Trust Protector Powers – the Corresponding Duty to Monitor?

Take-Away: More and more trusts are drafted with the addition of a trust protector provision. While the use of a trust protector helps to adapt the trust instrument to future changes in circumstances and thus it adds considerable flexibility to the trust’s administration, more thought needs to be given to the powers conferred on the trust protector and the implications of liability if the protector’s fails to exercise a delegated power under the trust instrument.

Background: The Uniform Trust Code’s authorization of the use of a trust protector does not require that a trust protector serve as a fiduciary although it provides that the trust protector presumptively acts as a fiduciary. [UTC 808(d).] Given that latitude, some states permit the trust settlor to opt-out of designating that a trust protector must serve as a fiduciary, e.g. Illinois [760 Ill. Comp. Stat. Ann. 5/16.3(e)- “unless the governing instrument provides otherwise”.] Other states expressly provide that a trust protector does not serve in a fiduciary capacity, e.g. Alaska [ Alaska Stat. Ann. Section 13.36.370(d) (West.)] Some states, like California and New York, which have not adopted any variant of the Uniform Trust Code, nonetheless have statutes that specifically authorize the use of trust protectors.

Michigan: The Michigan Trust Code clearly states that a trust protector must always act as a fiduciary. [MCL 700.7809(1)(a).]
Fiduciary Standard: A Michigan trust protector must always act (i) in good faith, (ii) in accordance with the terms and purposes of the trust, and (iii) in the interests of the trust beneficiaries. [MCL 700.7809(1)(b).]
Damages: A Michigan trust protector will be liable for any loss that results for the breach of his/her fiduciary duties. [MCL 700.7809(1)(c).]
Exoneration: The Michigan Trust Code makes it clear that a trust instrument that attempts to relieve a trust protector from liability for a breach of his/her fiduciary duties is unenforceable to the extent either of the following circumstances apply: (i) the exoneration provision relieves the trust protector of liability for acts committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the trust beneficiaries; or (ii) the exoneration provision was inserted in the trust instrument as a result of an abuse by the trust protector of a fiduciary or confidential relationship with the trust settlor. [MCL 700.7809(8).] Consequently, if a Michigan trust instrument is silent on the trust protector’s liability, a trust protector arguably could be held liable for mere negligence. If the trust instrument attempts to fully exonerate the trust protector from liability, a trust protector can still be held liable if his/her acts are either determined to be made either in bad faith or with reckless indifference to either the purposes of the trust or the interests of the trust beneficiaries.

Trust Protector Powers: As a generalization, a trust protector under the Michigan Trust Code acts in accordance with the specified powers that are delegated to the trust protector under the trust instrument. [MCL 700.7809(3).] In contrast to Michigan’s approach to leave the identified delegated powers to the settlor’s choice, other states provide a laundry list of powers that may be delegated to the trust protector, usually identified as a non-exhaustive list. For example, Illinois’ trust protector statute lists 10 different powers that may be delegated to the trust protector, including the power to ‘change the situs of the trust and the governing law of the trust, or both’ and the power to ‘modify the terms of any power of appointment granted by the trust so long as such modification or amendment may not grant a beneficial interest to any individual or class of individuals, or other parties, who are not specifically provided for under the trust instrument.’] [ 760 Ill. Comp. Stat. Ann. 5/16.3.] When you review a proposed trust instrument that names a trust protector, pay close attention to the powers delegated to the trust protector and decide how those powers will assist, or interfere with, the efficient administration of the trust and determine if the trust protector is entitled to receive copies of all reports or trust accountings.

Inferred Duty to Monitor: Implicit in the delegation of power and authority to the trust protector, or arguably an adviser who possesses the authority to direct a trustee under a directed trust scenario, is an implied duty to monitor the trustee. Could there be an implied duty imposed on the trust protector, or adviser of the trustee, to monitor the trustee activities in order to know when to exercise a delegated trust protector power? This was the subject of two of the few reported cases that deal with the power and duties of a trust protector.

Key Case: Robert T. McLean Irrevocable Trust v. Davis, 418 S.W.3d 482, 486 (Mo. Ct. App. 2013)
Facts: The successor trustee of the trust sued the trust protector for a breach of fiduciary duty. No laundry list of duties was delegated to the trust protector under the trust instrument, but the trust instrument specified that the trust protector was to act in a fiduciary capacity. The trust instrument provided immunity to the trust protector for ‘actions taken in good faith.’ The trust protector possessed the authority to remove the trustees of the trust, a common power given to most trust protectors. Apparently the initial trustees of the trust had improperly spent trust funds, warranting their removal, which the trust protector did not do according to the successor trustee’s claim, because the trust protector had failed to monitor either the trust or the actions taken by the acting trustees, which would have then prompted the trust protector to remove the acting trustees for their behavior. The law that governed the trust, Missouri, had no statute that specifically delegated duties to the trust protector.
Courts: The trial court dismissed the lawsuit in favor of the trust protector. That trial court’s decision was reversed by the Missouri Court of Appeals. The Court of Appeals found that in the absence of a specific Missouri statute dealing with trust protectors, any duties held by the trust protector would have to be discerned from the trust instrument itself. The Court of Appeals found that there must be some implied duty of care placed upon the trust protector. Thus, it might be possible to draw the inference that the trust’s settlor intended the trust protector to remove a trustee who acted against the purpose of the trust. As a result, the case was remanded to the trial court to determine if the trust protector had breached that implied duty to monitor. At the trial court level, the trial judge found that the trust protector had no obligation to monitor the activities of the trustee, but a duty to remove the trustee may have arisen only if the trust protector was made aware of any bad conduct of the trustee. Ultimately the trial judge held in favor of the trust protector, and that decision was sustained on a second trip to the Missouri Court of Appeals. The upshot of this decision is that arguably if the trust protector remains in blissful ignorance, apparently there is no affirmative duty to exercise the powers delegated to the trust protector.
Recent Case: No Duty to Monitor: An unreported 2018 California decision dealt with a trust protector who sought to monitor the trustees’ administration of the trust. The trustees refused to provide an accounting and other records requested by the trust protector. The trust protector then filed a lawsuit in California courts to gain access to the requested information. The California Appellate Court affirmed the trial court’s dismissal of the trust protector’s lawsuit, stating that the trust protector’s ‘powers did not include any authority to affirmatively seek oversight of the trust.’ Carberry v. Kaltschmid, No.A150675, 2018 WL 2731898 at *1 (Cal. Ct. App. 6/7/2018). Would not that be an implied power to exercise an expressly delegated power, i.e. one of oversight, if the trust protector was expressly delegated the authority to remove the trustee at any time, or for any reason?

Unanswered Questions: The addition of a trust protector to a trust in Michigan leads to several questions, which the trust settlor may not be aware to fully appreciate the consequences of adding a trust protector. This also may the case when a whole host of powers are delegated to the trust protector (over several pages) without much thought to the exposure to the trust protector to liability, since he/she is always a fiduciary, perhaps with an implicit duty to monitor the administration of the trust in order to be able to exercise one of the many powers expressly delegated to the trust protector, a so-called kitchen-sink grant of powers to the trust protector.

Does the settlor really want a trust instrument that places the interests of the beneficiaries at the trust protector’s whim, especially if no standards are used to limit the trust protector’s discretion?
Does the settlor understand that with a blanket delegation of powers to the trust protector, the trust protector can expressly re-write the terms of the settlor’s trust?
What is the actual standard of care imposed on the trust protector if he/she acts in a fiduciary capacity with regard to the trust? Negligence or reckless indifference or best interests of the trust beneficiaries (but maybe not the trust’s settlor?)
As a fiduciary who is potentially liable to the trust beneficiaries, under what circumstances will the trust protector affirmatively exercise his/her powers?
While an amendment to a trust administrative provision by a trust protector might seem to be relatively harmless, even that could equally cause future liability exposure to the trust protector. Example: the trust protector amends the trust instrument to permit the trustee to purchase securities on margin, and that change in administration ultimately results in a substantial loss to the trust. Guess who gets sued by the unhappy beneficiaries?
If a trust protector exercises a power that relates to a modification of a dispositive provision of the trust instrument, which has the effect of increasing or decreasing a beneficial interest in the trust, how can that power be exercised without violating a fiduciary duty to a beneficiary or a class of beneficiaries when the exercised power negatively impacts their interest?

Conclusion: A couple of thoughts come after the list of unanswered questions.

Springing Appointment: If the trust protector is added to a trust solely to act as a fail-safe device to respond to future changes, or to fix perceived problems, then probably the trust protector should be a springing trust protector, who has no powers or duties until an event is triggered, or the trustee, or a majority of the adult trust beneficiaries, activate the provision and formally appoint the trust protector, only after which the trust protector is given powers and responsibilities.
Use Discrete Powers: Rather than include in the trust a random kitchen sink list of powers delegated to the trust protector, the trust protector’s powers should in some manner be tied to, or limited by, the settlor’s material purposes that are identified in the trust instrument. Merely tacking on a kitchen-sink list of powers to be exercised by the trust protector helps neither the trust protector, the trustee, or the trust beneficiaries. Instead it only adds to the confusion in the administration of the trust, ambiguous as to where duties begin and end, and who has ultimate responsibility.
Relieve the Trust Protector of the Obligation to Act: It might be wise to relieve the trust protector from the obligation to act, even if it possesses a power, in order to mitigate an implied duty to monitor the trust and its administration. Example: A trust instrument might include the following: “The trust protector shall not be obligated to exercise any of the powers or authority granted to the trust protector under this instrument, nor shall the trust protector have any affirmative duties to inquire or monitor the administration of this trust as a condition to the exercise of the trust protector’s powers.”

Learning to live with trust protectors will take time and answers to lots of questions that their presence in a trust’s administration will present.