Trust Protectors for Special Needs Trusts
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, such as 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 often 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 award them the title of “trust protector.”
Liability for Trust Protectors
The question, however, is what liability an individual takes 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 fiduciaries, 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, different 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 quadriplegic in an auto accident mismanaged the trust, losing over $500,000. In seeking to recover these funds, the successor trustee sued the prior trustees as well as 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 although 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 kept the trust protector in the case because the trust called him a “fiduciary” and while it exempted him from liability if he acted in good faith, the new trustee alleged that he acted in bad faith. The Court said, 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.
Accept the Role With Care
So, what’s the moral of this story? First, be careful before agreeing to become a 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. And 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.