Should Your Trust Have a Trust Director (or Protector)?

Michigan’s Trust Code authorizes the use of a trust director, formally called a trust protector with a trust. A trust director is an individual or entity that possesses the power over a trust, but who is not a trustee. Often a new trust will name a trust director, even when a trust director is not needed. Is this good practice?

Fiduciary Capacity

One difference in trust directors between Michigan’s trust director statute and other states’ laws that authorize a trust director (or trust protector) is that Michigan’s statute is clear that a trust director serves in a fiduciary capacity, which means that the trust director owes duties of care and loyalty to the trust beneficiaries, from which liabilities can attach to the trust director who does not act reasonably and in the trust beneficiaries’ best interests. Consequently, this aspect of serving as a trust director with fiduciary responsibilities may cause some individuals to decline to serve as a trust director considering that personal liability expense, e.g., liability insurance, associated with the role.

Trust Director Powers

The powers given to a trust director can change from state to state where the trust is administered. A few states permit the trust director to add or to delete trust beneficiaries, or the power to change the provisions of the trust, meaning a total reformation of the trust instrument. Other states, like South Dakota, have a ‘laundry list’ of powers that are automatically conferred on a trust director. Michigan does not specify which powers are available to a trust director, leaving that decision to the trust’s creator.

Advantages of a Trust Director

The perceived advantages of a trust instrument that names a trust director include:

A trust director provides an additional layer of oversight over the trustee, to better assure that the trustee administers the trust in the beneficiaries’ best interests, and in accordance with the trust creator’s intent.
As the law changes over time, and recently with even greater rapidity as states vie for new trust business, irrevocable trust instruments will need to be updated to reflect those law changes. Rather than formally amend the trust with a trust modification petition filed in the probate court, the trust director can be given the authority to modify the terms of the trust when needed, which adds flexibility to adapt the trust.
Family circumstances can also change over time. Or the original trustee may no longer be able to perform his duties regarding the trust. A trust director could step in and remove the trustee. Or a trust director could be given the authority to modify the trust terms to reflect changes in trust’s distribution provisions to adapt to the beneficiary’s changing circumstances. An example is if a trust instrument gave a trust beneficiary distribution rights, and that beneficiary later became disabled and needed to receive Medicaid benefits; the trust instrument could be amended by the trust director to convert the trust to a discretionary trust the existence of which would not prevent the beneficiary from becoming eligible to receive governmental benefits.
Future probate court involvement can be reduced if the trust director is able to step in and amend the trust instrument without the need to involve the probate court. The time and expense of filing petitions with the probate court can be avoided if the trust director holds the power to amend the trust.
If changes can be made to the trust instrument by the trust director without involving the probate court, then the privacy of the trust and the trust beneficiaries can be better preserved by keeping a copy of the trust instrument or information about the trust’s assets from becoming part of the public record.
A trust director can be empowered to mediate and resolve disputes between the trustees and trust beneficiaries to avoid potential litigation or forestall family hostilities boiling over into court litigation and open to the public. For example, a recent Florida appellate court found that the trust director possessed the authority to construe ambiguous trust terms such that the probate court did not have any jurisdiction to oversee a dispute among trust beneficiaries regarding how their trust should be interpreted.
In some limited situations, a trust director can exercise powers, like the ability to suspend a trustee’s ability to distribute assets from the trust, to safeguard assets from creditor claims against a trust beneficiary or if the beneficiary is later in a divorce proceeding.

Disadvantages of a Trust Director

Despite the benefits of naming a trust director, not all trusts need to name a trust director. One simple example is if a trust terminates shortly after the death of its creator with the direction that all trust assets be distributed to the trust beneficiaries. If the trust instrument contemplates a relatively ‘short shelf-life’ there may be no need to build flexibility into the trust instrument with the use of a trust director. There are other reasons why naming a trust director might not be a viable choice, including:

It can be a challenge to find an honest, competent and reliable individual or institution with the necessary knowledge or sophistication (knowing both trust and tax law) to serve the trust director’s role effectively. Or, those strengths that led to the selection of an individual to initially serve as the trust director disappear over time.
If a trust director is involved in the trust’s administration, you can expect an increase in administrative expenses. The trust director will charge a fee, just like the trustee, and an additional layer of communication between the trustee, the trust director, and the trust beneficiaries will be involved. It would be reasonable, for example, since the trust director serves as a fiduciary to obtain and pay for liability insurance or to hire his/her own attorney if a dispute arises between the trust director and either the trustee or the trust beneficiaries.
Different states have different laws when it comes to a trust director, so that lack of legal clarity can lead to an inconsistent understanding of the role and responsibilities of a trust director. For example, some states do not require that a trust director (or protector) serve in a fiduciary capacity. That difference in treatment could lead to misunderstandings, either by the trust director or the trust beneficiaries.
Even when the trust director serves in a fiduciary capacity, he/she might make decisions that do not align with the expectations of the trust beneficiaries, thus possibly creating new disputes that could lead to litigation that would not exist if there was no trust director.

Springing Trust Director

With some of the drawbacks of naming a trust director in a trust instrument, one approach used by some trust creators is to use a ‘springing’ or stand-by trust director provision. Such a provision has an unnamed trust director standing by to serve later, if ever. A springing trust director who does nothing would not be entitled to receive a fee. However, one unanswered question is if the trust director stands by and does nothing, can he/she be held liable if the trustee breaches its fiduciary duties, i.e., is there any implied duty to monitor the trustee’s actions?

A springing trust director can thus eliminate some of the concerns associated with naming a trust director in the trust instrument who immediately serves, but it will then require that the trust instrument includes some provisions to identify the circumstances of the need for a trust director to act, and how that trust director is to be named. The key characteristics of a springing trust director include:

The director does not have any powers or duties, including the duty to monitor the trustee, until an event is triggered.
If a specific event activates the trust director’s authority, either the trustee can ask the director to become involved, or the trust beneficiaries can ask the trust director to become involved if the problem relates to the trustee.
Normally the trust instrument will outline the trust director’s powers, which can include modifying the trust terms, replacing the trustee, approving, or adjusting trust distribution provisions, or resolving disputes.
The trust director’s powers over the trust are intended to be temporary. Once the trust protector has addressed the problem, he/she can be removed from their role and the trust continues without the director’s involvement.
The future appointment of a trust director should state the terms and conditions of the trust director’s appointment, including the duration of that appointment, meaning the purpose and powers of the trust director can be tailored to the needs of the trust and its beneficiaries at that time.

If a springing trust director sounds like a reasonable accommodation to enjoy the flexibility afforded with a trust director, without a few of the drawbacks of naming one with immediate responsibilities, consider using a springing trust director provision in a trust that contains the following provisions:

A detailed set of instructions on the situation or circumstances that warrant authorizing the springing trust director to act.
Describe what powers are given to the springing trust director (or what powers will never be given to the trust director). Or authorize the ‘asking’ party to grant the limited powers needed to address the problem that the springing trust director will be expected to solve.
Identify who will name or appoint the springing trust director. The acting trustee or a majority of the current trust beneficiaries, or the attorney, or law firm, which drafted the trust, could be given this responsibility.
Describe what the compensation will be paid to the springing trust director from the trust and how the trustee will pay it.
Describe the springing trust director’s right to information from the trustee and the trust beneficiaries to enable the trust director to fully exercise their powers.
Address if the springing trust director possesses the authority, using trust assets, to hire agents, and others to assist the director in carrying out the director’s responsibilities under the trust instrument, perhaps including the hiring of the trust director’s own attorney, or the purchase of ‘errors and omissions’ liability insurance.
Describe what exculpation will be afforded the springing trust director who acts under the trust, such as limiting the trust director’s liability to a showing of an absence of good faith and self-dealing.

A trust director acts as a ‘safety net’ to manage situations that the trust’s creator may not have anticipated. The benefit of using a springing trust director is that it can be utilized repeatedly to deal with trust problems as they appear during the full term of the trust without being bound to using a single trust director (who may not possess the required skills to deal with the problem at hand) and without having to resort to the probate court to have one appointed. Once the trust director’s duties are fulfilled, the director’s role can end. As circumstances change, trust instruments can adapt to those changes, often with the use of a springing trust director.