Recently, a state appellate court decided the first reported case in the United States involving the role of a “trust protector.”
Many modern trusts provide for a trust protector in addition to a trustee. The concept originated with offshore asset protection trusts as a hedge against ceding complete control to a foreign trustee. Although the offshore asset protection trust is problematic, (federal judges jailing the settlor/beneficiary for contempt, for example), the trust protector idea caught on as a mechanism to curb a trustee’s power in domestic trusts as well. The most popular use of the trust protector is to provide trustee oversight and a system to remove and replace the trustee when appropriate.
Given the relatively recent development of the trust protector role in domestic trusts, it is not surprising that there is little guidance as to the scope of the trust protector’s authority and the degree of his or her liability. A few jurisdictions (not including Maryland) have enacted statutes dealing with trust protectors. The uniform trust code and the yet-to-be-passed Maryland trust code delineate the role of trust advisors in general. [UTC § 808; MTC § 14.5-808.] This statutory guidance leaves many unanswered questions. Recently, however, the Missouri appellate court has issued two reported opinions (involving the same trust) that focus explicitly on the role of the trust protector. Robert T. McLean Irrevocable Trust v. Patrick Davis, PC, 283 S.W.3d 786 (2009) (reversing summary judgment and remanding) and Robert T. McLean Irrevocable Trust v. Ponder, ___ S.W.3d ____, 2013 WL 5761058 (2013) (upholding trial court’s directed verdict in favor of the trust protector).
The McLean case involved a special needs trust created to receive a substantial product liability award arising out of an accident that left Robert McLean a quadriplegic. The tort lawyer was designated as trust protector and had the power to remove and replace the trustee. The trustee was the lawyer who referred the personal injury case to the tort lawyer. Other than (1) giving the power to remove and replace the trustee and (2) stating that the trust protector was to act in a fiduciary capacity, there was little guidance in the trust instrument as to what the trust protector was obligated to do or not to do. The issue before the court was whether the trust protector had an affirmative duty to monitor the trustee’s actions, which in this matter would have led to an earlier discovery that significant improper distributions were depleting the trust. The two McLean cases stand for the propositions that (1) a trust protector does not have a duty to monitor the activities of the trustee, unless the trust agreement explicitly obligates the trust protector to do so or gives some other indication that the settlor intended the trust protector to actively monitor trustee behavior, and (2) if the trust protector is aware of the trustee imprudently handling trust assets then there is an affirmative duty to remove and replace the trustee.
It is telling that in the first McLean case, one of the appellate judges complained of attempts to modify (modernize?) trust law: “Trusts are, in my opinion, dangerous devices when they undertake to break new ground in so far as designating obligations or rights of a nature not theretofore established by statute or prior judicial determination … For that reason I suggest that breaking new ground by using procedures other than those time-proven in the law is something that should not be encouraged.” [Compare Oliver Wendell Holmes, Jr.: “The truth is, that the law (is) always approaching, and never reaching, consistency. It is forever adopting new principles from life and at one end, and it always retains old ones from history at the other, which have not yet been absorbed or slouched off. It will come entirely consistently only when it ceases to grow.”]
Although not “time-proven”, providing for a trust protector in a trust can be a very powerful estate planning technique. The McLean cases illustrate, however, that when drafting a trust with trust protector provisions, one must spell out exactly the role of this trust protector and his or her duties and liabilities. If, for example, the trust protector is supposed to be inactive unless or until beneficiaries seek the trust protector’s intervention, then the provisions of the trust should explicitly lay that out. If, on the other hand, the trust protector is to actively monitor certain aspects of the trustee’s duties, then the trust provisions should include plain language stating such a duty. The McLean case teaches that one cannot rely on the courts to fill in the gaps.