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) 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 § : 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 § : 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 § : 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 §

Statutes affecting trust protectors TTC § : Mandatory Rules – The terms of the trust prevail over the TTC, except that the terms of the trust may not limit “the applicability of § to an exculpation term of a trust” Query: Does § and/or § 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) § (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, § (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 § : 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