Limiting Your Liability Exposure Upon Trust Termination or a Change of Trusteeship
Over the course of the last fifteen years, the Tennessee legislature has routinely passed legislation enhancing Tennessee Trust laws. This has included laws easing non-controversial changes to a trust such as a change of trustee, enhancing protections for beneficiaries from creditors (including divorcing spouses) and increasing the breadth of discretion for trustees.
This year has provided further enhancements. One such enhancement provides authority for an incoming or outgoing Trustee to obtain an absolute release from liability. Section 9 of Public Chapter No. 340 provides that if a trustee resigns, is removed or if a trust terminates, an interested party may require the outgoing trustee to file a complete accounting. If approved, the outgoing trustee is fully relieved from liability and all costs and attorney fees would be paid for from the assets of the trust. This process would also shield an incoming trustee if the outgoing trustee did something wrong that the incoming trustee could become responsible by failing to hold that outgoing trustee responsible.
If you are an outgoing trustee, then unless you are able to obtain a written release from the beneficiaries of the trust, the court path is very attractive. The judicial release (if successful) costs the outgoing trustee nothing. While this process costs the trust money, it does present an opportunity to encourage a reluctant beneficiary to save themselves (or the trust) potentially significant legal costs by signing a thorough written release.
Alternatively, if you are the successor trustee and if a claim exists by the trust against an outgoing trustee, you have a duty to take reasonable steps to protect the trust. For instance, if an outgoing trustee embezzled money from the trust and you are taking over, you probably have a duty to sue the outgoing trustee. If you did not protect the trust by suing the outgoing trustee, you could be liable. Who wants that?
To protect yourself as successor, ask the court to require the outgoing trustee to file a final accounting. This insulates you from the outgoing trustee’s potential misdeeds. If there is little real concern of wrongdoing, then the cost might seem unnecessary. To avoid this cost, you should request that the beneficiaries release you from the undiscovered bad acts of your predecessor.
If during the transition of trusteeship you do not obtain a release (whether judicial or contractual), then the statute of limitations during which you could be hauled into court is as long as three years from the resignation, removal or termination. In today’s litigation-minded society and considering typical beneficiary’s entitlement mentality, three years is a very long time indeed. In some cases, the statute of limitations may not begin to run until you resign or the trust terminates!
In short, whether you are the outgoing or incoming trustee, you should always obtain a release (whether judicial or contractual). In this way, you can save the trust, but more importantly, yourself! It is, after all, your statutory right.
 See T.C.A. § 35-15-111 allowing nonjudicial settlement agreements between the Trustee and the Qualified Beneficiaries of the trust to address administrative issues concerning the administration of a trust.
 See T.C.A. § 35-15-501, et seq. which provides that trusts created for third-party are generally protected from the creditors of the third-party beneficiary except from the claims of the State of Tennessee.
 See T.C.A. § 35-15-814 providing in pertinent part that the exercise of a Trustee’s discretion over certain trusts can only be reviewed for things such as dishonesty. In other words, a trustee over certain trusts has no duty to act reasonably!
 Public Chapter No. 340 was signed into law on May 10, 2019 and is available on the Tennessee Secretary of State website at tinyurl.com/y6gcusdw. This new law will be codified at T.C.A. § 35-15-205.
 See T.C.A. § 35-15-811 regarding the Trustee’s duty to enforce and defend trust claims.
 See T.C.A. § 35-15-1005(c).