Using Trust Protectors

In the governance of a trust, a trust protector can play a valuable role. A trust protector traditionally supervises a trustee. A trust protector simultaneously may help to ensure that the settlor’s intent or the trust’s purposes are being fulfilled.

TRUST PROTECTOR POWERS

A trust protector’s role is defined by the terms of the trust. Unlike a trustee, a trust protector does not have any statutory powers. In the traditional model of a trust protector, the trust protector supervises the trustee. In that model, a trust protector functions like a company’s board of directors, and the trustee functions like the company’s management. Accordingly, a trust protector’s powers often include the following powers:

  • Power to remove a trustee
  • Power to appoint a trustee

In some instances, a trust protector may have the power to veto certain actions. For example, a trust protector may have the following veto powers:

  • Power to veto a distribution
  • Power to veto an investment decision

In some trusts, a trust protector may have an array of powers. Those powers may go well beyond supervising the trustee and, in fact, may place the trust protector in the position of leading some or all of the trust’s administration and management. For example, the trust protector’s powers may include:

  • Power to direct distributions
  • Power to direct investments
  • Power to amend the trust
  • Power to decant the trust
  • Power to change the trust’s principal place of administration
  • Power to change the governing law

If a trust protector has too many affirmative powers, then there is a risk that the trust protector would be treated as functionally equivalent to a trustee, which may adversely affect the trust’s governance and the overall trust design.

In lieu of granting an array of affirmative powers to a trust protector, it often makes more sense to require a trustee to notify the trust protector of a proposed action—such as a proposed distribution or a proposed amendment—and leaving it to the trust protector to initiate a dialogue with the trustee if the trust protector questions the proposed action. In the end, the trust protector could exercise the removal power if the trust protector determines that the proposed action is sufficiently egregious.

TRUST PROTECTOR’S DUTIES

Although a trust protector does not have any statutory powers, some states impose certain statutory duties, such as the duty to monitor the trustee and the duty to warn the beneficiaries if the trust protector believes that the trustee may be breaching the trustee’s fiduciary duties. Aside from those statutory duties, a trust protector’s duties generally will be dictated by the nature and scope of the trust protector’s powers. For example, a trust protector that has the power to direct investments or the power to veto investments generally would have the duty to exercise those powers in good faith in accordance with the terms of the trust. The trust protector’s duties, however, will be affected by whether the trust protector is a fiduciary or a non-fiduciary.

FIDUCIARY STATUS

In designing a trust protector’s role, the trust protector’s fiduciary status is important. As a fiduciary, a trust protector will be held to the highest standards, which can be advantageous because it encourages behavior that is beneficial to the beneficiaries, but can be disadvantageous because it exposes the trust protector to greater risk of lawsuit and liability. In some cases, it may be preferable to design a trust protector’s role so that the trust protector is a non-fiduciary.

In designing a trust in which a trust protector is a non-fiduciary, a settlor should consider whether the trust protector should be held to a good-faith or some other standard. In the absence of any standard, the trust protector’s powers are personal powers, and the trust protector can exercise those powers unfettered by any constraints. Having non-fiduciary standards in place avoids the downside of granting a trust protector purely personal powers.

State laws vary on what they permit. In New Hampshire, for example, a trust protector of a noncharitable trust can be either a fiduciary or a nonfiduciary. Other states do not allow a non-fiduciary trust protector or are unclear on whether a trust protector can be a non-fiduciary.

STATE RECOGNITION OF TRUST PROTECTORS

A few states, like New Hampshire, expressly recognize trust protectors. Many states do not expressly recognize trust protectors, so there is less certainty concerning the nature and scope of a trust protector’s powers and duties. In those states, a court might recognize a trust protector based on the theory that, under the terms of a specific trust, the trust protector is a manifestation of the settlor’s intent.

ENTITIES AS TRUST PROTECTORS

Using a corporation or limited liability company as a trust protector often is advantageous, because the entity can insulate the directors from liability and it potentially can help to avoid causing the trust become subject to the jurisdiction of states outside of the state in which the entity was formed and the trust has its principal place of administration. Some states, like New Hampshire, allow an entity to act as a trust protector. In most jurisdictions, a corporation or limited liability company cannot act as a trust protector, because the entity might violate the jurisdiction’s banking laws. An entity generally cannot exercise trust powers, unless the entity is chartered as a trust company or a bank with trust powers.

HOW PERSPECTA CAN HELP

Perspecta can help explain the advantages of using a trust protector and explore whether it makes sense to include this role in your trust planning. Please give us a call to find out more.

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