By Harry S. Margolis
Historically, trusts have had three primary players: the “grantor,” who creates the trust, the “trustee,” who manages the trust, and the “beneficary,” the person for whom the trust is created and managed.
Now, more and more trusts have a fourth player called a “trust protector.” This is an outgrowth of off-shore trusts generally created by wealthier clients to protect assets from claim in lawsuits. In order to gain such protection, grantors must give up all control of the assets they put in such trusts. But to retain some control and to permit changes in the future, they often appoint someone else who can hire and fire trustees and even amend the trust. This individual was named the “trust protector.”
This concept has been increasingly brought into more standard trusts, especially in special needs trusts where parents want to provide as much protection as possible to their children with disabilities. After they are gone, they want someone — a trust protector — to watch over the shoulder of the trustee, to review accounts, to fire and hire trustees, and to make amendments to the trust if necessary to maintain eligibility for public benefits.
To some extent these powers can be found in most trusts, but usually they belong to the beneficiaries. They have the right to review accounts and change trustees. But where the primary beneficiary is not able to properly exercise these powers, they may be given to someone else. Special needs trusts often consolidate these powers with one person and grant her the title of “trust protector.”
The question, however, is what liability does an individual take on by becoming trust protector and, more specifically, does a trust protector have a fiduciary responsibility to the trust or to the trust beneficiary. Trustees are considered fiduciary, which means that they are held to the highest level of responsibility and loyalty. In essence, if they screw up and are sued, the benefit of the doubt will be against them and they will have the burden of proving that they acted appropriately.
Whether a trust protector will be held to the same standard is a murky issue because this is a relatively new designation, differrent states have different rules, and every trust defines the role differently. This came up a few years ago in the case of Robert T. McLean v. Patrick Davis (Mo. Ct. of App., January 26, 2009, 283 S.W.3rd 786), in which the trustees of a special needs trust for a young man who became a quadrapilegic in auto accident mismanaged the trust, losing over $500,000. In seeking to recover these funds, the successor trustee in addition to suing the prior trustees, also sued the trust protector for failure to perform adequate oversight.
The trust protector convinced the trial court to dismiss him from the case on the grounds that while he had the power to remove the miscreant trustees, he had no duty to do so. Unfortunately for him, he was not so successful on appeal. The Missouri Court of Appeals keeps the trust protector in the case because the trust calls him a “fiduciary” and while it exempts him from liability if he acts in good faith, the new trustee has alleged that he acted in bad faith. The Court says in part:
That the intent of the grantor could have been that the Trust Protector exercise some sort of supervisory duties over the trustees might also be implied by the fact that section 5.4.1 of the trust gave the Trust Protector the ability to nullify a removed trustee’s designation of his or her successor and thereby prevent that person from serving. What duties and responsibilities the grantor intended the Trust Protector to have are not clearly set forth in the language of the trust, and that intent is a significant and contested issue of material fact.
In any event, the provision that the Trust Protector will “not be liable for any action taken in good faith” certainly allows an inference that the Trust Protector could be susceptible to liability for actions taken in bad faith; a claim Appellant makes in her petition.
So what’s the moral of this story? First, be careful before agreeing to become trust protector. Make sure that you can maintain communication with the trustees and know what they’re doing. Second, read the trust and make sure it does not raise your standard of care to that of a fiduciary. But, third, don’t simply run away from taking on the responsibility. Parents need assurance that their children will be looked after and need help after they’re gone to make sure everything works as planned. Do what you can to help out.