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Dissecting trust protectors

Dissecting trust protectors. Glenn M. Karisch Austin, Texas. What is a trust protector?. Called many things No references to “trust protector” in statutes Working definition: A non-trustee who has the power to: make changes to the trust, its trustee, its beneficiaries or its situs;

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Dissecting trust protectors

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  1. Dissecting trust protectors Glenn M. KarischAustin, Texas

  2. What is a trust protector? • Called many things • No references to “trust protector” in statutes • Working definition: A non-trustee who has the power to: • make changes to the trust, its trustee, its beneficiaries or its situs; • direct the trustee to take an action; or • prohibit the trustee from taking an action.

  3. Who can be a trust protector? • A beneficiary • The trustee • A third party • Uncle Joe • The attorney • The accountant • The financial advisor? • A bank or trust company?

  4. Common uses • Amend the trust • Tax (otherwise non-substantive) • Nontax (substantive) • Change trustee personnel • Direct/restrict investments • Direct/restrict distributions • Change situs • Direct the trustee to decant • Do any of the things on Shannon’s decanting list

  5. Statutes affecting trust protectors • TTC §114.003: Powers to Direct • Trust instrument may give trustee or other person a power to direct the modification or termination of the trust • If the trust gives a person the power to direct actions of the trustee, the trustee shall act in accordance with the direction, unless: • The direction is manifestly contrary to the trust terms; or • The trustee knows the direction would constitute a serious breach of a fiduciary duty that the powerholder owes to the beneficiaries

  6. Statutes affecting trust protectors • TTC §114.003: Powers to Direct • A person other than a beneficiary who holds a power to direct is presumptively a fiduciary required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. • The holder of a power to direct is liable for any loss that results from a breach of the person’s fiduciary duty

  7. Statutes affecting trust protectors • TTC §114.007: Exculpation of Trustee • A trust term relieving the trustee of liability for breach of trust is unenforceable if the breach is committed in bad faith, intentionally or with reckless indifference • This doesn’t prohibit the settlor from relieving the trustee from a duty or directing the trustee to do or not do something that otherwise would be a breach, except as provided by TTC §111.0035

  8. Statutes affecting trust protectors • TTC §111.0035: Mandatory Rules • The terms of the trust prevail over the TTC, except that the terms of the trust may not limit “the applicability of §114.007 to an exculpation term of a trust” • Query: Does §114.007 and/or §111.0035 affect the settlor’s ability to relieve a trust protector from liability?

  9. Must the trust protector be a fiduciary? • No (not in Texas, at least) • §114.003(c): A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary • A possible inference is that a beneficiary serving as trust protector is presumptively not a fiduciary • For any trust protector, §114.003(c) makes no sense if the trust instrument cannot provide that he/she is not a fiduciary

  10. To be, or not to be, a fiduciary? • Arguments for making the trust protector a fiduciary • If he/she is not a fiduciary, the beneficiaries can be left completely without recourse • §114.003: Trustee can follow non-fiduciary trust protector’s direction even if it would constitute a serious breach of trust had he/she been a fiduciary • The trust protector should approach his/her responsibilities as a fiduciary – seriously, with the beneficiaries’ interests in mind

  11. To be, or not to be, a fiduciary? • Arguments against making the trust protector a fiduciary • No one will want to be a trust protector if he/she is subjected to fiduciary duties • He/she probably is unpaid • He/she does not have the resources of the trust to mount a defense • If he/she is a fiduciary, he/she may believe it is necessary to use trust resources to investigate before making decisions, “wasting” trust assets

  12. To be, or not to be, a fiduciary? • Karisch’s solution: • Make the trust protector a fiduciary, except for a beneficiary who is given the power to block the sale of a beloved asset • Limit the trust protector’s duties to provide the necessary protection. Examples: • No duty to act, and cannot be compelled to act • No duty to monitor trustee’s activities • Limit the powers to clear choices

  13. Examples – routine provisions • Remove trustees, fill trustee vacancies, designate future successor trustees, appoint co-trustees • Designate future trust protectors • Compensation • No bond

  14. Examples – liability • Fiduciary/no fiduciary • Duty to act/not to act • Investigate/monitor • Take actions permitted by trust instrument • Compelling trust protector to act • Exculpation • Indemnification

  15. Examples – powers • Amend trust • To achieve tax objectives • Change beneficiaries • Other • Change situs • Decant • Other

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