AI Risks in New York Irrevocable Trusts: Who Bears the Loss?

A New York father recently asked Dilendorf Law Firm to review an irrevocable trust he set up for his children in 2023.

Irrevocable trust is a trust in which the grantor transfers assets to a trustee for the benefit of others and generally can’t take the assets back or change the trust’s terms.

His question was simple: if a hacker impersonates him, breaks into the trustee’s accounts, or sends a fake instruction, who loses the money, the trustee or the children?

He wanted the answer to be the trustee, every time.

The question came from the June 22, 2026 statement of the Five Eyes cyber security agencies, led by the National Security Agency (NSA), which addressed anyone responsible for other people’s assets.

“Frontier AI models are anticipated to exceed current industry expectations, fundamentally transforming both offensive and defensive cyber capabilities. The timeline is not years, it is months.” (NSA, Five Eyes Cyber Security Agencies Statement, June 22, 2026). [Emphasis added].

The 2023 trust was well drafted for its time. However, it never mentioned hacking, stolen passwords, crypto. Or how the trustee should check that an instruction really came from the person it appeared to come from.

This article explains what we recommended and how we helped the client think through a new trust.

Why New York law lets a grantor put the loss on the trustee

New York’s EPTL § 11-2.3 (“Prudent Investor Act”) sets the default rules for how a trustee must manage trust property.

EPTL stands for the Estates, Powers and Trusts Law, the New York statute that governs trusts.

The default rules apply “except as otherwise provided by the express terms and provisions of a governing instrument within the limitations set forth by section 11-1.7 of this chapter.”

In plain terms, the trust document can set its own rules provided it stays within the limits of section – EPTL § 11-1.7 (“Limitations on Powers and Immunities of Executors and Testamentary Trustees”).

This section says that any attempt to give a trustee “The exoneration of such fiduciary from liability for failure to exercise reasonable care, diligence and prudence” is “contrary to public policy.”

Note that nothing in the law stops a grantor from demanding more of the trustee than the default.

Clear rules also protect a trustee who follows them.

A trustee “is not liable to a beneficiary to the extent that the trustee acted … in reasonable reliance on the express terms and provisions of the governing instrument” (EPTL § 11-2.3(b)(1)).

A trust that spells out the trustee’s security duties tells the trustee exactly what to do. This approach does not leave a room to argue later that no such duty existed.

Our recommendations to the client

The recommendations fall into nine groups.

1. Say plainly that the trustee bears the loss

We added a new article to the trust stating that if money is lost through hacking, impersonation, or a forged instruction, the trustee will be fully responsible for that loss.

The authority comes from EPTL § 11-2.3 (“Prudent Investor Act”), which provides that “A trustee has a duty to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined by this section, except as otherwise provided by the express terms and provisions of a governing instrument.” [Emphasis added].

We drafted two versions of this clause.

The stronger version makes the trustee pay for a cyber loss. It is what the client asked for. His instruction was that the risk of loss be on the trustee “always.”

The softer version makes the trustee liable only if it fails to follow applicable industry standards for managing AI-related risks (even though those standards are evolving and not always clearly defined).

Because many banks and trust companies would be unwilling to accept the stronger version, clients can choose the approach that best aligns with the trustee they want to engage.

2. Make protecting the assets a stated duty, checked every six months

The trust now says that protecting the assets from unauthorized access is part of the trustee’s job and must be done with “reasonable care, skill and caution.”

Those are the words the EPTL § 11-2.3(b)(2) (“Prudent Investor Act”) already uses: “A trustee shall exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would.”

The law judges a trustee “in light of facts and circumstances prevailing at the time of the decision or action of a trustee” (EPTL § 11-2.3(b)(1)).

Because the NSA warns that “cyber risk assumptions can become outdated in months, not years” (NSA, June 22, 2026), the trust requires the trustee to review its security against current government guidance every six months.

That approach avoids imposing a rigid cybersecurity standard while recognizing that the standard of care must evolve as threats evolve.

At the same time, it leaves open the question of what constitutes “reasonable care, skill and caution” in light of changing government warnings and emerging AI-related risks.

We expect that issue to become a frequent subject of trustee litigation in the foreseeable future.

3. Keep everything, including crypto, in the trust’s own name at a regulated custodian

All trust property (including crypto) must be held in the trust’s name at a regulated custodian. This means a bank or licensed firm whose business is safekeeping assets; or under controls that require more than one person to approve a transfer.

EPTL § 11-1.6 (“Property Held as Fiduciary to Be Kept Separate”) gives the rule: “Every fiduciary shall keep property received as fiduciary separate from his individual property,” and “all transactions by him affecting such property shall be in his name as fiduciary.”

The same section makes a bank “absolutely liable for any loss occasioned by the acts of its nominee with respect to the securities so registered” (EPTL § 11-1.6(b)).

The 2023 trust applied that principle only to paper securities. The new language extends it to online accounts, passwords, and digital wallets.

The change reflects the age of EPTL § 11-1.6, which was written for a paper-based financial system and still refers to certificates (representing securities held by a bank custodian).

It provides little guidance for today’s reality, where access to trust assets is often controlled through online accounts and digital credentials.

4. Require insurance instead of a bond

Trustees are sometimes required to post a bond (form of guarantee that pays the family if the trustee causes a loss).

The 2023 trust waived that requirement. The client did not want to bring it back; so we kept the waiver but required the trustee to carry cyber and crime insurance and to send proof to the family each year.

EPTL § 11-1.1 (“Fiduciaries’ Powers”) already allows every trustee “To effect and keep in force fire, rent, title, liability, casualty or other insurance to protect the property of the estate or trust and to protect the fiduciary.”

The trust turns that permission into a requirement, so a loss the trustee cannot repay out of pocket is covered rather than falling on the children.

5. Make the trustee answer for the people it hires

The trustee still hires banks, advisers, and technology providers. But the trust now holds the trustee to the standard the law sets for hiring help.

EPTL § 11-2.3(c)(1) (“Prudent Investor Act”) requires a trustee “to exercise care, skill and caution in … selecting a delegee suitable to exercise the delegated function,” in “establishing the scope and terms of the delegation,” and in “periodically reviewing the delegee’s exercise of the delegated function.”

A delegee is simply someone the trustee hires to do part of its job.

The same section says that “[a]n attempted exoneration of the delegee from liability for failure to meet such duty is contrary to public policy and void” (EPTL § 11-2.3(c)(2)).

The trust now requires every custodian/service provider with access to trust accounts to acknowledge that responsibility in writing.

It would also require service providers to maintain security procedures reasonably designed to address AI-related cyber risks, including those issued by the NSA (e.g., “Frontier AI models are…transforming… defensive cyber capabilities. The timeline is not years, it is months.”)

The trust says it cannot be changed. What then?

The 2023 document said it could not be “altered, amended or modified by the Grantor or any other person.” That is not the end of the road.

Under EPTL § 7-1.9 (“Revocation of Trusts”), “[u]pon the written consent, acknowledged or proved in the manner required by the laws of this state for the recording of a conveyance of real property, of all the persons beneficially interested in a trust of property,” the creator “may revoke or amend the whole or any part thereof.”

In plain terms, if every beneficiary signs a notarized consent, the grantor can amend the trust.

That works only when every beneficiary is an adult who can sign. Where the beneficiaries include children or grandchildren not yet born, as is common in a family trust, consent is impossible.

In that situation the client can consider decanting. Decanting means the trustee pours the assets from the old trust into a new trust with better terms, much as wine is poured from one bottle into another.

EPTL § 10-6.6 (“Exercise of a Power of Appointment; Effect When More Extensive or Less Extensive Than Authorized; Trustee’s Authority to Invade Principal in Trust”) provides that “[a]n authorized trustee with unlimited discretion to invade trust principal may appoint part or all of such principal to a trustee of an appointed trust” for the same beneficiaries.

Decanting may be done “without the consent of the creator, or of the persons interested in the invaded trust, and without court approval,” by a notarized instrument that takes effect “thirty days after the date of service” on the people entitled to notice (EPTL § 10-6.6(j)).

A Protector with the right powers may offer a third route. Each path has notice requirements and tax consequences that should be reviewed before anything is signed.

Designing the new trust

We advised the client to treat the marked-up document as a blueprint for a new trust rather than fix the old one.

The first decision is who will serve as trustee: a family member may accept full responsibility for cyber losses but may not have the money to repay a large one.

A bank or trust company could insure the risk but may accept responsibility only for losses caused by its own failures.

The second decision is control. A Protector who can replace the trustee protects the family only if that power itself cannot be stolen. Every change of trustee or Protector has to notarized, confirmed, and probably also delayed.

The third decision is where the trust is based.

Keeping it under New York law preserves the protection of EPTL § 11-1.7; if the family later moves the trust to another state, the same risk-of-loss language should move with it, because some states let a trust lower the trustee’s duty.

Dollar limits for transfer delays, insurance amounts, and offline storage are left blank for the client to set with the trustee.

This article is for general informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Dilendorf Law Firm. Attorney Advertising.