'Trust Protector' guides practitioners through topic's unchartered waters

By Eric P. Hayes The Daily Record Newswire Alexander Bove and the topic of the trust protector have become virtually synonymous, thanks to his deep knowledge regarding the concept of the trust protector and his extensive writing and lecturing on the subject. Bove's first article, published in 2003, "The Trust Protector: Trust(y) Watchdog or Expensive Exotic Pet," was followed by "The Trust Protector: Friend or Fiduciary," "The Growing Use of Trust Protectors: Are We Overprotected?" and "The Case Against the Trust Protector." Bove has now written a book on the subject - "Trust Protectors: A Practice Manual With Forms" - and it is a worthy and welcome addition to the trust and estate practitioner's library. Bove's book is a thorough and thoughtful review of the development of the trust protector; the role of the trust protector; the trust protector as a fiduciary; the powers, duties and rights of the trust protector; and the liability of the protector. The book also examines the relationship between the trust protector and the trustee as well as practical issues involving trust protectors. Finally, Bove reviews and discusses the relevant cases on trust protectors, which, with one exception, are cases outside the United States. Developing area of trust law The rights, duties and responsibilities of a trust protector are an area of trust law that continues to develop. The unsettled state of the law is evidenced by the fact that the Uniform Law Commission established a Committee on Divided Trusteeship to draft recommended legislation that will provide guidance where functions such as investment, distribution and administration are given to persons who are not designated as trustees. The description of the committee on the ULC website states, in pertinent part: "There is much uncertainty about the fiduciary status of non-trustees who have control or potential control over a function of trusteeship and about the fiduciary responsibility of trustees with regard to actions taken by such non-trustees." Bove's book is an excellent resource to fill the void by providing guidance to those drafting trusts that will employ a trust protector and to those advising settlors, trustees and trust protectors. The book begins by pointing out that the concept of a third party who is not a trustee, but who has powers over the trust, was quickly accepted by the legal community. The quick acceptance by practitioners, in Bove's opinion, is due to the flexibility that can be obtained by adding a trust protector who is given various enumerated powers, either by the terms of the trust or applicable statute, thereby avoiding the cost, expense, delay and publicity of a court proceeding. For example, a trust protector may be granted the power to modify the terms of the trust, change the situs of the trust, add or remove beneficiaries or trustees or both, decant the trust to another trust, or direct investments and discretionary distributions of income or principal. The rapid adoption of the trust protector first in offshore jurisdictions and now in the United States has, so far, outstripped the development of the law regarding trust protectors, and numerous questions remain unanswered. Bove's book addresses many of those questions. Bove also reminds us that the trust protector is not a concept without precedent or an entirely new concept. For many years, trusts have designated a third party, a trust advisor, who has authority to direct the trustee. There is no meaningful distinction between a trust protector and a trust advisor. What is perhaps new is the expansion of the trust protector's powers, which often include powers to modify a trust, add or remove beneficiaries, remove and appoint trustees, and direct or approve investments and control over discretionary distributions. While a trust protector may not always be granted extensive powers over the trust, it is often the case that the trust protector's powers are extensive. An important question is whether a trust protector is a fiduciary subject to fiduciary duties. Bove thoroughly addresses that issue, discussing the distinction between personal powers and fiduciary powers. The exercise of a personal power is not subject to fiduciary duties and, generally speaking, may be exercised by the power holder arbitrarily. In contrast, a fiduciary power is subject to fiduciary standards, and the exercise of a fiduciary power arbitrarily is a breach of fiduciary duty. Thus, if the power is deemed to be a personal power held by the protector, the protector with regard to the exercise of the power is not a fiduciary. In Bove's view, that should be the exception and not the rule, and a third party who is a trust protector should be held to a fiduciary standard when the powers they are granted - such as to direct investments, direct distributions, and remove and appoint trustees - are inherently fiduciary powers. As Bove writes, the cases that have reviewed the role of the trust protector have, with only one exception, held the protector to be a fiduciary. Forms for drafting provisions The book also reviews and discusses the prevalent drafting practice that generally provides that a trust protector is not a fiduciary. Bove questions the wisdom of that practice. While he notes that the practice of relieving a trust protector from fiduciary duties is done to encourage acceptance of the position as a trust protector by limiting the liability of the trust protector, he wonders whether relieving a trust protector of fiduciary responsibilities is truly in the best interests of the settlor and the trust's beneficiaries. It is unlikely that the issue of whether the trust protector should be considered a fiduciary is reviewed or discussed with the settlor, he points out. In a similar vein, he questions the wisdom of exculpatory provisions that limit the trust protector's liability to acts of willful misconduct or bad faith by the trust protector. Bove discusses the statutes, onshore and offshore, which address the role of the trust protector. In many of the statutes, the trust protector, unless the governing document provides otherwise, is not a fiduciary. Many of the statutes, both domestic and international, are included in a very useful appendix. Bove spends considerable time discussing the relationship of the trustee and the trust protector. What are the respective responsibilities and liabilities of the trustee and the trust protector? What happens when the powers of the trustee and the protector overlap? Does the trust protector have a duty to inquire about the trust and monitor the trustee? Must the trustee follow the protector's instructions? Bove addresses those questions in a chapter titled "The Relationship Between the Protector and the Trustee." The practical issues in using trust protectors is reviewed at length in a chapter titled "Practical Issues in Using Trust Protectors." Guidance is provided regarding when a trust protector should be used, who the trust protector should be, what the general criteria and specific criteria are that should be considered in selecting a trust protector, what powers the trust protector should be given, and if the trust protector should be compensated. Finally, the book includes a complete appendix of forms for use in drafting provisions for trust protectors. This is welcome since, as Bove points out, provisions for trust protectors in drafting manuals are few and far between. Trust protectors, their status as a fiduciary, their duties and liabilities, their relationship with the trustee, and their rights and powers largely remain an unchartered area of the law. Bove's book is an excellent guide to successfully navigating these waters. ----- Eric P. Hayes is counsel in the trusts and estate planning practice at Goodwin Procter in Boston. He served as chairman of the ad hoc committee for the Massachusetts Prudent Investor Act, the Massachusetts Uniform Trust Code Committee and the Boston Bar Association's Trusts and Estates Section, and was president of the Boston Estate Planning Council. Published: Tue, Mar 03, 2015