by Jeffrey S. Goethe
The use of trust protectors has attracted much attention over the past few years, but as with many planning tools, each client’s circumstances must be considered. When drafting to build flexibility, alternatives such as powers of appointment, terms permitting nonjudicial modification, decanting, and designated representatives must be considered as alternatives to, or in conjunction with, the use of a trust protector. This article includes a brief history of trust protectors and the current status of the law on trust protectors, and then analyzes the nature of a trust protector’s duties.
The History of Trust Protectors, Advisors, and Directors
Professor Lawrence A. Frolik reflected on the development of the law of trust protectors in the United States, citing the “trust adviser” discussed in a 1965 Harvard Law Review article.1 Although trust protectors are often considered to be a tool for offshore trusts,2 they can be a tool within a trust for a Florida resident. With the increased perpetuities period under F.S. §689.225, permitting trusts to last as long as 360 years, uncertainty about future tax law developments, and the need to address changes in the lives of the trust beneficiaries over a long period of time, trust protectors can be used to build flexibility into the trust.
Sources of Law for Trust Protectors
• Caselaw — As statutory law continues to develop, caselaw is important and may be the only source of law for issues coming before a court. For a good discussion of recent cases, see Professor Frolik’s article.3
• Minassian v. Rachins — In Minassian v. Rachins, 152 So. 3d 719 (Fla. 4th DCA 2014), Minassian established a trust that designated his estate planning attorney as his trust protector. The settlor was survived by his wife and children from a prior marriage. The trust provided that, upon his death, a trust would be established for his wife. He intended that his wife continue to enjoy the lifestyle established during the marriage. The children filed suit as qualified beneficiaries of the trust, alleging she breached her fiduciary duty as trustee by improperly administering the estate. The wife claimed that the trust was drafted in such a way that the children were not qualified beneficiaries of her trust, because the trust terminated at her death, and new trusts were created for their benefit after her death. The court focused on the language that provided for “shares” for each of the children, rather than new trusts. After a hearing on the wife’s motion to dismiss, the trial court ruled against her. The trust instrument allowed the wife to appoint a trust protector. The instrument provided very detailed authority to the trust protector. The appellate court described the terms of the trust in detail:
“After the trial court denied the motion, the wife appointed a ‘trust protector’ pursuant to [art.] 16, [§]18 of the trust. This section authorizes the wife, after the husband’s death, to appoint a trust protector ‘to protect...the interests of the beneficiaries as the [t]rust [p]rotector deems, in its sole and absolute discretion, to be in accordance with my intentions....’ The trust protector is empowered to modify or amend the trust provisions to, inter alia: (1) ‘correct ambiguities that might otherwise require court construction’; or (2) ‘correct a drafting error that defeats my intent, as determined by the [t]rust [p]rotector in its sole and absolute discretion, following the guidelines provided in this [a]greement[.]’ The trust protector can act without court authorization under certain circumstances. The trust directs the trust protector, prior to amending the trust, to ‘determine my intent and consider the interests of current and future beneficiaries as a whole,’ and to amend ‘only if the amendment will either benefit the beneficiaries as a group (even though particular beneficiaries may thereby be disadvantaged), or further my probable wishes in an appropriate way.’ The trust provided that ‘any exercise...of the powers and discretions granted to the [t]rust [p]rotector shall be in the sole and absolute discretion of the [t]rust [p]rotector, and shall be binding and conclusive on all persons.’”4
Minassian’s children filed a supplemental complaint to challenge the validity of the proposed amendment by the trust protector. The wife claimed that the amendment resolved an ambiguity.
“The new [§]1 provided, ‘Upon the death of [the wife] and the termination of the [f]amily [t]rust as provided in [art. 10], [§]7, if there is any property remaining, it shall be disbursed to a new trust to be created upon the death of [the wife] with a separate share for each of” the children.’”5
The trial court found that there was no ambiguity, that the amendment was not in the interest of the beneficiaries, and that the amendment was improper. The Fourth DCA overruled the trial court, finding that Florida law permits the use of trust protectors, that the powers granted to the trust protector to modify the trust are authorized by Florida law, and that the settlor intended to use the trust protector, instead of the court, to resolve any ambiguity or problem with drafting of the trust.
• In re Rivas — In In re Rivas, 540 N.Y.S.2d 944 (2011), the New York court recognized the ability of a settlor to designate someone to direct or advise the trustee.6 New York has no statutory provisions for a trust protector or director. A more recent New York ruling held that a committee of trust advisors was subject to the fiduciary duties governing trustees.
“For the reasons set forth above, this [c]ourt cannot allow the proposed investment of the Helen Rivas Trust corpus, as such investment in the LTIP is contrary to the [a]greement and the intent of the settlor, may give rise to an impermissible division of fiduciary loyalties among the majority of the [a]dvisory [c]ommittee, and would also violate the Prudent Investor Act. The provisions of the [t]rust shall be executed as set forth by the clear wording of the [a]greement, with any future disputes to be brought before this [c]ourt for disposition and additional consideration.”7
In re Eleanor Pierce (Marshall) Stevens Living Tr., 159 So. 3d 1101, 1110 (La. Ct. App. 2015), also involved a trust that permitted the removal of a co-trustee by a trust protector. The trust instrument provided:
“[S]hould the [t]rust [p]rotector determine, in his or her sole discretion, that the individual then serving [as trustee] cannot properly represent the interest of the beneficiaries, the [t]rust [p]rotector may remove the trustee, with or without cause, and designate one or more residents of the State of Louisiana to succeed to the office of trustee.”
On appeal, it was argued that the appointment of a trust protector was against public policy. The court rejected the argument, recognizing the value of trust protectors.
“By designating a trust protector, the settlor’s interest in managing the assets for the benefit of the beneficiaries is better protected, as the trust protector is someone whom the settlor has selected ‘to represent the settlor’s interests in making specified trust decisions that the settlor will be unable to make.’ Sterk, Trust Protectors, Agency Costs, and Fiduciary Duty, 27 Cardozo L. Rev. 2761, 2777 (2006). It has even been said that the trust protector is ‘the living embodiment of the dead settlor,’ that is, ‘a person whose primary function is to exercise judgment on behalf of the trust settlor.’ By appointing a trust protector, the beneficiaries are no longer saddled with the responsibility of monitoring the trustee for a breach of fiduciary duty and costs of litigation may be avoided as the **15 settlor ‘could even give the protector power to remove the trustee without judicial approval.’”8
• Midwest Trust Co. v. Brinton — In 2014, in an unpublished opinion, Midwest Trust Co. v. Brinton, 331 P.3d 834, 2014 WL 4082219 (Kan. Ct. App. July 22, 2015), a Kansas court examined a trust that required the approval of a trust protector as a condition to a beneficiary’s exercise of a power of appointment.9 The court found that the clear and unambiguous language of the trust required the approval of the trust protector, which the beneficiary did not obtain. As a result, the attempted exercise of the power of appointment was not valid.
• Estate of Wimberley — In Estate of Wimberley, 349 P.3d 11 (Wash. Ct. App. 2015), the trial court removed a trust protector who was the settlor’s former estate planning attorney. The trust provided that the trust protector could only be removed for violating his fiduciary duty to the settlor. Following the settlor’s death, litigation ensued. The trust protector filed motions against one of the beneficiaries. The beneficiary alleged a conflict of interest between the protector’s duties and the trial court removed the protector.
• IMO Ronald J. Mount 2012 Irrevocable Dynasty Trust — In an unpublished opinion in IMO Ronald J. Mount 2012 Irrevocable Dynasty Trust, C.A. No. 10991-VCN (Del. Ch. Jan. 21, 2016), a Delaware Chancery Court, reviewed choice of law issues in a matter involving six actions in three states. An underlying source of conflict between the parties was a claim that the settlor’s caretaker unduly influenced the settlor to designate the drafting attorney as trust protector. They claimed that the settlor’s caretaker (and future wife) sought the appointment of the drafting attorney so she would have an “ally” to control the distributions from the trust to the children. The trust provided that distributions would be directed by a distribution committee. The drafting attorney removed one member of the committee and appointed another person. The children alleged that the appointed committee member was also an ally of the caretaker. Although these facts were not determinative of the outcome, they appear to have been a source of conflict among the parties. The caretaker/wife was appointed to serve as guardian in Florida proceedings, but was later removed.
• MacMillan v. MacMillan — Although the MacMillan v. MacMillan, 771 S.E. 2d 633 (unpublished opinion) (N.C. App. 2015), decision is only a slip opinion, it is illustrative of the issues that can arise in litigation. One of the litigants sought to disqualify another litigant’s counsel. As grounds, the moving party claimed an imputed conflict of interest because counsel’s former law partner drafted a will giving members of the firm authority to appoint a successor trustee or trust protector. The litigant argued that there was an imputed fiduciary duty owed by the opposing party’s attorney simply because he was a former partner with an attorney who drafted an instrument granting certain authority with respect to trust protectors. Although the argument ultimately failed, it certainly created additional litigation costs.10
• U.S. State Law Statutes — Alexander Bove pointed out that the first protector statutes in the U.S. were seen in South Dakota in 1997 and Idaho in 1999. He attributed the first offshore statutory definition to the Cook Islands in 1989.11 Current statutory provisions in the U.S. vary significantly, and include:
1) One, three, or four subsections from §808 of the Uniform Trust Code.
2) Distinctions between trustees, trust advisors, trust protectors, investment advisors, and other persons having the authority to direct.
3) Statements subjecting trust protectors to court jurisdiction.
4) Fiduciary status of trust protectors and advisors, ranging from traditional fiduciary liability to liability only in cases of bad faith.
5) Liability of trustees, advisors, and trust protectors.
6) Duty to monitor or not monitor actions of trustees, protectors, and advisors.
7) Time limitations for actions against advisors and protectors.
8) Authority to bind beneficiaries as recipients of notices and information.
9) Prohibitions to prevent modifications that would jeopardize the benefits of special needs trusts, S-corporation trust status, charitable deductions, and marital deductions.
10) Entitlement to compensation and reimbursement of costs expended from the trust assets, including costs of defending claims against the protector.
• The Directed Trust Act — The National Conference of Commissioners of Uniform State Laws is working on a Directed Trust Act. In a memo dated May 23, 2016, Chair Robert H. Sitkoff, Vice Chair Turney Berry, and Reporter John D. Morley discussed the status of the draft scheduled for a first reading at the 2016 annual meeting. The memo discusses the current status of state laws concerning directed trusts:
“Background. The Directed Trust Act addresses an increasingly common arrangement in contemporary estate planning and asset management known as a directed trust. A directed trust involves the naming of a trustee to hold custody of the trust property and another person who is not a trustee to perform one or more of the investment, distribution, and administration functions that would otherwise have belonged to the trustee. There is no consistent vocabulary for the nontrustee powerholder in a directed trust. Several terms are common in practice, including ‘trust protector,’ ‘trust adviser,’ and ‘trust director.’ There is much uncertainty about the fiduciary status of a nontrustee who has control or potential control over a function of trusteeship and about the fiduciary responsibility of a trustee with regard to actions taken or directed by such a nontrustee. Existing uniform trusts and estates statutes address the issue inadequately. Existing nonuniform state laws are in disarray.”
Current View of Trust Protectors as a Planning Tool
In a 2011 ACTEC Law Journal article,12 Bove recognized the confusion surrounding the use of trust protectors.
“I believe that the reluctance of practitioners to employ the trust protector in more of their trusts may well be on account of the confusion surrounding the position, and in my opinion, the confusion, in turn, stems in large part from two sources: the handful of speculative and contradictory commentary on the subject, [see, e.g., Gregory S. Alexander, Trust Protectors: Who Will Watch the Watchmen?, 27 Cardozo L. Rev. 2807 (2006); Richard C. Ausness, The Role of Trust Protectors in American Trust Law, 45 Real Prop. Est. & Tr. J. 319 (2010); Stewart E. Sterk, Trust Protectors, Agency Costs, and Fiduciary Duty, 27 Cardozo L. Rev. 2761 (2006)] and the inconsistent manner in which the position is regarded in the several state statutes which reference the term. [Compare Idaho Code Ann. §15-7-501(1)(g) (2011) with Alaska Stat. §13.36.370(d) (2011).] That is to say, if the handful of commentary is itself uncertain and repeatedly refers to the total absence of United States case law on the subject of trust protectors, thereby generally discouraging their use, and if the relevant state statutes themselves are largely inconsistent and contradictory, how can practitioners draw adequately solid conclusions about how and to what extent they might use a protector in their trusts?”
• Powers Granted to Trust Protectors — State statutes, including the Florida Trust Code provisions, generally do not specify the powers that can be granted, so they must be provided in the trust instrument. A review of caselaw offers some powers that can be given to trust protectors and the risks and benefits of particular powers. Powers granted to a trust protector could include: remove a trustee; replace a trustee who has been removed, resigned, or otherwise ceases to serve; appoint an additional co-trustee; add or remove an investment manager or advisor; veto or direct trust distributions, including distributions based upon the actions or status of the beneficiary, such as substance abuse; add or remove beneficiaries of the trust; consent to the exercise of a power of appointment; approve trust accountings; amend the trust, including administrative or distributive provisions; veto or approve the sale of trust assets, such as a family business; resolve a deadlock between co-trustees.
This is not an exclusive list, and powers should be clearly identified in the trust instrument to insure that the settlor understands the consequences of allocating authority to a trust protector or director.
Are Trust Protectors Subject to a Fiduciary Duty?
In an effort to protect the persons serving as protectors, many Florida practitioners draft trust instruments to provide that a trust protector’s powers are not subject to a fiduciary duty. Bove discusses the office of trust protector and the status of the trust protector as a fiduciary.13 He points out that some state statutes make fiduciary status the default, while other state statutes provide that the trust protector is not a fiduciary unless the trust instrument so states. In considering the fiduciary status of a protector, Bove looks to several factors:
“When one considers the reported case law on the subject, knowledgeable commentary, the history of fiduciary law, and the very purpose of having a protector, the question of the true role of the protector should hardly be a question at all. At the outset, the very choice of the term ‘protector,’ is suggestive. As one justice put it, “It seems to me that it would be wrong to entirely neglect the terminology involved. The word ‘protector’ seems to me to connote a role for the person holding that position even before one considers the detailed provisions relating to it. A ‘protector’ is, presumably, one who ‘protects’.... [T]he protector can serve a critical function ‘outside’ the trust while acting in conjunction with the trustee to enhance the carrying out of the settlor’s wishes, but not without responsibility to interested parties if the protector breaches his duty. In such a role he can introduce flexibility and response to future needs and changes that a trustee could not or would certainly be reluctant to do. In this context, then, the position can be uniquely useful and should be considered in any trust where such flexibility and outside consultation is indicated. At the same time, however, we as advisors must not be vague about it, as that is often what has proved to be the real source of the problems. Perhaps, then, we should take a lesson from the character Humpty Dumpty when he said to Alice, ‘When I use a word, it means just what I choose it to mean — neither more nor less.’ 42 [Lewis Carroll, Through the Looking Glass, Ch. VI (1871).] so that when we decide to utilize the position of a protector in a trust, let us present it in a thoughtful way so that the position is deemed to be just what we choose it to be — neither more nor less.”
It may not always be appropriate to provide that the trust protector as one who exercises powers in a nonfiduciary power. Bove’s comments suggest that a court could disregard a lower standard of care set forth in the trust instrument if damages resulted from the trust protector’s actions.
Richard C. Ausness, in a 2014 law review article, discussed different trust protector duties with varying standards of care.14 Figure 1 summaries his observations:
• Florida’s Trust Code — Florida law includes provisions for a “trust director,” which would be anyone, including a trust protector, who has the authority to direct the actions of the trustee. F.S. §736.0808(4) provides:
“(4) A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty.”
Florida practitioners should consider categorizing the duties of a trust protector in a trust instrument, consider the identity of the trust protector, and determine whether a different standard should apply to the various duties assigned to the trust protector.
• The Uniform Trust Code — Section 736.0808 is based upon §808(d) of the Uniform Trust Code. The comments to §808 are consistent with Florida’s statute:
“But for the type of donative trust which is the primary focus of this Code, the holder of the power to direct is frequently acting on behalf of others. In that event and as provided in subsection (d), the holder is presumptively acting in a fiduciary capacity with respect to the powers granted and can be held liable if the holder’s conduct constitutes a breach of trust, whether through action or inaction.”
• Protection of Beneficiaries — A review of the various state statutes reflects that the majority of states require at least a standard of good faith, and some carefully limit the fiduciary duty to the specific powers authorized. Most states require actions in the interest of the beneficiaries and compliance with the terms and purposes of the trust.
• Protection of the Settlor’s Intent — Although the current trend seems to be focused upon the fiduciary duty toward the beneficiaries, at least some cases recognize that a valid purpose for a trust protector is to protect the settlor’s intent. If the goal is to protect the trust protector from claims by trust beneficiaries who just do not like the limitations on their interests imposed by the trust, perhaps specific language in the trust document could help protect the trust protector when acting in accordance with the settlor’s intent.
• Interaction Between Trust Directors and Excluded Fiduciaries — A related question, currently being addressed by the NCCUSL and already addressed in several state statutes, is the liability of a directed trustee for following the directions of a trust protector, trust advisor, or trust director. A review of statutes from various jurisdictions shows that a majority of states start with the presumption of fiduciary status. The statutes also consider the liability of the trust protector for acts or omissions of the trustee. Certainly, this is an area to consider when drafting trust provisions. For entities offering investment advisor services, limited liability is important.
Trust protectors are certainly a viable tool to provide flexibility for clients who wish to utilize continuing trusts. They can offer an option that is private and less costly than judicial proceedings. The client and the drafting attorney should consider many factors and should not simply accept “boilerplate” language.
Why should a trust protector be used? A conversation between the trust settlor and the drafting attorney is crucial. Why would the drafting attorney recommend a protector? Why would such a recommendation be consistent with the client’s planning goals, financial circumstances, and personal relationships? Is a protector necessary to protect the settlor’s intent or the interests of the beneficiaries?
Who will serve? The relationship of the trustee, the trust beneficiaries, and the potential for a conflict of interest between the protector and the trustee or the beneficiaries must be considered. How will successors be appointed? What standard of care will apply to the protector?
What are the trust assets and trust protector duties? Do the anticipated trust assets include any assets that require management expertise, such as interests in a closely held partnership, a farm, rental properties, or intellectual property? If so, does the proposed trust protector have the expertise required to carry out the settlor’s intent.
Which powers should be granted? Does the settlor want flexibility to address the beneficiaries’ needs and wishes? Does the settlor want to control from the grave and require strict adherence to the settlor’s objectives? Will any of the powers result in a conflict of interest for the protector, or subject the protector to litigation?
When will the trust protector act? The trust instrument can direct when the protector’s duties arise. For example, will the protector only act when there is a vacancy in the office of trustee, or only when the beneficiaries are not satisfied with the current trustee?
Where will the trust protector act? The geographic location of the trustee, the protector, the beneficiaries, the trust administration, and the trust assets should all be considered. Can the protector serve remotely? Will the location of the protector invoke the jurisdiction or tax laws of another state?
What standard of care will apply to the trust protector? Some authorities submit that trust protectors always have a fiduciary duty. Consideration should be given to the standard of care to apply to the trust protector and setting that out in the trust instrument. The drafting attorney should also ask the client about provisions to protect the trust protector, such as indemnification, reimbursement for legal fees incurred in defending and carrying out the trust protector’s duties, and compensation for the risk that comes with the duty of trust protector.
The drafting attorney should also consider other means to provide flexibility and the ability to address unexpected circumstances. Provisions allowing for a power of appointment, decanting, designated representatives, alternative dispute resolution provisions, and nonjudicial modification can accomplish some of the same objectives for which trust protectors are utilized. In some situations, the alternatives may avoid unexpected liability for a trust protector, may be subject to clearer caselaw, and may allow for greater flexibility while still protecting the intentions of the settlor and the interests of the beneficiaries.
1 Lawrence A. Frolik, Trust Protectors: Why They Have Become “The Next Big Thing,” 50 Real Property, Trust and Estate J. 267, 270 (2015); see generally Note, Trust Advisers,
78 Harv. L. Rev. 1230 (1965).
2 For a thorough discussion of trust protectors, including caselaw relating to offshore trusts, see Alexander J. Bove, Jr., Trust Protectors: A Practice Manual With Forms (2014).
3 See note 1.
4 Minassian,152 So. 3d at 721.
5 Id. (emphasis added).
6 Matter of Will of Rubin, 540 N.Y.S.2d 944 (N.Y. 1989).
7 In re Rivas, 540 N.Y.S.2d at 944.
8 In re Eleanor Pierce (Marshall) Stevens Living Tr., 159 So. 3d 1101, 1110 (La. Ct. App. 2015).
9 Midwest Trust Co. v. Brinton, 331 P.3d 834, 2014 WL 4082219 (Kan. Ct. App., July 22, 2015).
10 MacMillan, 771 S.E.2d at 633.
11 Alexander A. Bove, Jr., The Case Against The Trust Protector, 37 ACTEC Law J. 77 (Summer 2011), available at https://www.naepc.org/journal/issue11f.pdf.
14 When is a Trust Protector a Fiduciary?, 27 Quinn. Prob. Law J. 277, 307-08 (2014).
Jeffrey S. Goethe is a Florida Bar board certified wills, trusts, and estates attorney, and a fellow of the American College of Trust and Estate Counsel. He is a partner with Barnes Walker, Goethe, Hoonhout, Perron & Shea, PLLC, in Bradenton.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Deborah Packer Goodall, chair, and Douglas G. Christy and Jeff Goethe, editors.