Picture the trust you have spent a lifetime funding. Your kids are the beneficiaries. The trustee is your cousin Tom, the one in the family who knows a little about finance. He has sole discretion over how the money is invested and how much goes out the door, and after you are gone, nobody is looking over his shoulder. Now picture reading an article about a new insurance policy that covers trustee theft, with up to $10 million in coverage, packed with stories of trustees who drained accounts meant for someone else’s children.
That is the situation one listener described. He was wondering whether this kind of coverage is worth adding so his kids are protected down the road. It is a fair question, and the fear behind it is completely understandable. But I think it starts one step too late.
The Tension Inside the Policy
When you set up a trust, you are choosing someone to steward your legacy for the people you love most. Buying insurance in case that person steals from your family creates a little tension. If we are worried Tom is going to take the money, maybe the better question is why Tom has unsupervised control of the money in the first place.
That does not mean the insurance is a bad idea. I think it is a clever product, and I can see a place for it. I just see it as the last line of defense, not the first. The order matters.
The Real Risk Is a Single Point of Failure
In most of the trustee fraud stories I hear about, the trustee is not a stranger. It is a family member or a close friend, serving as the only trustee, with full control over investments and distributions. There is no one checking whether the amounts leaving the account match what the beneficiaries actually need, or whether the portfolio is being managed well.
The problem in that setup is not that Tom is a bad person. The problem is that the trust makes it easy for anyone to make a bad decision, whether that is theft, a careless mistake, or a slow drift away from what you intended. When one person holds every key, there is nothing between a lapse in judgment and your children’s inheritance.
Two Signatures Change the Math
This is why I always recommend having a conversation with your estate attorney about adding a corporate trustee, or at least trust protector language, alongside the family member. The practical effect is simple: two signatures on anything significant. Major transfers need a second set of eyes before they happen.
If Tom has nothing to hide, he should welcome this. If I were the trustee, I do not want to make a mistake with someone else’s money. A co-signer protects me as much as it protects the beneficiaries. And that points to an even bigger benefit.
Protecting the Family From Suspicion
Here is what drives a trustee even more than the fear of an error: not wanting anyone in the family to wonder whether they are stealing. This comes up constantly between siblings. Parents pick the child who is most responsible with money to serve as trustee and executor. That is a completely rational choice.
Then the other children look at the arrangement and start asking questions. Why can’t I control my own money? Why does my brother decide how much I can take out? How do I know he is not giving me less than I am owed? Even when the trustee is doing everything right, that single-trustee structure invites resentment.
A second signer takes much of the air out of those questions. The structure itself says no one person can move money alone. That prevents fraud, and it also prevents a lot of the family strife that tends to show up in estates and trusts long after the parents are gone.
Layer the Coverage on Top of Good Design
So here is how I would approach it. Start by sitting down with your attorney and naming the worry out loud: I am concerned about someone mismanaging or stealing from this trust after I am gone. Then ask how the document can make that as difficult as possible. Corporate co-trustees, trust protectors, distribution standards, and regular reporting to beneficiaries all belong in that conversation.
Once the structure is sound, sure, consider the insurance, depending on what it costs. I would expect pricing to reflect the controls you have in place, so a well-designed trust may also be cheaper to insure. At that point, several things would have to fail before a claim ever comes into play, and the policy becomes what it should be: a backstop behind a system that already works. If you want help thinking through that structure, feel free to bring it to us, your advisors, and we will work through it alongside your attorney.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on protecting a trust from the people who run it, watch the full podcast episode here.