Disputes involving trust protectors are increasing in number and will likely only further increase in number in the coming years. This blog post discusses what a trust protector is, whether trust protectors owe fiduciary duties (and to whom), and why litigation involving trust protectors is likely to increase in the future.
What Is A Trust Protector?
A trust protector is a person who is named in a trust to exercise varying types of oversight functions with respect to a trustee, or to exercise certain powers with respect to amending the trust. The powers of a trust protector can vary widely, and may include the authority to remove and replace the trustee, modify the terms of the trust, and approve certain actions by the trustee. In some states (especially those that have adopted the Uniform Trust Code), a trust protector is also referred to as “trust director.”
A settlor of a trust (the person who creates the trust) may want to have his estate planning lawyer draft the trust to provide for a trust protector for a wide array of reasons. Some of the most common reasons to utilize a trust protector include having the ability to modify the terms of the trust to account for changes in tax laws and regulations and other changed circumstances, and to monitor the actions of a trustee if the settlor has some reservations about the ability of the trustee to fulfill his duties.
Does a Trust Protector Owe Fiduciary Duties?
In numerous states, the law is unsettled as to whether (and to what extent) a trust protector owes fiduciary duties to the trust beneficiaries. This issue is ripe for litigation, and we can expect to see the issue hotly litigated if the legislatures in those states do not statutorily address the issue first.
The Uniform Trust Code provides in Section 808 that a trust protector 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.”
This raises a very interesting issue that seems ripe for litigation: if a trust protector is merely “presumptively” a fiduciary, in what circumstances is a trust protector not a fiduciary? Unfortunately, the comments to Section 808 of the Uniform Trust Code do not elaborate.
The situation becomes even more interesting under Virginia law. Virginia Code Section 64.2-770 mirrors, in part, Section 808 of the Uniform Trust Code. Virginia law specifically provides in Section 64.2-770(D) that a trust protector,
“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.”
Section 64.2-770 further provides for a set of statutory powers and restrictions that a settlor can impose on a trust protector by incorporation by reference to Section 64.2-770(E). What is interesting for our purposes is that the provisions contained in Section 64.2-770(E) relating to the duties of a trust protector are different from those contained in Section 64.2-770(D). Section 64.2-770(E) provides that a trust protector,
“shall be deemed 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.”
Note the absence of the use of the word “presumptively.”
What Types of Litigation Involving Trust Protectors Will We See?
In Virginia, we will likely see litigation in the coming years over the extent to which a trust protector is “presumptively” a fiduciary (assuming a settlor does not incorporate by reference the provisions of Section 64.2-770(E)). In other states, we will likely see continuing litigation as to whether a trust protector is a fiduciary at all (and, if so, what the scope of those fiduciary duties are).
We will also likely see increasing amounts of litigation against trust protectors for claims for breach of fiduciary duty. Because the trust protector concept in a relatively recent one, the timeframe for trust protectors to have committed acts or omissions giving rise to litigation has been relatively short. As more estate planning attorneys employ trust protectors in the trusts that they draft, and as time passes, the available pool of acts or omissions that could give rise to litigation will substantially increase.
We are also likely to see litigation between trustees and trust protectors. Virginia law provides that if Section 64.2-770(E) does not apply,
“the trustee shall act in accordance with [a direction from a trust protector] unless the attempted [direction] is manifestly contrary to the terms of the trust or the trustee knows the attempted [direction] would constitute a serious breach of a fiduciary duty that the [trust protector] owes to the beneficiaries of the trust.”
What constitutes a “serious breach of a fiduciary duty”? That’s another issue that is ripe for litigation.
I recall speaking with an estate planning attorney friend of mine a few years ago who remarked that he thought that as the utilization of trust protectors proliferated, trust litigation would decline since trust protectors would be able to remove trustees acting improperly, referee disputes among beneficiaries, etc., thereby precluding the need to litigate those issues. I told him that I thought just the opposite would occur: by inserting into a trust another fiduciary role, a settlor was merely expanding the sea of potential targets of a lawsuit; and by granting trust protectors various new powers (albeit powers that in many cases are designed to reduce litigation), a settlor was merely establishing an initial battleground (the trust protector’s decision) prior to the later war (the ensuing litigation over whether the trust protector acted properly in making the underlying decision). Time will tell which view is correct, but with human nature being what it is, I foresee the widespread employment of trust protectors leading to more litigation rather than reducing it.