Defending Against Trustee Surcharge Claims: What Fiduciaries Need to Know
By Richard Watson, Esq. & Jacqueline Watson, Esq.
A surcharge claim is a legal action brought by a beneficiary seeking to hold a trustee personally liable for losses to the trust estate. These claims are among the most serious risks facing trustees, as a successful surcharge can result in the trustee being required to restore lost assets from their own funds. For professional fiduciaries, surcharge claims also carry reputational consequences that can affect their broader practice.
Common Surcharge Allegations
The most frequent surcharge claims in Orange County involve allegations of imprudent investment, failure to diversify trust assets, unauthorized self-dealing, excessive fees, and delay in making distributions. Each of these claims requires the petitioner to demonstrate both a breach of fiduciary duty and resulting damage to the trust estate — a causal connection that is often more difficult to establish than it may initially appear.
The Business Judgment Defense
Trustees who can demonstrate that their decisions were made in good faith, after reasonable investigation, and within the scope of their authority have a strong defense against surcharge claims. Documenting your decision-making process — including the information you considered, the alternatives you evaluated, and the reasons for your ultimate decision — is the single most effective protective measure a trustee can take.
Exculpatory Clauses
Many trust instruments contain exculpatory clauses that limit the trustee's liability for certain types of errors or omissions. While California courts will not enforce clauses that attempt to relieve a trustee of liability for bad faith or reckless indifference, properly drafted exculpatory provisions can provide meaningful protection against claims of ordinary negligence.
Proactive Risk Management
The best defense against surcharge claims is prevention. Trustees should maintain meticulous records, obtain professional advice when facing complex decisions, communicate regularly with beneficiaries, and provide timely and thorough accountings. When disputes arise, early engagement with experienced trust litigation counsel can often resolve matters before they escalate to formal surcharge proceedings.