Transcript Dissecting trust protectors

Dissecting trust protectors
Glenn M. Karisch
Austin, 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; or
3. 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)
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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