Written By: Andrew T. Huber

Source: AmericanBar.org

The trust protector’s role is relatively new in modern trusts. Generally, trust protectors provide oversight of certain decisions and allow for a degree of flexibility not easily accommodated by the traditional parties to a trust. Although the trust protector’s role can be very useful, its role is not precisely defined. For attorney-drafters, settlors, and trustees alike, ambiguity in defining the role can be a difficult challenge because statutes among the states are diverse, inconsistent, and, arguably, incomplete. There is a dearth of domestic case law interpreting state statutes, and identifying whether the trust protector is a fiduciary (or not) can be problematic. The purpose of this article is to provide a broad overview of the role and to identify some of the challenges and opportunities inherent with using trust protectors.

What Is a Trust Protector?

The role of trust protector is a function that carries out enumerated administrative and strategic purposes generally not reserved to the trustee, settlor, or beneficiaries. There is no mandate that the trust protector actually “protect” the trust. The name itself could be anything and has no inherent meaning.

To help interpret the intricacies of the trust protector’s role, commentators look to the variety of statutory and case law that exists in the United States regarding “trust advisors,” although there seems to be some question about how similar the roles of trust protectors and trust advisors are. Also, there is international common law jurisprudence that can be used for reference purposes.

In structuring a trust, generally the attorney delineates the relative rights and powers of the parties. For instance, the trust generally addresses matters such as whether the settlor (and beneficiaries, after the settlor’s death or incapacity) will have the right to remove or replace a trustee. Further, the powers of the trustee regarding many matters, including investment and distribution, are also generally addressed. Beyond these basics, sometimes more profound issues are not easily addressed by the traditional roles. For example, questions can arise over whether to change the legal situs, governing provisions, or beneficiaries of the trust. These are the instances in which the role of the trust protector is most helpful.

Brief History of the Trust Protector Role in the United States

Third-party oversight has been part of U.S. trust law for many years. Before the trust protector’s emergence, the trust advisor was (and continues to be) used to bifurcate some of a trustee’s duties. In the 1980s, the use of trust protectors began to rise in popularity in the context of U.S. settlors who created trusts in foreign jurisdictions for asset protection purposes. A major concern for U.S. settlors was the need to relinquish control over trust assets to an unknown professional trustee in an often unfamiliar country. The role of trust protector emerged as a tool to alleviate some of this concern. It was not uncommon to name a trusted family friend, attorney, or other close associate in the role of trust protector, with important powers, including power to change the jurisdiction of the trust or the identity of the trustee. Richard C. Ausness, The Role of Trust Protectors in American Trust Law, 45 Real Prop Tr. & Est. L.J. 319 (Summer 2010).

How to Differentiate Between Trust Advisors and Trust Protectors

What is the difference is between the protector and advisor?

There is no inherent definition of either label. What really matters is how the roles are defined in the trust instrument and state law. Some commentators view the roles as nearly identical in definition, which is “a person who has power to control a trustee in the exercise in some or all of his powers.” Alexander A. Bove Jr., Trust Protectors: A Practice Manual with Forms, ch. 2.3 (2014), quoting Trust Advisors, 78 Harv. L. Rev. 1230 (1965). This approach is not definitive, and recent thought leadership in this area argues that the nomenclature between the two labels should be given meaning in practice.

To help differentiate the roles, think of trust advisors as third-party decision makers who “have the power to control the trustee’s exercise of some or all of the trustee’s powers, generally with respect to investment decisions but at times with respect to distribution decisions … [and] have usually been found to have the same fiduciary duties as a trustee. These trust advisors were usually exercising one or more of the powers inherently a part of the role of trustee.” Kathleen R. Sherby, In Protectors We Trust: The Nature and Effective Use of “Trust Protectors” as Third Party Decision Makers, § 2.2, University of Miami Heckerling Institute on Estate Planning (2015) (emphasis added).

By comparison, a trust protector “has been used much more recently as the person given the power to perform certain delineated non-administrative decisions relating to the trust but not otherwise inherently a part of a Trustee’s role. Most often the trust instrument provides that the trust protector is not acting as a fiduciary, because the powers given to the trust protector are not typically traditional trustee powers.” See Sherby, § 2.2, referring to Trust Advisors, 78 Harv. L. Rev. 1230 (1965).

Such a differentiation between the terms can be helpful in practice when explaining concepts to clients and when interpreting trust documents.

Is the Trust Protector a Fiduciary?
Why Does This Matter?

If the role of trust protector is fiduciary in nature, then certain duties of care are owed to the trust beneficiaries, and liabilities may attach for breach of such duties. If the role is not a fiduciary role, then what is it? A nonfiduciary power is said to be “personal” to the one wielding it. That is, the power can be exercised without reasonableness, provided exercising the power does not contradict the settlor’s intentions or the governing instrument.

For example, suppose the settlor names his friend, Jordan, as a trust protector with the power to appoint or eliminate trust beneficiaries among the settlor’s issue. Without additional information, is this power a fiduciary or personal power? Because the settlor specifically names Jordan, perhaps the power is strictly personal and can be exercised based on Jordan’s individual inclination. Personal powers can be exercised for whatever reason, provided the exercise is not a fraud on the power. That is to say, the power cannot be used in contravention of the settlor’s clear instructions, even though the power is technically available. For example, a trust protector with the power to change beneficiaries cannot remove the settlor’s family and name the trust protector’s family as beneficiaries. Such abuse would be an obvious fraud on the power to which a settlor would have never agreed.

What if the trust protector (as in the “office” of trust protector) as opposed to a named individual is given power? This could be in the nature of a fiduciary. Why else would a settlor give powers to a possibly unknown individual unless it was to further the settlor’s intentions? See Bove, ch. 3.7.

Suffice it to say that the classification of the trust protector as a fiduciary or nonfiduciary is critical for establishing the standard of care owed to the trust and its beneficiaries and possible exposure to liability.

Schools of Thought

There are three primary schools of thought on how to classify the trust protector role. First, one trend in the United States is to create a statutory default assumption that the trust protector is not a fiduciary. Rationales for this approach vary. One argument is that it encourages people (or trust companies) to serve without the fear of litigation exposure. Some argue that it allows for competition among the states for trust administration business.

A second trend is that trust protectors are to be treated as fiduciaries by default. The primary rationale is that a settlor would not want to appoint someone with great power over the trust who is unaccountable to the courts and possibly to the beneficiaries.

A third trend is for statutes to be silent, or if a default is stated, to be ambiguous in application. This approach contemplates the trust protector as a fiduciary, a non-fiduciary, or a quasi-fiduciary. One must look to the powers granted in the trust and statute to determine the appropriate categorization. Matthew T. McClintock, LISI Est. Plan. Newsl. #2439 (July 21, 2016), at http://www.leimbergservices.com.

The bottom line: be careful and know the state law that applies to your circumstances. In most cases, the trust can be drafted to overcome most deficiencies in the statute. If that is not possible, consider another jurisdiction.