Trust Directors and Trustees: Dueling Fiduciaries

Take-Away: If a trust instrument is drafted that gives a trust protector extraordinary powers, such as the power to consent to the trustee’s exercise of discretion, it is critical that the same trust instrument include an alternate dispute mechanism in order to avoid an impasse between the two fiduciaries. Otherwise, there will probably be a litigation logjam sorting out which fiduciary’s voice is louder.

Background: What happens when an irrevocable trust gives the trustee full discretion to make discretionary distributions from the trust, subject only to the prior written consent of a trust director, aka trust protector, and the trust protector flatly refuses to give the necessary consent to the trustee’s proposed exercise of discretion? The administration of the trust comes to a standstill. That was the situation in two separate recently reported cases, albeit off-shore decisions: The Royal Court of Jersey and the Supreme Court of Bermuda. Both jurisdictions have historically recognized the use of a trust protector, long before trust protectors became commonplace in the U.S. In both of these reported cases the trust protector, like Michigan’s Trust Code, served in a fiduciary capacity.

Issue: Many current trusts grant extraordinary power to the trust protector (or in Michigan, a trust director) vis-à-vis the trustee. The issue then becomes what happens if there is an impasse between the trustee’s exercise of authority and the trust protector’s exercise of authority under the same trust instrument. In the absence of a dispute resolution mechanism embodied in the trust instrument, courts must become involved to resolve that impasse, thus leading to publicity, delays, and extraordinary legal expenses incurred by the trust to identify ‘who wins?’

In the Matter of the Piedmont Trust and the Riviera Trust, JRC 248 (2021) [Jersey]

In the Matter of the X Trusts, SC Bda 72 Civil (September 17, 2021) [Bermuda]

• Bermuda: In the Bermuda case the judge described the trust protector as a ‘watchdog or enforcer’ of the trustee’s performance, but  then went on to observe that the trust protector is not expected to operate and administer the trust himself. Consequently, the actual power to exercise discretion over trust assets remains that of the trustee and not the trust protector despite the required protector consent requirement. Restated, the protector with consent power does not possess the power to exercise any discretion other than the use of his position to ascertain that the trustee is, or is not, properly performing its duties under the trust instrument. As the Bermuda judge observed, “If the protector believes that the trustee’s proposed exercise of discretion is improper, he can withhold his consent but that does not have the effect of transferring the trustee’s discretion to the protector.”
• Jersey: In the Jersey decision the court observed: “It is emphatically not the duty of the protector to take that discretionary decision himself, or force the trustee into making the decision which the protector would make if he were the trustee by stating that he will only consent to a particular decision.” That would be a violation of the protector’s proper role as contemplated by the settlor.
• Disparate Judicial Views: While the two courts in different jurisdictions were looking at the same question, albeit in different trusts, they approached the competing roles of the trustee and protector somewhat differently. These divergent viewpoints were called the wider view and the narrower view.

The wider view is that the protector would be acting properly to withhold consent to a proposed act by the trustee even if the proposed act was one that would be approved by ‘a reasonable body of informed trustees,’

The narrower view is that the protector would consent to a proposed act by the trustee if the act was one that a reasonable body of informed trustees was ‘entitled to decide.’

Thus, the primary (sadly, not all that clearly stated) distinction between these views is the conclusion that the powers of discretion are vested in the trustee and not the trust protector and that the protector is not a co-holder of joint power of discretion. The Jersey court agreed that the powers were to be regarded independently, but it disagreed that the required adoption of the narrower view, acknowledging that such a position would likely lead to a greater risk of deadlock between the trustee and the protector, but then the Jersey court casually minimalized that risk by acknowledging that the parties always have recourse to the courts (and no doubt protracted litigation and legal expense.)

• Judicial Decisions: The Jersey court based its analysis of the role of the trust protector and rendered a decision that ordered the protectors to consent to the trustee’s proposals “on the basis that it is a decision which reasonable trustees, properly instructed, could have reached.”

The Bermuda court simply decided the protector’s duty is “to satisfy themselves that the proposed exercise of a power by the trustee is an exercise which a reasonable body of properly informed trustees is entitled to undertake and if so satisfied, to consent to the same.”  In effect, the Bermuda court left the parties in the same situation when they went to court, without resolving their deadlock.

Conclusion: When a trust instrument is drafted that gives the trust protector, or trust director, extraordinary authority, particularly over the trustee, then the instrument needs to anticipate and address the prospect of a deadlock between the two fiduciaries. Examples might include: (i) simply identifying in the event of a disagreement, which fiduciary’s decision prevails; or (ii) use the appointment of independent arbitrators (with the two arbitrators appointing a third, neutral arbitrator) with the decision of the arbitrators being binding on all interested parties to the trust. The point is that when fiduciaries are set-off against one another in the trust, it is critical to anticipate a dispute between them and set in place a mechanism to resolve that dispute before heading off to court.