not wanting to make a trustee liable – if potential trustees believed they could be held liable for any mistake they made, would anyone be willing to accept their appointment?
The general rule is that when a trustee breaches his duty, he will be liable to the beneficiaries for any losses that occur as a result of that breach. However, as a way of balancing the rights of beneficiaries with the interest to not overburden trustees, s. 35 of the Trustee Act holds that when a breach of trust occurs, the court has the discretion to relieve the trustee of liability in cases where it believes that she has acted “honestly and reasonably and ought fairly to be excused.” When there are multiple trustees and the court believes that not all of them should be held liable for a breach of trust, it has the discretion to exempt the “innocent” trustee(s) from liability, thus departing from the general rule that trustees are jointly and severally liable for their acts or omissions. The effect of relieving a trustee from his or her breach of trust is that any losses that are sustained must be borne by the beneficiaries.
In situations where a breach of trust has occurred and the court refuses relief, then the trustee will generally be required to compensate the beneficiaries for the losses they suffered. If the finding occurs in the context of a civil action brought by a beneficiary, then a trustee can be held liable for damages in the usual way. If the finding occurs in the context of a passing of accounts, the court will usually deny or decrease the amount of compensation to which the trustee would otherwise be entitled. The court also has the additional, but infrequently used, option of ordering the trustee to reimburse the estate any losses that have occurred because of the breach of trust.
Read the full paper at: Trustee Liability – When Will A Trustee Be Excused by Justin de Vries