Trust Protector As A Fiduciary – To Be Or Not To Be

/in ,

by Carol Warnick

As the use of trust protectors has become more and more popular, one issue continues to surface. That is the question of whether or not a trust protector is a fiduciary or can be insulated by the trust language from being a fiduciary. It is an important question because of the duties and potential liability that could be imposed on a trust protector who is considered a fiduciary.

To set the stage, a brief discussion of trust protectors in general is in order. Some trace the beginnings of the concept to the world of off-shore asset protection trusts. Others point to thoughtful estate planners in the early 1980's who were trying to create flexible or "amendable" irrevocable trusts. While its origin is interesting, what a trust protector can and does do is obviously more important. A trust protector is a person who holds a power that when invoked is able to direct the trustee in matters relating to the trust. The power can be either a negative one or a positive one. It would be negative if it was merely the power to stop or veto some proposed action the trustee wanted to take. It would be positive if it allowed the trust protector to take action proactively, such as the power to add beneficiaries, remove or replace trustees, or even amend or terminate the trust.

Is it too trite or "lawyerly" to answer the question regarding whether or not a trust protector is a fiduciary by stating it depends? Alexander A. Bove, Jr., in his thoughtful article, "The Protector: Trust(y) Watchdog or Expensive Exotic Pet?"1 believes that the answer to the question depends not only on what the powers are that are given to the trust protector but also the identity of the trust protector. One example he gives is that of the settlor's daughter being named the trust protector and being given the power to add or delete beneficiaries. Pursuant to the power, the daughter deletes her siblings and adds her husband and children. Bove argues that in such a case, the settlor would have contemplated such action by his daughter and so the power should be considered a personal, not a fiduciary power. By contrast, however, Bove states that if the same power were given to the settlor's attorney as a trust protector, and the attorney deleted the settlor's children and added his own, it would be considered an inappropriate use of the power because it was clearly not what the settlor would have had in mind. Thus, the same power given to the settlor's attorney could only be exercised in a fiduciary capacity because he would clearly have to bear in mind the purpose of the trust and the settlor's intent.

Powers such as the power to remove and replace trustees, power to change situs of the trust, and certain types of powers to amend the trust are more likely to be powers held in a fiduciary capacity.

Some state legislatures have jumped into the fray with statutes that attempt to give direction on the question. For example, in Wyoming, 2 the trust protector would likely be considered a fiduciary. In Alaska, the statutes provide that the trust protector has no fiduciary responsibility when performing the functions of a trust protector 3.

Absent state law on the subject, as is the case in Colorado and most other states, the question will likely ultimately be resolved by thoughtfully considering both the choice of the trust protector and successor trust protectors, as well as the effect of the particular powers granted to the trust protector. Bove suggests that, as a general rule, if the trust protector is the object of the settlor's bounty, and there is no language in the trust to suggest otherwise, then the power is probably held in a personal capacity. However, he goes on to state that if the trust protector is someone who serves in an advisory capacity to the settlor – not someone the settlor would likely name as a beneficiary – then the power will likely be held in a fiduciary capacity.

There is, however, a school of thought that holds (or perhaps hopes) that simply stating in the trust document that the trust protector will not be considered a fiduciary will settle the issue. Bove states that such an analysis is like saying "regardless of what type of animal walks through these gates, it will be deemed to be a horse." He vigorously argues that despite such language that may be included in a trust document, most trust protectors are intended to exercise their powers for the benefit of the trust, and as such can't escape the reality that comes with it.

The debate is far from being over. More states are likely to pass statutes relating to the question. Since the use of trust protectors, especially in long-term trusts, is increasing exponentially, the issue will be coming before judges who will be asked to rule on the issue. In the meantime, it behooves all of us who may be either drafting trusts with trust protectors, helping administer trusts where there are named trust protectors, or litigating trusts where such powers are involved, to not only consider the issue ourselves but to also discuss it thoughtfully with our clients.

1Bove, Alexander A., Jr., The Trust Protector: Trust(y) Watchdog or Expensive Exotic Pet? , Estate Planning, Vol. 30, No 8 (Warren, Gorham & Lamont, August 2003).
2"Trust protectors are fiduciaries to the extent of the powers, duties and discretions granted to them under the terms of the trust instrument." W.S. § 4-10-711.
3 “Subject to the terms of the trust instrument, a trust protector is not liable or accountable as a trustee or fiduciary because of an act or omission of the trust protector taken when performing the function of a trust protector under the trust instrument.” AS Sec. 13.36.370(d).

No Contest Clauses in Trusts and Powers of Appointment: Is Colorado’s Silence an Oversight or an Opportunity?

/in , , , , , , , , , , ,

by Kelly Cooper

With the increasing diversity in the make up of today’s families, many estate plans now treat family members differently or disinherit certain family members completely.  When there is unequal treatment or a disinheritance, estate planners often include no contest clauses in their documents to try to avoid costly disputes and litigation after a client’s death.  Under Colorado law, a no contest clause is only enforceable against a beneficiary if the beneficiary lacked probable cause to bring a contest.  An in-depth discussion of these clauses and the probable cause exception to enforceability was posted to our blog last week, to read it, click here.  We expect the use of these clauses to increase and for clients to request these clauses as they become more familiar with them through media reports about the use of them in celebrities’ estate plans (e.g. Michael Jackson, Brooke Astor).

The topic for today is whether a contest clause in a trust agreement is subject to the same probable cause exception as a contest clause contained in a decedent’s will.  Since a revocable trust is considered a will substitute, some will argue that there is no compelling reason to treat a contest clause in a revocable trust any differently than one in a will.  While Colorado’s probate statutes are clear that a probable cause exception exists for contest clauses in wills, Colorado’s trust statutes do not contain any similar provision.  Is this silence an oversight or an opportunity for planners?  

Colorado’s silence on the question of contest clauses in trusts made me wonder how many states had statutes addressing contest clauses in trusts (enforceability and/or exceptions to enforceability).  The answer is thirteen (and is found in a great 2012 State Laws Survey cited at the end of this post) – Alaska, California, Delaware, Florida, Hawaii, Indiana, Michigan, Nevada, New Hampshire, Oregon, Pennsylvania, South Dakota and Texas.  According to the survey, another nine states have case law addressing the question of the enforceability of contest clauses in trusts, but Colorado and twenty-five states have no statute or case law on this issue.  The Uniform Trust Code is also silent on whether contest clauses in trusts are enforceable.  In light of the fact that numerous states have already addressed the issue of contest clauses in trusts, it can be argued that Colorado’s silence is purposeful.

Colorado law is also silent on the issue of a decedent can place a condition on the exercise a power of appointment.  For example, a decedent’s will may state that he exercises a power of appointment to give assets equally to A and B if no contest is filed, but that he exercises the power to give all of the assets to A if B files a contest.  While this is a conditional exercise of the power of appointment, it reads very similarly to a contest clause.  Unlike revocable trusts, which are often will substitutes, a power of appointment is not a will substitute and the argument that a power of appointment should be treated like a will may well fall short.  In addition, powers of appointment are generally exercisable in regard to trust assets, not probate assets.  Here, Colorado’s law silence on the enforceability of contest clauses in trusts may provide a real opportunity to avoid the probable cause exception, but also causes uncertainty for fiduciaries and administrators of trust assets subject to powers of appointment.

In light of the uncertainty in this area, planners may want to consider drafting trusts instead of wills for those clients who wish to include contest clauses.  When possible, planners may also want to include powers of appointment to allow for greater flexibility and to assist their clients in exercising powers of appointment to implement any plan of unequal treatment among beneficiaries.

For more information about the differing state laws in regard to contest clauses, see a great survey “State Laws: No-Contest Clauses,” T. Jack Challis and Howard M. Zaritsky, March 24, 2012.

How Many Guns Did You Say the Decedent Owned?

/in , , , ,

by Carol Warnick

How many guns did you say the decedent owned?  Are they all accounted for and safely stored?  Who should be in possession of them during the administration period?  If it is going to be the fiduciary, should the attorney suggest a background check if the fiduciary is an individual?

Firearms belonging to a decedent often present an ongoing dilemma for a fiduciary.  Not only does the fiduciary have to worry about securing the firearms safely (firearms and potentially angry beneficiaries do not mix well) but they have to worry about identifying them correctly and understanding the transfer restrictions placed on the various classes of firearms.  Even the mere possession of certain types of firearms can create issues for the fiduciary.  Furthermore, an inappropriate transfer of a firearm by a fiduciary can result in liability for the fiduciary, the attorney, the beneficiaries receiving the transfer, or even third parties.

The National Firearms Act (26 U.S.C. 56) imposes restrictions on certain types of “NFA” weapons.  In addition, Colorado law finds that “(a)ny person who knowingly purchases or otherwise obtains a firearm on behalf of or for transfer to a person who the transferor knows or reasonably should know is ineligible to possess a firearm pursuant to federal or state law commits a class 4 felony.”  C.R.S. § 18-12-111.  How many fiduciaries know (or should reasonably know) who is ineligible to possess a firearm?  This came up recently in an estate our office was working on and it can get complicated.  Would the fiduciary necessarily know whether or not the person who was designated to receive the firearm had been dishonorably discharged from the U.S. military, or had renounced his or her U.S. citizenship, or had ever been convicted of a crime of domestic violence?  Each of these factors (this list is nonexclusive), along with a myriad of others, would make the person receiving the firearm a prohibited person.  18 U.S.C § 993(d). 

Even if the beneficiary is determined not to be a prohibited person, what about their housemates?  Could the nonprohibited beneficiary end up being liable for allowing their roommate or significant other who was a prohibited person have access to the firearm merely by virtue of sharing a house?  Does the fiduciary have the responsibility to check out the beneficiary’s roommates? 

The list of potential problems seems virtually endless.  Michael G. Sabbeth wrote an article which provides a good primer on these issues and which we suggest be required reading for fiduciaries of estates where firearms are involved (“After the Last Shot: Estate Administration Issues With Firearms,” 40 Colo. Law. 95 August 2011).

As big as these issues are now, they aren’t going away any time soon.  Expect that the problems and complications created by the presence of firearms in an estate or trust will do nothing but increase in the future.