There has been much confusion and misuse of the term trust protector, Alexander Bove examines the issues regarding the difficulty in defining the exact position and function of a trust protector.
The widespread confusion in the legal community over the position and function of the trust protector doesn’t seem to be abating very quickly. This confusion is leading to misuse of the position, which in turn, will undoubtedly lead to needless trust litigation and expense for trusts and trust beneficiaries, and perhaps even liability for the drafting attorneys.
Most of the confusion and misconception stems from the mistaken belief that the concept of the protector originated with the relatively recent advent of so-called ‘offshore trusts’, and in following this belief, many drafting attorneys also readily followed and accepted the position proposed by most of the offshore jurisdictions, which is that the trust protector is not a fiduciary and thus can be relieved of any liability in his position as protector.
First, the idea that the position originated in recent years with offshore trusts is unfounded - in fact, the concept can be traced to cases in the United States and the United Kingdom that occurred decades ago, documented in the form of hundreds of reported cases dating back nearly a century, dealing with trust ‘advisors’. Except for the usual variation of powers, trust law dictates that a trust advisor is the precise equivalent of a trust protector. It is only the name ‘protector’ that is recent. Second, it may not be as easy as many think to draft away a protector’s exposure to liability, especially where, as in the overwhelming majority of cases, the protector is deemed to be a fiduciary.
Just what is a protector? A protector may be defined as a party (which may be an individual, an entity, or a committee) who has powers over the trust but who is not a trustee. For instance, a settlor could name his cousin or his accountant or his law firm as protector of his trust, giving that party the power to remove and replace the trustee, or to direct trust investments, or even to add or delete beneficiaries. Although the protector in such a case can materially affect the administration of the trust and the disposition of trust assets, he does not hold title to trust property, does not administer the trust, and so is not a trustee. We all know that a trustee is a fiduciary and that the trustee’s basic fiduciary duty cannot be drafted away, because it is the adherence to this duty that is the very foundation of the trust concept. Without it, there can be no trust. But is the protector a fiduciary, and if he is, can his liability be completely drafted away? Unfortunately, many practitioners believe it can, and what is even more unfortunate, statutes in a number of jurisdictions support that position.
To address the fiduciary issue, we must look at the role of the protector vis à vis the trust and the beneficiaries. In the typical case, a settlor will name a protector of her trust in order to maintain a degree of ‘independent’ control aside from the trustee and to facilitate adjustments to the trust or its administration where a change in circumstances of the beneficiaries, the law, or any other matters may require. In such cases, without a protector, any adjustment to the trust to accommodate such changes is usually an expensive, time consuming, public, and uncertain procedure conducted by the trustee, if the trustee agrees to undertake such an exercise. If not, an action to reform the trust (and the concomitant expense) must be initiated by the beneficiaries. Thus, it is not unusual for a settlor to grant the protector powers such as the power to change the trust situs and governing law, add or delete beneficiaries, veto or direct distributions, and remove and replace the trustee. Powers as these would allow a protector, for example, to carry out necessary changes without application to, and without permission of a court, or of the beneficiaries, or of the trustee.
The question that necessarily arises is, if the protector exercises (or does not exercise) any of these powers, does he do so in a personal capacity or in a fiduciary capacity? As noted above, many practitioners and some statutes suggest that the powers may be personal, especially if the trust expressly states that the protector shall not be a fiduciary. Let’s examine this proposition. If the protector’s powers are truly personal, it would mean that he is never under a duty even to think about whether he should or should not exercise a power. He could totally ignore everything about the trust and beneficiaries, and even when requested to act, or when a clear problem, for example, a trustee’s breach of duty, is brought to his attention, he could ignore that as well and would not be held liable for doing so. Further, if, in fact, the law recognised the protector as a holder of a purely personal power, the protector would be able to act (or not act) capriciously, on a total whim, or even in retaliation, without liability. Does this make sense? If a settlor understood this, why would she even think of agreeing to such a risky arrangement? The clear answer is it makes no sense at all, and the idea of making the protector’s powers personal as opposed to fiduciary was developed for the sole purpose of exculpating (or attempting to exculpate) from liability those individuals who may accept the position of protector, thereby encouraging them to accept that position.
Despite the clear logic of this, the majority of relevant statutes across the common law world declare that, unless expressly provided otherwise in the trust, the protector shall not be deemed a fiduciary. For instance, in the first of the offshore asset protection trust statutes, Cook Islands law provides in the relevant part: “a protector of a trust shall not be liable or accountable as a trustee or other person having a fiduciary duty ….. in performing the function of a trust protector under the trust instrument.” Similarly, corresponding statutes in both Alaska and Arizona also specifically state that the trust protector shall not be a fiduciary unless the trust instrument provides otherwise. On the other hand, corresponding statutes in Michigan and New Hampshire provide that the protector will be a fiduciary. It is no wonder that the confusion continues.
If, however, the protector is deemed to be a fiduciary, then liability must follow if the fiduciary duty is breached, regardless of language stating that the powers are personal and regardless of the inclusion of broad exculpatory language in the trust. Nevertheless, it may be noted here, that as with a trustee, it is possible to limit the protector’s liability to cases where there is recklessness, fraud, or willful misconduct. The fact remains that if the protector is deemed to be a fiduciary, liability simply cannot be completely drafted away. In any event, you must consider the following important and inescapable fact that should convince cynics, as well as those who blindly follow the trend: in every reported case on the subject of trust protectors who do not have a personal interest in the trust (ie, one who is also a beneficiary), the protector has without exception been held to be a fiduciary who must act in the best interests of the beneficiaries consistent with the purpose of the trust, and a breach of that fiduciary duty will result in exposure to liability. No other conclusion would make sense
Alexander A Bove
Alexander A. Bove Jr. of Bove & Langa, is an internationally known and respected trust and estate attorney with over thirty-five years of experience. He is Adjunct Professor of Law, Emeritus, of Boston University Law School Graduate Tax Program, where he taught estate planning and advanced estate planning for eighteen years. Prior to that he taught estate planning for four years at Northeastern University Law School. In 1998 he was admitted to practice as a Solicitor in England and Wales. In addition to his J.D. and LL.M. degrees, in 2013, he earned his Doctorate in Law from the University of Zurich Law School.