Every time I teach a module on Land Trusts & Trustees, I always get asked the question,
“Will my Trustee have any personal liability?”
While I address this issue in greater detail when teaching a class, I am happy to provide a quick review on this issue and answer the question.
Basically, there is over 100 years of case law on the books in Illinois (and many other states) that holds up the premise that a Trustee is not personally liable for his actions as Trustee UNLESS THERE IS FRAUD INVOLVED.
However, some Trustees (institutional Trustees especially) are most concerned about this issue when the property being held in the Land Trust is commercial in nature. Their concern is one relating to environmental law.
Without going into a lot of legal mumbo jumbo suffice it to say that the issue boils down to whether a Trustee has any management control over the trust property. While most courts that have confronted the question of an “active” Trustee's environmental liability have agreed that no liability should attach simply because the Trustee is acting as an executor of the estate or title-holder of the property, virtually all courts have refused to dismiss the Trustee on a summary basis, pending showing that the Trustee did or did not exercise management control over the property. This proof can come directly from the Trust Agreement wording and proof of the Trustee's duties (or lack thereof). The Trustee in some cases bore the burden of establishing his/her innocence via a Phase I Environment Audit of the property held in trust.
The lesson to be learned here is that if you are going to be a Trustee of a Land Trust that will hold title to property that is suspect (regarding any possible environment issues), you should demand a Phase I Environmental Audit of the property to be held in trust. A clean Phase I report will protect you as Trustee in case of attack by the EPA.
In situations where the trust instrument strips the trustee of power to control the trust property (as in many inter vivos land trusts), the trustee cannot be held personally liable beyond the amount of the assets held in the trust.