Dissecting trust protectors

Glenn M. KarischAustin, Texas

What is a trust protector?

• Called many things• No references to “trust protector” in statutes• Working definition:

A non-trustee who has the power to:1. make changes to the trust, its trustee, its

beneficiaries or its situs;2. direct the trustee to take an action; or3. prohibit the trustee from taking an action.

Who can be a trust protector?

• A beneficiary• The trustee• A third party– Uncle Joe– The attorney– The accountant– The financial advisor?– A bank or trust company?

Common uses

• Amend the trust– Tax (otherwise non-substantive)– Nontax (substantive)

• Change trustee personnel• Direct/restrict investments• Direct/restrict distributions• Change situs• Direct the trustee to decant• Do any of the things on Shannon’s decanting list

Statutes affecting trust protectors• TTC §114.003: Powers to Direct– Trust instrument may give trustee or other person a

power to direct the modification or termination of the trust

– If the trust gives a person the power to direct actions of the trustee, the trustee shall act in accordance with the direction, unless:• The direction is manifestly contrary to the trust terms; or• The trustee knows the direction would constitute a

serious breach of a fiduciary duty that the powerholder owes to the beneficiaries

Statutes affecting trust protectors• TTC §114.003: Powers to Direct– A person other than a beneficiary who holds a

power to direct is presumptively a fiduciary 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 a breach of the person’s fiduciary duty

Statutes affecting trust protectors• TTC §114.007: Exculpation of Trustee– A trust term relieving the trustee of liability for

breach of trust is unenforceable if the breach is committed in bad faith, intentionally or with reckless indifference

– This doesn’t prohibit the settlor from relieving the trustee from a duty or directing the trustee to do or not do something that otherwise would be a breach, except as provided by TTC §111.0035

Statutes affecting trust protectors• TTC §111.0035: Mandatory Rules– The terms of the trust prevail over the TTC, except

that the terms of the trust may not limit “the applicability of §114.007 to an exculpation term of a trust”

• Query: Does §114.007 and/or §111.0035 affect the settlor’s ability to relieve a trust protector from liability?

Must the trust protector be a fiduciary?

• No (not in Texas, at least)• §114.003(c): A person, other than a

beneficiary, who holds a power to direct is presumptively a fiduciary– A possible inference is that a beneficiary serving as

trust protector is presumptively not a fiduciary– For any trust protector, §114.003(c) makes no

sense if the trust instrument cannot provide that he/she is not a fiduciary

To be, or not to be, a fiduciary?

• Arguments for making the trust protector a fiduciary– If he/she is not a fiduciary, the beneficiaries can be

left completely without recourse• §114.003: Trustee can follow non-fiduciary trust

protector’s direction even if it would constitute a serious breach of trust had he/she been a fiduciary

– The trust protector should approach his/her responsibilities as a fiduciary – seriously, with the beneficiaries’ interests in mind

To be, or not to be, a fiduciary?

• Arguments against making the trust protector a fiduciary– No one will want to be a trust protector if he/she

is subjected to fiduciary duties• He/she probably is unpaid• He/she does not have the resources of the trust to

mount a defense

– If he/she is a fiduciary, he/she may believe it is necessary to use trust resources to investigate before making decisions, “wasting” trust assets

To be, or not to be, a fiduciary?

• Karisch’s solution:– Make the trust protector a fiduciary, except for a

beneficiary who is given the power to block the sale of a beloved asset

– Limit the trust protector’s duties to provide the necessary protection. Examples:• No duty to act, and cannot be compelled to act• No duty to monitor trustee’s activities• Limit the powers to clear choices

Examples – routine provisions

• Remove trustees, fill trustee vacancies, designate future successor trustees, appoint co-trustees

• Designate future trust protectors• Compensation• No bond

Examples – liability

• Fiduciary/no fiduciary• Duty to act/not to act– Investigate/monitor– Take actions permitted by trust instrument– Compelling trust protector to act

• Exculpation• Indemnification

Examples – powers

• Amend trust– To achieve tax objectives– Change beneficiaries– Other

• Change situs• Decant• Other