Monthly Archives: April 2013

April 29, 2013

Trust Protector As A Fiduciary – To Be Or Not To Be

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).

April 22, 2013

Civil Unions Legislation Effective May 1, 2013

by Kelly Cooper 

In 2012, a law that would have permitted same-sex partners to enter into civil unions in Colorado failed.  In this year’s legislative session, advocates for civil unions were successful and on May 1, 2013, the Colorado Civil Union Act will become effective. 

The Act provides same-sex partners the benefits, protections and responsibilities given to spouses under Colorado law if they enter into a civil union.  In addition, the Act provides that civil unions, domestic partnerships and other legal relationships between same-sex partners created in other states will be treated as civil unions in Colorado.

Even though the Colorado Constitution (by a 2006 amendment) limits marriage to a man and a woman, the Act provides that all Colorado laws granting rights to man and woman spouses will now grant the same rights to partners entering into civil unions.   

This means, for example, that if partners wish to dissolve their civil union, they will need to file for a legal dissolution and that the laws regarding maintenance, parenting time, child support and property division will apply.

The Act does not alter the impact of the federal Defense of Marriage Act (DOMA), which provides that marriage is only between a man and a woman.  As a result, federal laws granting rights to spouses will not apply to partners in a civil union.  The United States Supreme Court is currently considering a challenge to DOMA.  An opinion is expected from the US Supreme Court in June 2013.  We can expect more developments and changes in this area in the near term, so stay tuned.

 

April 15, 2013

Good Lawyers With Good Clients

In 2008 the Colorado Legislature amended the Colorado Probate Code to add Part 5 to Article 10 of Title 15.  Part 5, often referred to as “The Judges Toolbox,” contains procedures available to Colorado courts and interested persons to check the actions of errant fiduciaries and to do so early and efficiently.  We recommend this recent article in the ABA Probate & Property publication on national trends: Shutting Down a Fiduciary Who Is Misusing Trust Assets

April 8, 2013

Expert Excess—When Expert Testimony Is Superfluous

by C. Jean Stewart

From May 1995 through June 2011 I served as Presiding Judge of the Denver Probate Court. Lawyers occasionally complained when I asked them not to burden me with expert witness testimony on a matter of fiduciary fees or legal fees, citing CRE 702 as not contributing to my experience or knowledge on the topic. Often, under CRE 703 the opinion was not properly supported. While I understood their desire to dazzle me with their expert's opinion about the fairness and reasonableness of their upstanding client's proposed fee or, alternatively, about the outrageously excessive fee being siphoned off of the estate or trust by the unscrupulous fiduciary and his/her scumbag accountants and attorneys, I often stood pat on my original ruling that expert evidence would not be heard on the issue because it did not provide "scientific, technical, or other specialized knowledge that I thought would assist me in understanding the evidence or determining a fact in issue." CRE 702

Once or twice I had occasion to rule on a case with facts that I thought might form an excellent appellate case so that my approach could be challenged (and hopefully supported by the prevailing side). It never came to be so Colorado does not have a good appellate opinion on the point.

Recently, I read several Michigan appellate cases (one unpublished) that summarize the issue and state my views succinctly.

The probate court excluded the expert testimony from evidence, finding that the testimony was not properly admitted in accordance with MRE 703. Barron Trust v. Barron, 2013 WL 275913 (Mich.App.) at FN 2, p. 2. [not a published opinion]

The Michigan Court of Appeals has addressed this issue previously and has concluded that

". . . the probate court could adequately evaluate the reasonableness of appellant's fiduciary fee in accordance with the pertinent factors enumerated in Comerica, 179 Mich. App at 724, especially in light of the court's extensive experience and knowledge in evaluating such matters. Thacker, 137 Mich. App at 258. Id.

Obviously, Michigan, where there are numerous specialized probate courts, is not Colorado. It is heartening, however, to see that I was not perched upon a particularly slender reed when I addressed contested fiduciary and legal fees without the use of expert testimony.

April 1, 2013

No Contest Clauses in Trusts and Powers of Appointment: Is Colorado’s Silence an Oversight or an Opportunity?

by Kelly Cooper

With the increasing diversity in the make up of today’s families, many estate plans now treat family members differently or disinherit certain family members completely.  When there is unequal treatment or a disinheritance, estate planners often include no contest clauses in their documents to try to avoid costly disputes and litigation after a client’s death.  Under Colorado law, a no contest clause is only enforceable against a beneficiary if the beneficiary lacked probable cause to bring a contest.  An in-depth discussion of these clauses and the probable cause exception to enforceability was posted to our blog last week, to read it, click here.  We expect the use of these clauses to increase and for clients to request these clauses as they become more familiar with them through media reports about the use of them in celebrities’ estate plans (e.g. Michael Jackson, Brooke Astor).

The topic for today is whether a contest clause in a trust agreement is subject to the same probable cause exception as a contest clause contained in a decedent’s will.  Since a revocable trust is considered a will substitute, some will argue that there is no compelling reason to treat a contest clause in a revocable trust any differently than one in a will.  While Colorado’s probate statutes are clear that a probable cause exception exists for contest clauses in wills, Colorado’s trust statutes do not contain any similar provision.  Is this silence an oversight or an opportunity for planners?  

Colorado’s silence on the question of contest clauses in trusts made me wonder how many states had statutes addressing contest clauses in trusts (enforceability and/or exceptions to enforceability).  The answer is thirteen (and is found in a great 2012 State Laws Survey cited at the end of this post) – Alaska, California, Delaware, Florida, Hawaii, Indiana, Michigan, Nevada, New Hampshire, Oregon, Pennsylvania, South Dakota and Texas.  According to the survey, another nine states have case law addressing the question of the enforceability of contest clauses in trusts, but Colorado and twenty-five states have no statute or case law on this issue.  The Uniform Trust Code is also silent on whether contest clauses in trusts are enforceable.  In light of the fact that numerous states have already addressed the issue of contest clauses in trusts, it can be argued that Colorado’s silence is purposeful.

Colorado law is also silent on the issue of a decedent can place a condition on the exercise a power of appointment.  For example, a decedent’s will may state that he exercises a power of appointment to give assets equally to A and B if no contest is filed, but that he exercises the power to give all of the assets to A if B files a contest.  While this is a conditional exercise of the power of appointment, it reads very similarly to a contest clause.  Unlike revocable trusts, which are often will substitutes, a power of appointment is not a will substitute and the argument that a power of appointment should be treated like a will may well fall short.  In addition, powers of appointment are generally exercisable in regard to trust assets, not probate assets.  Here, Colorado’s law silence on the enforceability of contest clauses in trusts may provide a real opportunity to avoid the probable cause exception, but also causes uncertainty for fiduciaries and administrators of trust assets subject to powers of appointment.

In light of the uncertainty in this area, planners may want to consider drafting trusts instead of wills for those clients who wish to include contest clauses.  When possible, planners may also want to include powers of appointment to allow for greater flexibility and to assist their clients in exercising powers of appointment to implement any plan of unequal treatment among beneficiaries.

For more information about the differing state laws in regard to contest clauses, see a great survey “State Laws: No-Contest Clauses,” T. Jack Challis and Howard M. Zaritsky, March 24, 2012.