Surcharge Actions Against Executors and Trustees in Kentucky
When an executor or trustee breaches their fiduciary duty and the estate or trust loses money as a result, Kentucky law provides a specific remedy: the surcharge action. A surcharge is a court order requiring the fiduciary to personally repay the estate or trust for losses caused by their misconduct. It is the most direct tool available to beneficiaries seeking to hold a fiduciary accountable for mismanagement, self-dealing, or neglect.
What Is a Surcharge?
A surcharge is not a penalty — it is a compensatory remedy. The purpose is to restore the estate or trust to the position it would have been in had the fiduciary performed their duties properly. If an executor sold estate real property to themselves at below-market value, the surcharge would be the difference between the sale price and the fair market value. If a trustee made imprudent investments that lost value, the surcharge would be the amount lost. The surcharge is a personal liability of the fiduciary, payable from their own assets.
Grounds for Surcharge
A surcharge action can be brought whenever the fiduciary’s conduct has caused a loss to the estate or trust. Common grounds include self-dealing (the fiduciary used estate or trust assets for personal benefit), mismanagement of investments (the fiduciary failed to invest prudently under the Uniform Prudent Investor Act, KRS 386B.9-010 through KRS 386B.9-060), failure to collect or protect assets (allowing assets to depreciate, failing to insure property, failing to pursue debts owed to the estate), improper distributions (distributing assets to the wrong beneficiaries or in the wrong amounts), excessive compensation (taking fees that exceed what is reasonable for the work performed), and unreasonable delay in administering the estate, causing the estate to incur unnecessary expenses or lose value.
Who Can Bring a Surcharge Action
Any interested party has standing to bring a surcharge action. This includes beneficiaries, heirs, creditors of the estate, and co-fiduciaries. In the trust context, both current and remainder beneficiaries can bring surcharge actions, depending on whose interests were harmed by the breach. A successor fiduciary can also bring a surcharge action against the predecessor who caused the loss.
The Surcharge Process
For executor surcharges, the most common procedural vehicle is exceptions to the settlement accounting filed in district court under KRS 395.610. The beneficiary reviews the accounting, identifies problematic items, files written exceptions, and the court holds a hearing. The burden is on the executor to justify each challenged item. For trustee surcharges, the action is typically brought as a breach of fiduciary duty claim in circuit court under the Kentucky Trust Code.
Defenses Available to Fiduciaries
Fiduciaries facing surcharge actions have several potential defenses. The business judgment defense protects good-faith decisions that turned out poorly — a fiduciary who made a reasonable investment that lost value is not automatically liable. Beneficiary consent may be a defense if the beneficiaries approved or ratified the challenged action with full knowledge of the facts. An exculpatory clause in the trust instrument may limit the trustee’s liability for certain types of conduct (though such clauses cannot protect against bad faith or reckless indifference). And the statute of limitations may bar stale claims — though concealment by the fiduciary can toll the limitations period.
The Fiduciary’s Bond
Under KRS 395.120, executors are generally required to post a bond before qualifying. If the executor is surcharged, the bonding company pays the surcharge (up to the bond amount) and then seeks reimbursement from the executor. However, many wills waive the bond requirement, leaving beneficiaries to collect the surcharge directly from the executor’s personal assets.
If you need to bring a surcharge action against an executor or trustee in Kentucky, contact Buckles Law Office at (859) 225-9540.
