dissecting trust protectors glenn m. karisch austin, texas
TRANSCRIPT
Dissecting trust protectors
Glenn M. KarischAustin, 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; or3. 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 §114.003: 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 §114.003: 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 §114.007: 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 §111.0035
Statutes affecting trust protectors• TTC §111.0035: Mandatory Rules– The terms of the trust prevail over the TTC, except
that the terms of the trust may not limit “the applicability of §114.007 to an exculpation term of a trust”
• Query: Does §114.007 and/or §111.0035 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)• §114.003(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, §114.003(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• §114.003: 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