Is There A Trustee Get Out Of Jail Free Card? The Use Of Exculpatory Clauses In Trust Documents In Texas

• Published date: 07 December 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Trials & Appeals & Compensation, Professional Negligence, Trusts
• Law Firm: Winstead PC
• Author: Mr David F. Johnson

I. INTRODUCTION

Settlors, trustees, and beneficiaries in Texas often insert clauses into trust documents that benefit the trustee and free the trustee to take certain actions without potential liability. For example, a settlor may want to limit a trustee's liability for negligent actions, especially where the settlor designates himself or herself as the initial trustee. The beneficiaries may want to relieve the trustee for any risk associated with maintaining a family business or farm as an asset in the trust even though doing so may violate a duty to diversify. There are many different scenarios where parties may want to insert clauses to limit a trustee's duty or liability

This article is intended to describe the use and enforceability of exculpatory clauses in Texas. The use and enforceability of this type of clause is somewhat controversial in that a trustee owes high fiduciary duties to beneficiaries. Removing liability for certain conduct or removing certain duties may transform a trustee position into something less than a fiduciary relationship. Public policy may not allow that to happen.

This article explores the historical enforcement of exculpatory clauses in trusts in Texas, the current Texas statutes that impact their enforcement, procedural issues that arise in litigating exculpatory clauses, and recent precedent applying those clauses to disputes. ¹

II. TRUSTEES' FIDUCIARY DUTIES

To understand whether exculpatory clauses should be enforced between a trustee and a beneficiary, one has to understand the broad scope of the fiduciary relationship. A trustee is held to a high fiduciary standard. Ditta v. Conte , 298 S.W.3d 187, 191 (Tex. 2009). The fiduciary relationship exists between the trustee and the trust's beneficiaries, and the trustee must not breach or violate this relationship. Slay v. Burnett Trust, 143 Tex. 621, 187 S.W.2d 377, 387-88 (Tex. 1945); RESTATEMENT (SECOND) OF TRUSTS ' 170 CMT. A (1959); G. BOGERT, TRUSTS AND TRUSTEES ' 543, at 217-18 (2d ed. rev. 1993). The fiduciary relationship comes with many high standards, including loyalty and utmost good faith. Kinzbach Tool Co. v. Corbett-Wallce Corp., 160 S.W.2d 509, 512 (Tex. 1942). At all times, a fiduciary must act with integrity of the strictest kind. Hartford Cas. Ins. v. Walker Cty. Agency, Inc., 808 S.W.2d 681, 687-88 (Tex. App' Corpus Christi 1991, no writ). The Texas Supreme Court has described the high...