Unanticipated changes in the law or circumstances may derail a careful plan to preserve a client’s intent to transfer wealth through trusts.
A “trust protector” originated from a need to protect offshore trusts from unchecked foreign trustees in unfriendly jurisdictions. Many planners now view it as an elixir to cure all unknown ills and as a staple in many planner’s forms for all planning.
We recently examined several different “train wreck” trusts – each with different protector concerns. Each was set on a course to destroy the grantor’s express plans; moreover, they all raised serious ethical questions and even possible fiduciary breaches by the planner or protector. Thus, our current top five warnings:
1. Not You. Naming the drafting attorney as protector likely violates our conflict-of-interest rules of professional responsibility - between the client and their attorney (see Rule 1.08). A protector who benefits from compensation, broad powers and a broadly written exculpatory clause – and is also the drafter – appears to be in direct conflict with his or her client’s best interest. Moreover, the professional rules essentially prohibit the client’s waiver of such a conflict without independent counsel. Self-appointment also violates the fiduciary duty of loyalty and duty to provide representation only for the client’s best interest. In short, don’t do it.
2. If Not You, Then Who? Protector selection and succession is crucial - impartiality and independence are mandatory. Many protector powers we have seen essentially usurp the Trustee’s powers or otherwise leave the trustee impotent. Proper initial selection of a trustee overcomes the necessity to override or micromanage that trustee. Consider whether removing liability protections for the trustee and granting the protector only the powers to remove and replace the trustee solves the bulk of any likely problem.
3. Beware of Overbroad Powers. The boundaries of a protector’s powers are not defined by case law; thus, locating the boundaries of enforceable powers is a bit of a wild west. Yet, clearly in Texas, a protector acts as a fiduciary unless the protector’s powers are limited to removing and replacing a trustee, as provided in Trust Code §114.0031. Trust amendment powers we have seen attempt to redraw power boundaries far beyond appropriate adjustments for scrivener errors, changes in tax law, situs or controlling law or qualifying as a special needs trust or like benefits in favor of a beneficiary. Know this: protector granted powers beyond removing or appointing a successor trustee will be judged on a fiduciary standard much like a trustee’s actions.
4. Avoid Over-Exculpation. Capable trustees may require broad limited liability provisions; however, blanket protections and added burdens of proof only encourage abuses of power. The Trust Code §114.007 invalidates trust provisions attempting to relieve a trustee’s liability for bad faith breaches - intentionally or with reckless indifference to the beneficiary’s interest. Moreover, language attempting to relieve abuse of a fiduciary duty liability or liability arising from a lawyer’s confidential relationship with the settlor are ineffective. Yet, §114.007(c) suggests that a trustee may, under the trust terms, be relieved from some trust duties or restrictions; however, §114.007(c) is subject to §111.0035. With no definitive case law, the statutory suggestion that some trust duties or restrictions can properly be relieved is open for debate and speculation. Surely even these “safe harbor” notions do not permit enforcement of planner / protector inserted trust provisions attempting to insulate the protector. Disturbingly, we have seen provisions requiring proof of clear and convincing evidence of bad faith acts, gross negligence, or intentional misconduct, requiring the trust to pay all protector defense costs, and providing blanket indemnification of the protector.
