What Is The Liability Of A Land Trust Trustee?

As you know by now, I recommend using individuals as Trustees of your Land Trusts. This not only saves Trustee expense but offers more “flexibility” in administering your trusts. The problem is finding individuals that will agree to serve as your Trustee. Oftentimes I am asked, “Is my trustee going to be personally liable for being my trustee?”

Since most Land Trust legal decisions follow Illinois Land Trust case law and Statute Law (and there is over 100 years of Illinois Land Trust legal history), I will first address this issue from Illinois statute law. A judgment against a Trustee is enforceable by an execution against the trust property only (Ill.Rev.Stat., c. 110, 12-103), enacted in 1981.

The relevant portion of the statute provides as follows:

A judgment entered against a person…solely because he or she is the holder of title to property as…trustee of a specifically identified trust…shall be enforced only against the property held in the particular representative capacity….

Oftentimes legal advice regarding the issue of Trustee liability is given incorrectly because of the misunderstanding between Land Trusts and other conventional type trusts. Conventional type trusts (where the Trustee retains all the incidents of ownership) are treated different under the law than Land Trusts. The difference is that in a Land Trust the incidents of ownership are divided between the Trustee and the Beneficiary. Additionally, the Trustee of a Land Trust will exculpate him/herself from all personal liability (when signing as Trustee).

Consequently, this action adds responsibilities on the trust property and the beneficiary. Legal decisions dealing with Land Trust controversies have recognized these distinguishing characteristics.

To recap: A Land Trust Trustee is NOT personally liable for the debts, obligations, or liabilities of the Trust. However, the Trustee could be liable IF the Trust Agreement provided for this, but most Land Trust Agreements do not. Additionally, a Land Trust Trustee could be personally liable if she/he acts negligently or without direction from the beneficiary (holder of the power of direction).

In the state of Florida (which also has a Land Trust Statute) Section 689.071 (7) was added to the statute to overrule a court decision that held a Trustee personally liable (Taylor v. Richmond’s New Approach Association, Inc. 351 So. 2nd 1094 (1977)). A Trustee IS personally liable for contracts for attorney’s fees to which he agrees, and for such statutory obligations as property taxes.

At the Federal level, Congress has also taken action to protect Trustees. The Asset Conservation, Lender Liability, and Deposit Insurance Protection Act provide that the Trustee’s liability does not exceed the assets of the trust. The Act can be read in Subtitle E of Public Law 104-208, Sections 2501-2505.