The Trust Protector in the US: Welcome Immigrant or Persona Non Grata?

Don’t look now, but United States courts are finally beginning to formally recognise the trust protector. Not that the US dockets are bursting with cases dealing with the trust protector, not by a longshot. But where there was not a single case on protectors, per se, as recently as six years ago, just in the last year or so there have been three new ones and one appeal from the first protector case, which was heard in 2009. Although the US legal community has been quicker to adjust to the concept than the US courts, I believe it is safe to say that the protector is here to stay. All we need now is a broader base of judicial review and educated decisions.

Part of the problem has been that as the cases arise within the US court system, they have no precedent on which to be guided. And for some inexplicable reason, to date they have simply ignored the dozens of cases on protectors that have been decided in non-US, common law jurisdictions. This is quite unfortunate, because many of these cases contain erudite analysis of the position and the role of the protector, which would be of immense value to US courts, which have literally no experience with the position. Perhaps the best illustration is the Robert T McLean Irrevocable Trust v Ponder case, the first US case dealing with the role of the trust protector.

Very briefly, the background of the McLean case is that 24-year-old Robert McLean, a Missouri resident, was severely injured in an automobile accident in 1996, which rendered him a quadriplegic. A lawsuit followed, and Robert received about US$1.7 million in settlement. As a result of his condition and his eligibility for public benefits, a ‘special needs’ trust was established for Robert, and Michael Ponder, the personal injury attorney who handled the lawsuit, was named protector of the trust. The relevant terms of the trust provided that:

            “The protector would be a fiduciary and would not be liable for acts taken in good faith;

The protector would have the right to remove and replace the trustee and control the appointment of a successor trustee; and

The protector could resign and appoint his successor.”

No other powers, duties, or responsibilities were given to, or imposed upon the protector.

Although the trust was established with the intention of supplementing Robert’s needs for the rest of his life (estimated to be 27 years), as a result of expenditures made by the trustee in the first 18 months of the trust, the trust went bankrupt, and the trustee resigned. Suits against the original trustee, Davis (another personal injury attorney and the one who referred the case to Ponder), were settled unsuccessfully, so the new trustee, Robert’s mother, brought suit against Ponder, the protector, for an unspecified amount of damages. She claimed that the protector breached his fiduciary duty as protector and acted in bad faith by failing to remove the trustee when he saw that the funds were being spent in a manner that was contrary to the very purposes of the trust.

The protector responded by stating that he had no duty to supervise or monitor the acts of the trustee and that he had no such affirmative duty to remove the trustee. The trial court agreed, granting Ponder summary judgment in 2005. McLean appealed to the Missouri Appellate Court. In 2009, the Missouri Court of Appeals remanded the case to the trial court to determine the duties of the protector.

This ‘new’ position of the trust protector threw the Missouri Appellate Court justices for a loop. They had no idea what it was or what to do with it, in large part because, “no recorded Missouri case has ever dealt with the function or duties of a ‘Trust Protector’.” To its credit, the court did at least mention the relevant section, 808 of the Uniform Trust Code (UTC), but gave it and its inferences no more than the mention. (Section 808(d) of the UTC states in part, “the holder of a power to direct [ie, a protector] is liable for any loss that results from a breach of fiduciary duty.”) To its discredit, the court offered comments that suggest there is a question as to whom the protector’s fiduciary duty would be owed, because, “the trust provision that created the position of the protector does not explicitly indicate who or what is to be protected.” Who else would be ‘protected’ but the beneficiaries? What else could be inferred by the power to remove and replace the trustee?

It is interesting, if not quite discouraging, that the court did not at least look at some of the offshore decisions analysing and ruling on the position and responsibilities of protectors in order to assist it in understanding the position, instead of rejecting the concept more or less out of hand simply because it had never been seen in Missouri before this. Such an approach (a reference to cases from other jurisdictions) is not unheard of, as it has been used by no less than the United States Supreme Court in some landmark decisions. Furthermore, and despite their acknowledgement of the UTC, the Missouri court never considered the fact that the position of protector is analogous to that of the trust advisor, and there are hundreds of US cases on that subject. In any event, to the court’s credit, it remanded the case to the trial court to determine just what the protector’s duties were and whether there was a breach of duty.

On remand and hearing, the trial court ruled to deny all expert witness testimony as being invasive of the province of the court to determine on its own the duties of the trust protector. After hearing further pleadings and testimony, the trial court ruled:

• that the trust protector had no duty to monitor the activities of the trustee;

• that nevertheless, the trust protector could not simply ignore the conduct of the trustee, which threatened the purpose of the trust; and

• that, to the extent of any such conduct, and to the extent that the trust protector was made aware of such conduct, a duty may have arisen to remove the trustee.

Unfortunately, the judge also ruled that the plaintiff did not offer proof that the expenditures made by the trustee were improper or that they harmed the trust, and he granted the trust protector’s motion for a directed verdict. The plaintiff again appealed to the Missouri Court of Appeals, which on 14 October 2013 affirmed the trial court’s ruling.

In my opinion, and considering current (international) law and case decisions on the subject, the trial court’s ruling was extremely insightful and correct. Here, the trust declared that the protector was a fiduciary, which imposed serious duties on the protector, including, as the court rightly observed, the affirmative duty to remove the trustee once it came to the protector’s attention that the trustee was committing a breach. But the problem in this case was two-fold. First, evidence as to the notice to the protector of the trustee’s breach was inadequate, and second, damages could only be established by identifying and proving the amount of the allegedly improper expenditures that occurred after the notice to the protector. Neither was done.

One part of the trial court’s ruling that gives rise to considerable discussion and difference of opinion, however, is that part which states that the protector had no duty to monitor the activities of the trustee. The judge based this decision not upon case precedent or any interpretation of a fiduciary duty, but on a strict reading of the trust. The duty (to monitor), he observed, was not stated in the trust, so it could not be imposed.

Couldn’t one argue, however, that along with the power to remove and replace the trustee, it would be reasonable to think that one would have to periodically review the trustee’s activities and performance to see if replacement was needed? And let’s not forget the rule that a party with a fiduciary power has the obligation to periodically consider whether to exercise it. How could that be done in a case as this without a review of the trustee’s performance?

Unfortunately, there is no specific law, nor have I seen any case on the point. As an aside, any settlor who seeks such monitoring by an advisor (protector) would be well-advised to specify it in the trust, along of course, with numerous other provisions governing the role.

McLean is the first reported case in the United States dealing directly with the position of trust protector, and except for the trial court’s ultimate ruling supporting the duty to remove a trustee who has committed a breach, it is a disappointing one. Both courts had extensive cases and commentary from other jurisdictions to consider in their review and analysis but never did. All they did was to point to a total lack of Missouri law on the subject. The other few United States decisions relating to protector are encouraging to a certain extent but discouraging in another.

The encouraging aspect is that in three of four cases reviewed, the position of trust protector as a fiduciary and as a party with the standing to pursue legal proceedings on behalf of the trust was not questioned, and this has very important ramifications. A discouraging comment, however, was that in the fourth case, where the court referred to the protector as a “Cromwellian title,” referring of course to Oliver Cromwell, the 17^th century Lord Protector of England, thereby suggesting it may be an obscure and antiquated concept. Let’s hope that future courts will be more circumspect and will take a more modern view of the growing use of trusts in our society, and with it, the growing use of trust protectors with various powers designed to assist in the smoothest and best operation of the trust.

Copyright 2014 by Alexander A Bove, Jr

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.