Trustees occupy the office of Trustee. As Trustee, they must pay all debts of the Trust. More than that, Trustees often also have an obligation to pay debts of a decedent even if the debt is not officially against the Trust. Things like credit card bills taken out in a decedent’s individual name may still be paid from the Trust even though it is not technically a Trust debt. The same goes for mortgages, car loans, and any other debt a person accrues during life.
What Trust Debts am I liable for as the Trustee?
While a Trustee has a duty to pay debts, a Trustee does NOT have a duty to pay the debt themselves. In other words, a Trustee may use all the Trust assets to pay debts (assuming that is required), but they need not pay the Trust debts from their own pocket.
What if the Trust Lacks Money?
Some Trustees assume that if the Trust lacks money to pay debts, then the beneficiaries must pay them. That is also false. Beneficiaries are only liable for debts of a Trust to the extent the beneficiary received assets from the Trust. If the beneficiary received $10,000 from the Trust, and the Trust owes $1,000 in debt, then the beneficiary may have to pay back $1,000 to cover the debt. But if the Trust owes $100,000 in debt, then the beneficiary would only have to pay back up to $10,000. The beneficiary is not required to pay the rest of the debt from her own assets.
The same is true of Trustees. If there is not enough money (or other assets that can be sold to raise money) in the Trust, then the debt will remain unpaid. The trustee does not have a duty to reach into her own pocket to pay the Trust debts. Above pitfalls are important to discuss with Albertson & Davidson Trust Litigation Specialists before you have made mistakes that will cost you a great amount personally, but below is a Trustee mistake that may just be good news for the trustee.
What if I Manage a Trust with a Large amount of Debt?
That’s good news for a Trustee who is managing a Trust with a large amount of debt. Of course, there are a few exceptions. For example, if a Trustee intentionally attempts to bypass a legitimate debt and distributes Trust assets to the beneficiaries instead, the Trustee may be liable. Also, if the Trustee pays a debt that is not enforceable, then the beneficiaries may sue the Trustee and seek to reimburse for the wrong debt payment from the Trustee personally.
However, where the Trustee is acting in according to their Trustee duties, then the Trustee will not be personally liable to pay the Trust’s debts.