Trust Director or Trust Detractor?

Take-Away: Trust Director provisions should be used judiciously and sparingly because of their potential grave consequences to the trust settlor’s plan. A settlor needs to understand the potential abuses and measures available to keep this fiduciary in check.

Background: Back in 2019 the Michigan Trust Code (MTC) was amended to authorize the use of trust directors (formerly called trust protectors.) This amendment was part of Michigan’s adoption of the Uniform Directed Trust Act. Unlike some states, Michigan opted to require that a trust director always serve as a fiduciary, a role that cannot be altered by the terms of the trust instrument. [MCL 700.7703a(4)(5)(8).]

Before a trust director is added to a trust instrument, consider the following observations (or warnings:)

1. Does the Trust Need a Trust Director?: Not all trusts need a trust director. Example: A trust provides that all of its assets are to be distributed by the trustee no later than the third anniversary of the settlor’s death. How likely is it that the trust instrument will need to be amended within 3 years of its settlor’s death?
2. Removing the Named Trustee?: If the concern is with regard to the named trustee’s administration of the trust that prompts the belief that a trust director is warranted, maybe consider some simple alternatives, such as allowing trust beneficiaries to remove and replace the named trustee with an independent trustee.
3. Powers to Amend the Trust: Powers to amend the trust should be strictly limited to necessities for the trust to operate as the settlor intended. Perhaps the trust director’s power to amend the trust instrument should require the consent of the trustee, or others affected by the proposed change.  If the trust director amends the trust, granting the trust director the unlimited use of trust funds to defend the trust director’s decision is ill-advised, as it provides little deterrent to abuse by the trust director and it financially penalizes the trust beneficiaries who seek to end the abuse. In addition, the settlor needs to consider how to anticipate and avoid contests and litigation over the meaning of the trust director provisions.
4. Drafting Attorney Should Not Name Self as Director: The attorney who names themself as a trust director of their client’s trust violates the attorney’s conflict-of-interest rule of professional responsibility (e.g. compensation, broad powers, broad exculpation.) All of these provisions that are normally used in connection with a trust director conflict with the settlor’s best interests. If the drafting attorney proposes to serve as trust director,  that will require a waiver by the client, and also the use of independent legal counsel. In short, an attorney’s self-appointment as trust director probably violates the attorney’s ethical duty of loyalty to their client.
5. Usurping the Trustee’s Powers: When naming a trust director for a trust, impartiality and independence are mandatory. Unfortunately, many trust director powers seem to overlap or usurp the trustee’s power or go to such an extreme as to leave the trustee impotent in the administration of the trust. As an alternative to giving to the trust director a ‘laundry list’ of powers that might clash with the trustee’s normal powers, consider simply giving the trust director the sole power to remove and replace the named trustee; this one, albeit limited, power should be sufficient to resolve the bulk of any problems associated with the trust’s administration.
6. What are the Limits (if any) of a Director’s Powers?: The boundaries of the trust director’s powers are not limited by common law. Accordingly, identifying those boundaries is a bit like the ‘Wild West.’ A trust director acts as a fiduciary under the MTC. Often the trust amendment power given to a trust director seem to go far beyond appropriate adjustments for scrivener’s errors, changes the tax law, trust situs, controlling law, or qualifying it as a ‘special needs’ trust. All of these ‘expansive’ powers will be judged by a fiduciary standard just like the trustee’s actions, so how likely is it that the trust director will actually exercise the power without seeking a probate court’s instructions?
7. Avoid Over-Exculpation of a Director: Capable trustees may require broad limited liability provisions in a trust instrument. However, blanket protections and added burdens of proof only encourage abuses of power. Some of provisions of the MTC attempt to relieve a fiduciary’s liability are deemed invalid with regard to intentional actions, or actions taken with reckless indifference to the beneficiary’s interests in the trust. In the absence of much (if any) common law, the statutory suggestion in the MTC that some fiduciary duties held by a trust director can be properly relieved is open to debate and speculation. Restated, a trust instrument that uses a trust director should never require proof of clear and convincing evidence of bad faith, gross negligence, or intentional misconduct requiring the trust to pay all of the trust director’s costs, nor should the trust provide blanket indemnification to the trust director.

Conclusion: It is probably safe to say that trust directors are here to stay as part of trusts and trust administration. That said, it does not mean that every trust needs to have a trust director named. And if the settlor believes that a trust director will be of some assistance in the administration of the trust, a lot of thought goes into what those power might be, or restricted so as to not destroy the settlor’s express purposes for the trust. In short, when it comes to adding a trust director to a trust instrument, proceed with caution and restraint.