by Carol Warnick
As the use of trust protectors has become more and more popular, one issue continues to surface. That is the question of whether or not a trust protector is a fiduciary or can be insulated by the trust language from being a fiduciary. It is an important question because of the duties and potential liability that could be imposed on a trust protector who is considered a fiduciary.
To set the stage, a brief discussion of trust protectors in general is in order. Some trace the beginnings of the concept to the world of off-shore asset protection trusts. Others point to thoughtful estate planners in the early 1980's who were trying to create flexible or "amendable" irrevocable trusts. While its origin is interesting, what a trust protector can and does do is obviously more important. A trust protector is a person who holds a power that when invoked is able to direct the trustee in matters relating to the trust. The power can be either a negative one or a positive one. It would be negative if it was merely the power to stop or veto some proposed action the trustee wanted to take. It would be positive if it allowed the trust protector to take action proactively, such as the power to add beneficiaries, remove or replace trustees, or even amend or terminate the trust.
Is it too trite or "lawyerly" to answer the question regarding whether or not a trust protector is a fiduciary by stating it depends? Alexander A. Bove, Jr., in his thoughtful article, "The Protector: Trust(y) Watchdog or Expensive Exotic Pet?"1 believes that the answer to the question depends not only on what the powers are that are given to the trust protector but also the identity of the trust protector. One example he gives is that of the settlor's daughter being named the trust protector and being given the power to add or delete beneficiaries. Pursuant to the power, the daughter deletes her siblings and adds her husband and children. Bove argues that in such a case, the settlor would have contemplated such action by his daughter and so the power should be considered a personal, not a fiduciary power. By contrast, however, Bove states that if the same power were given to the settlor's attorney as a trust protector, and the attorney deleted the settlor's children and added his own, it would be considered an inappropriate use of the power because it was clearly not what the settlor would have had in mind. Thus, the same power given to the settlor's attorney could only be exercised in a fiduciary capacity because he would clearly have to bear in mind the purpose of the trust and the settlor's intent.
Powers such as the power to remove and replace trustees, power to change situs of the trust, and certain types of powers to amend the trust are more likely to be powers held in a fiduciary capacity.
Some state legislatures have jumped into the fray with statutes that attempt to give direction on the question. For example, in Wyoming, 2 the trust protector would likely be considered a fiduciary. In Alaska, the statutes provide that the trust protector has no fiduciary responsibility when performing the functions of a trust protector 3.
Absent state law on the subject, as is the case in Colorado and most other states, the question will likely ultimately be resolved by thoughtfully considering both the choice of the trust protector and successor trust protectors, as well as the effect of the particular powers granted to the trust protector. Bove suggests that, as a general rule, if the trust protector is the object of the settlor's bounty, and there is no language in the trust to suggest otherwise, then the power is probably held in a personal capacity. However, he goes on to state that if the trust protector is someone who serves in an advisory capacity to the settlor – not someone the settlor would likely name as a beneficiary – then the power will likely be held in a fiduciary capacity.
There is, however, a school of thought that holds (or perhaps hopes) that simply stating in the trust document that the trust protector will not be considered a fiduciary will settle the issue. Bove states that such an analysis is like saying "regardless of what type of animal walks through these gates, it will be deemed to be a horse." He vigorously argues that despite such language that may be included in a trust document, most trust protectors are intended to exercise their powers for the benefit of the trust, and as such can't escape the reality that comes with it.
The debate is far from being over. More states are likely to pass statutes relating to the question. Since the use of trust protectors, especially in long-term trusts, is increasing exponentially, the issue will be coming before judges who will be asked to rule on the issue. In the meantime, it behooves all of us who may be either drafting trusts with trust protectors, helping administer trusts where there are named trust protectors, or litigating trusts where such powers are involved, to not only consider the issue ourselves but to also discuss it thoughtfully with our clients.
1Bove, Alexander A., Jr., The Trust Protector: Trust(y) Watchdog or Expensive Exotic Pet? , Estate Planning, Vol. 30, No 8 (Warren, Gorham & Lamont, August 2003).
2"Trust protectors are fiduciaries to the extent of the powers, duties and discretions granted to them under the terms of the trust instrument." W.S. § 4-10-711.
3 “Subject to the terms of the trust instrument, a trust protector is not liable or accountable as a trustee or fiduciary because of an act or omission of the trust protector taken when performing the function of a trust protector under the trust instrument.” AS Sec. 13.36.370(d).