Directed Trustees

Take-Away: The Michigan Probate and Estate Planning Council currently has formed a committee that is looking at the adoption of the Uniform Directed Trustee Act. Some changes to Michigan’s law will result if the Uniform Act is enacted ‘as is’ including: the trust protector-director will be treated as a fiduciary with an affirmative duty to act; a trust protector-director’s breach will be treated as a breach of trust that results in an action directly against the trust protector-director (not necessarily including the directed trustee); and a directed trustee will only be secondarily liable to trust beneficiaries to the extent of its own willful misconduct.

Background: The past few decades have produced some fundamental changes to the basic law of trusts and the equitable principles that govern trusts. One of the big changes is the ability to appoint a trust protector who can advise, direct, or veto the actions of a trustee. We now have ‘trust protectors’ who can act in Michigan who can be given powers under a trust instrument that go far beyond asset management to include non-judicial oversight of a trustee’s other activities and responsibilities. See MCL 700.7103(n); MCL 700.7105(20(h) and MCL 700.7809(2) with regard to the authorization of trust protectors. Unlike some states, a trust protector only serves under a Michigan trust will as a fiduciary. Yet numerous questions come to mind if a trust instrument names both a trustee and a trust protector, both of whom are treated under the Michigan Trust Code as fiduciaries of the same trust.

Some common questions that arise when a the trustee-trust protector relationship exists under the same trust instrument include:

What are the trustee’s duty to monitor the trust protector, as both are fiduciaries under Michigan’s Trust Code?;
What are the express, versus implied, fiduciary duties and liabilities of the trust protector since the Michigan Trust Code does not spell out those duties, unlike a trustee’s fiduciary duties?; see MCL 700.7801- .7803; 700.7820-.7821;
What rights does the trust protector possess to access information from the trustee with regard to the trust, its beneficiaries, its assets, and its administration?;
What rights to reasonable compensation from the trust estate does the trust protector possess, and what responsibility, if any, does the trustee have to object to the trust protector’s claim for compensation or for reimbursement for expenditures on advisors hired by the trust protector, e.g. the trust protector hires its own attorney to provide guidance on the protector’s responsibilities under the trust instrument?;
What are the tax implications to both the trustee and the trust protector when one, or both, exercise their authority over the trust’s assets and income?; and
What if the trust protector is given so broad a power over the trustee, e.g. the trustee is not able to make any decision in the trust’s administration without the prior approval or consent of the trust protector, that the trust protector becomes in reality the trustee and the named trustee becomes merely a custodian of the trust’s assets?

Protector-Director As Fiduciary: As noted, Michigan resolved a question that many states have attempted to side-step when those states adopted their version of the Uniform Trust Code. In Michigan it is clear that the trust protector is a fiduciary. Accordingly, the powers that are granted to the trust protector in a trust instrument should be viewed as furthering the settlor’s purposes to benefit the trust beneficiaries. Restated, as a fiduciary ‘power-holder’ a trust protector cannot exercise the delegated powers to him/her under the trust instrument for their own benefit. Restatement (Third) of Trusts, Section 64 (Reporter’s Comments.) The Uniform Act, which calls the trust protector a trust director (for purposes of this summary I will refer to the role-player as the protector-director), supports this presumption that the trust protector-director serves as a fiduciary and provides that, unless otherwise specified in the trust instrument, a protector-director is a fiduciary with an affirmative duty to act (unless the trust instrument specifies that it is only a springing protector power to act in the future on the occurrence of specified events.)

Case law, albeit often taken from foreign jurisdictions, have summarized the fiduciary duties of a protector-director to include:

To act in good faith and in the interests of the trust beneficiaries as a whole;
To reach a decision open to a reasonable protector-director;
To take into account relevant matters but only those matters; and
To not act for an ulterior purpose (outside the trust’s material purposes.)

Removal of Trustees: Of interest is that the Uniform Act does not regulate the powers of a protector-director to appoint or remove a trustee or another protector-director. [Section 5(b)(1)] While that would seem to clearly be a fiduciary power, the Uniform Act provides that the delegated power to a protector-director to remove a trustee is not a fiduciary power held by the protector-director. That then begs the question: if Michigan adopts the Uniform Act without modification, will some powers delegated to a trust protector-director be fiduciary in nature as seemingly required by the Michigan Trust Code, while other default powers delegated under the Uniform Act escape that fiduciary classification?

Uniform Act Overview: Overly simplifying some of the provisions of the proposed Uniform Act-

Irrevocable Trusts: It governs irrevocable trusts;
Powers of Appointment Excluded: An individual who holds a power of appointment over the trust’s assets will not be treated as a protector-director;
Common Law Equity Principles Decide who is a Director: General principles of equity will continue to be applied to determine whether an individual who holds a power of direction over the trustee is, or is not, a protector-director, and instead only a co-trustee, or merely a person who holds a power of appointment over trust assets. Unfortunately the Uniform Act does not offer any ‘magic language’ when a protector-director is intended to be created under a trust instrument, leaving that determination (fiduciary, co-trustee, merely power of appointment holder) to the application of general equitable principles to the facts and the language used in the trust instrument;
Breach of Fiduciary Duty: A breach of the protector-director’s breach of fiduciary duty is treated as a breach of trust, and the trust beneficiary’s recourse for that misconduct is a breach of trust action brought against the protector-director (not necessarily the directed trustee.) [Uniform Act, Section 2(1)]
Trustee Secondarily Liable for Willful Misconduct: The directed trustee incurs secondary liability only to the extent of the directed trustee’s own willful misconduct. [Uniform Act Prefatory Note.]
Affirmative Duty to Act: Under the common law neither a non-fiduciary power of appointment holder, nor an agent acting on behalf of a fiduciary has an affirmative duty to act, unlike a trustee. Under the Uniform Act, a protector-director will have an affirmative duty to act.
Potentially Same Fiduciary Duties as Trustee: Grossly generalizing, and dependent upon the language used in the trust instrument and the rights, duties, obligations and powers given to the protector-director, the protector-director possesses the same rights and the same duties as the directed trustee. [Uniform Act, 8(a)]-This section provides that if a power of direction is held individually rather than jointly, the protector-director ‘has the same fiduciary duty and liability in the exercise or non-exercise of the power as would a sole trustee acting in a like position in like circumstances.’
Default Rules Apply: The default rules that are normally applicable to trustees will apply as well to a protector-director, such as, with regard to: acceptance, producing a bond, compensation, resignation, removal, and filling vacancies.
Change in Standard of Liability- Willful Misconduct: At common law a fiduciary has a duty to not knowingly participate in a breach of trust, even when a non-party to the trust relationship would owe the trust beneficiary such a duty. The Uniform Act seems to replace this ‘duty to not knowingly participate in a breach of trust’ with a ‘willful misconduct’ standard of behavior. [Uniform Act, Section 9(b)] The Act provides that a directed trustee may not comply with the exercise of a power of direction given by a protector-director to the extent that by complying, the trustee would engage in willful misconduct. Are knowingly participate and willful misconduct the same standard? It would be helpful if the Uniform Act provided some working definition of willful misconduct, but it does not. In sum, it is possible that under the Uniform Act a directed trustee’s liability may be watered down to willful misconduct which may be harder to prove than under the Uniform Trust Code that imposes liability on the trustee only when the protector-director’s direction is manifestly contrary to the terms of the trust OR the trustee knows that the attempted exercise would constitute a serious breach of fiduciary duty that the protector-director owes to the trust beneficiaries.
Power to Veto Trustee: The Uniform Act seems to depart from the Uniform Trust Code on another major topic, too. The Uniform Act provides that a trustee that operates under a veto or approval power has the normal duties of a trustee regarding the trustee’s exercise of its own powers, but has only the duties of a directed trustee regarding the trust director’s exercise of its power to veto or approve. [Uniform Act, Section 9] In contrast, the Uniform Trust Code provides that a trustee who administers a trust subject to a veto power occupies a position akin to that of a co-trustee and is responsible for taking appropriate action if the third-party’s refusal to consent would result in a serious breach of trust. See MCL 700.7808. Thus, the Uniform Act and the Michigan Trust Code treat veto powers differently when it comes to the directed trustee’s liability, with the Michigan Trust Code seemingly implying some residual liability for the directed trustee which would disappear under the Uniform Act, if adopted .
Co-trustees: The Uniform Act address in a couple of sections some ‘co-trustee to co-trustee’ directions [Uniform Act, Section 12] as does the Michigan Trust Code. [See MCL 700.7703-MCL 700.7704]
Hiring and Firing: The Uniform Act is silent about the power to hire and fire either directed trustees or protector-directors. General rules of equity will still govern the existence and scope of these powers.

Conclusion: The Uniform Directed Trustee Act has not yet been adopted in Michigan. A good guess is it may take a couple of years before it is adopted in some form, if ever. Until then it is possible that a probate court might transpose some of the Uniform Act’s provisions that govern a protector-director, including its imposition of an affirmative duty to act on behalf of a trust, onto either a trust protector, or a court may apply the willful misconduct standard of liability onto a directed trustee. Many attorneys have described the role of a trust protector as a ‘stand-by’ agent who can amend the trust instrument to address uncovered problems in the trust or to respond to property or tax law changes of the future. If a trust protector, as a fiduciary under the Uniform Act, has an affirmative duty to act to protect the trust, its assets, and the interests of the trust beneficiaries, that role is far more than a passive ‘stand-by’ role-player who only acts when asked to act. Individuals who have been named in a trust instrument as its trust protector should probably be advised that they may have more than a passive role to play, only coming onto the ‘playing field’ when asked by the trustee or the trust beneficiaries. As a fiduciary under either the Michigan Trust Code, or the Uniform Act, a trust protector may have more responsibilities than were initially envisioned. This is something to keep in mind when dealing with a trust which names a trust protector.