Trust-protector jurisprudence lurks not just in statute, the trust being a creature of equity

Charles E. Rounds, Jr.
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The trust relationship being a creature of equity, the rights, duties, obligations, and liabilities of the parties to a particular relationship are governed by principles of the common law, as those principles have been enhanced by equity. The Uniform Trust Code (UTC) is merely an aggregation of assorted tweaks to those principles. The UTC even elects not to explain/define what a trust actually is, it being content to leave such general matters in equity’s capable hands. Thus this practice tip: When tackling a trust issue, first consult the common law as enhanced by equity. Then, and only then, check the UTC and other such trust-related partial codifications to see whether the relevant doctrine has somehow been legislatively tweaked. To do it the other way around, to start with the UTC, risks missing a vast body of applicable law. And then to limit one’s inquiry to the four corners of the UTC makes issue-missing all but a certainty.

Take, for example, Matter of ABB Trust, 251 Ariz. 313, 491 P.3d 1120 (2021). Settlor established and funded an ostensibly irrevocable trust for his own benefit under which a trust protector, who was his lawyer, had been granted express authority to amend its terms. The protector proceeded to do just that in a way that enhanced and qualified the equitable future property interest of the settlor’s second wife, eliminated the equitable future property interest of the first wife, and diminished the equitable future property interests of his children, who collectively asserted that the settlor had been unduly influenced by the second wife to cause the protector to execute the amendment. The protector testified that he had followed and acted upon the settlor’s direction. The probate court dismissed the children’s complaint on the ground that the trust protector, who had possessed the express power to amend, had himself not been unduly influenced, at least not directly. Yes, but the protector saw himself as the settlor’s common law agent, notwithstanding the trust’s terms, and behaved as such. Equity is guided by substance, not formalities. Moreover, the lawyer-client fiduciary relationship itself is a type of agency. There was clear and convincing evidence that the principal, in this case the settlor, had been unduly influenced by his second wife. Whether or not undue influence had ever been exerted on the agent is irrelevant. Rather than initially applying core principles of the common law, as enhanced by equity, to the facts of the situation, the appellate court went straight to parsing a provision of Arizona’s version of the UTC and never looked back or beyond: “A trust is void, in whole or in part, to the extent its creation was induced by fraud, duress, or undue influence.” A.R.S. § 14-10406. What ensued was much earnest legalistic musings over the grammatical significance of the passive voice and the meaning of the word induce in this context. Holding: “Because Petitioners alleged that…[the second wife]…induced the Second Amendment’s creation by exerting undue influence of…[the settlor]…we reverse the probate court and remand Petitioners’ undue influence claim.”

Oh, and one thing more. That the trust had initially been for the benefit of the settlor suggests that the trust in any case might have been constructively revocable by the settlor, this by virtue of the fact that the corpus had remained accessible to his creditors, assuming that had been the case in Arizona, which is likely. In other words, the settlor might well have possessed a constructive general inter vivos power of appointment, notwithstanding the trust’s express irrevocability provisions. The second wife’s counsel take note. None of this core equity doctrine was considered by the appellate court. The topic of the constructive general inter vivos power of appointment is taken up in §4.1.3 of Loring and Rounds: A Trustee’s Handbook, which section is reproduced in its entirety in the appendix below.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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