Would this relative with spendthrift habits decide to sue the bank? Would he claim that the money in the trust had been mismanaged by the bank? The bank put in the indemnification clause to protect the bank’s interests. But, in light of the grandparents’ intent with the trust, should the other heirs be liable?
When a Gift Becomes a Headache
This brings us to what the purpose of a trust is for most people. It’s clear from this example that the original parents who created the trust set it up to do one thing: be of financial benefit to their progeny. The indemnification clause is a new addition to the distribution of funds to beneficiaries. Does the bank have the right to change the terms of the original trust? What about their duty to distribute the funds?
It has become customary for the corporate trustee industry to present a settlement agreement to beneficiaries. These “proposed” agreements may include several items. Commonly, they will have a release (asking the beneficiary to agree to say “I will not personally sue or file claim against the bank”). They may also have an indemnity clause (“I will reimburse the bank for any costs it incurs if others sue or file claim”). The bank may refuse to distribute the appropriate funds until these “proposed” agreements are signed. These increasingly broad agreements may go beyond what is legal in a particular state.
