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«Aggregated Summary of Reports Provided by ABA-PTL and ACTEC-Prac List serves 2015 Heckerling Estate Planning INSTITUTE Edited, Aggregation of On-Site ...»

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10:55 - 11:45 In Protectors We Trust: The Nature and Effective Use of Trust Protectors Kathleen R. Sherby This presentation will explore the state of the law in the U.S. governing trust protectors, what is meant when referring to a trust protector, the differing roles a trust protector can fulfill to maximize flexibility of a trust and carry out the settlor’s intent, the extent of the trust protector’s duties, if any, and to whom these duties might be owed, the terms essential to include in a trust when providing for a trust protector, and what a person should confirm prior to agreeing to serve as a trust protector.

Reporter: Joanne Hindel Esq.

The emergence of third party decision makers in trust administration is one of the most significant recent developments in American trust law.

Kathleen began using trust protectors 20 years ago when her London partners described them at her law firm.

When she learned that a litigator was looking forward to challenging a trust “protector” she changed her documents to say trust “adviser”. Eventually, she found however that the change in name added to the confusion and she researched how each state’s laws handles the terms and the distinctions.

There is confusion and controversy over the role and nature of a third party decision maker, there is also a lack of consensus as to what such a person should be called. Trust protector, trust adviser, investment adviser, trust director, distribution adviser etc. are some of the names used.

Best approach is to use trust adviser for a person who holds one or more powers that may direct the trustee in carrying out traditional trustee duties and the term trust protector should be used to identify a person who has powers that relate to one or more specific trust matters without involving or infringing on the trustee’s performance of traditional trustee duties.

Kathleen pointed out that the early states that adopted these laws made these distinctions.

The use of the term trust protector does not have an independently understood legal role. Most state statutes either do not address the powers of a trust protector at all or almost uniformly provide that the trust protector only has those powers that are expressly provided in the trust terms.

When deciding whether to designate a trust protector the best question to ask is “is there any role or function that would be important in this trust to give to a third party decision maker that would require the appointment of a trust adviser or trust protector?” Trust protectors are not for every trust – use them carefully and only when needed.

Trust protectors are third parties to whom powers are given by the settlor to work with the trustee.

The term and concept has been used for a long time in England and in other foreign jurisdictions.

Settlors have used trust advisers in the US for some time to bifurcate the powers of the trustee, giving some powers to persons other than the trustee to determine investments, direct discretionary distributions of principal or to consent to the sale of trust assets and the reinvestment of sale proceeds in other investments or to discretionary distributions.

In the early 1980s settlors began to expand the powers given to persons other than trustees creating new roles for trust protectors in self-settled spendthrift offshore asset protection trusts that were then gaining in popularity.

Eventually, states started to develop statutes addressing the appointment and duties of third parties with respect to trusts.

In the late 1990s the ULC was working on the Uniform Trust Code that included Section 808 entitled “Powers to Direct”. This section provides that a person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries.

This UTC section deals primarily with trust advisers. The comments to the UTC indicate that this section is intended to ratify the use of trust protectors, however.

The UTC has been adopted in 29 states and 15 of these still provide Section 808 as the only provision in their laws touching on trust advisors and trust protectors.

Of the states that have not adopted the UTC, a few have general statutes that are virtually indistinguishable from UTC Section 808.

There are, however, 11 states that have no state statute addressing either trust advisors or trust protectors.

In fact, more than half the states have either no statutory provision or a very limited and ambiguous statutory provision as to trust protectors and trust advisors.

The state statutes vary as to whether they provide a list of powers available to a trust protector – most indicate that the trust protector only has the powers set forth in the trust document.

The state statutes vary as to whether or not they treat a trust protector as a fiduciary.

A lot of states indicate that the trust protector is a fiduciary but this can be changed in the trust agreement.

Most states use the term trust protector and trust adviser interchangeably which adds to the confusion.

Only Virginia makes the distinction between the two and its trust protector statute makes the trust protector a fiduciary that cannot be changed by the trust terms.





There are three cases dealing with trust protectors:

In the McLean case the question was whether the trust protector could be held liable in not exercising the right to remove and replace the trustee of a Special Needs trust. The court held that the trust protector had no duty to monitor the actions of the trustee and determined that the trust protector was not obligated to remove and replace the trustee.

In the Schwartz case, the court held that the trust protector’s amendment of the trust added an entirely new provision to the trust that purported to expand his own powers over the trust and that exceeded the trust protector’s powers given under the trust terms.

The third case is the Manasean case from Florida where the authority of the trust protector was upheld even though Florida does not have any statute specific to trust protectors but just the UTC Section 808.

Three types of powers can be given to a third party:

Powers that would otherwise be subsumed by a trustee – these powers should go to a trust adviser and include investment or distribution decisions.

Be sure to identify who still retains fiduciary responsibility for actions – whether it is the advisor or the trustee.

The second type of power is a power that the settlor, beneficiary or trustee would not otherwise have but might be reserved by or given to them in the trust instrument without adverse tax or other consequences. Examples include the power to control trustee compensation and the ability to change governing law.

The third group of powers would be the powers that are otherwise lodged with a court and for tax or other reasons cannot be given to a beneficiary or trustee or reserved by a settlor. Examples might include modifying the trust instrument or interpreting trust terms.

Top drafting considerations:

1. Trust protectors are not necessary or desirable for all trusts

2. Do not rely on state law, and try to avoid jurisdictions that provide mandatory statutory provisions for trust protectors (Virginia).

3. If the trust protector will hold powers beyond those inherently given to a trustee, will the trust protector act in a non-fiduciary capacity? Make that option available in the trust terms.

4. Be very specific in trust terms as to what authority the trust protector has and whether or not the trust protector will act as a fiduciary. Make it clear whether the trust protector will monitor the actions of the trustee and be entitled to information about the trust.

5. Make sure to use the terms trust protector and trust advisor appropriately and consistently.

6. Give the trust protector discretionary, not mandatory, powers and provide guidance as to the exercise of those powers.

7. Clearly articulate the duty of care with which the trust protector is to act.

8. Remember that the trust protector needs protection as well.

9. Grant the trust protector access to the trust information. But be careful not to increase the trust protector’s liability by giving access to information.

10. Provide detail with respect to the manner in which the trust protector is to be compensated.

11. Provide a mechanism to remove, replace and appoint trust protectors.

12. Remember that the trust protector does not “protect” the trust.

If a lawyer is acting as a trust protector, he or she may want to have an indemnification agreement executed when acting in that role to ensure that he or she is not later sued for actions taken as a trust protector.

11-45 - 12:35 Ethical Considerations in Acting as an Executor or Trustee: Do You Really Want to Do This? (Ethics Session) Charles D. “Skip” Fox, IV This session will review the ethical considerations that lawyers and other professionals must take into account when deciding whether to be named as an executor or trustee and when acting as an executor or trustee. Among the subjects to be covered are avoiding conflicts of interest, communications with beneficiaries and third parties, hiring the lawyer’s firm to represent the trust or estate, how to and not to charge fees, and confidentiality of information including possible responsibilities to the IRS.

Reporter: Michael Sneeringer Esq.

Mr. Fox educated the audience on ethics, including considerations that estate planning practitioners should take into account when deciding whether to be named as an executor or trustee, and when acting as an executor or trustee.

Mr. Fox’s overarching theme was how should estate planning practitioners handle the representation? What role do lawyers have? He noted at the outset that serving as a fiduciary for a client can make for one of the estate planning practitioner’s most fulfilling relationships. Another theme of his was that the presentation was not just for lawyers; the topics covered applied to other professions including accountants and insurance professionals among others.

Although he briefly touched on some case law and state ethics opinions, Mr. Fox relied primarily on the ACTEC Commentaries on the Model Rules of Professional Responsibility and the American Bar Association’s Model Rules of Professional Conduct.

Mr. Fox began with a summary of the five challenges facing estate planning practitioners advising fiduciaries or serving as fiduciaries: competence; conflicts of interest; communication, privilege, and confidentiality;

compensation; and gifts. Mr. Fox then gave the audience some statistics on active complaints against lawyers acting as fiduciaries. He highlighted the number of complaints against lawyers acting as fiduciaries. He noted that when estate planning practitioners have longstanding relationships with clients, many of the issues discussed in his presentation come up as problems routinely occur. Mr. Fox explained that this was because the estate planning practitioner has a comfort with the family due to the relationship, and may then fail to adhere to the rules. The five challenges were then discussed in greater detail for the duration of the presentation, with a great focus placed on conflicts of interest.

Mr. Fox then spoke about competence. He noted that Model Rule 1.1 was most important. He then went through the Model Rule and ACTEC Commentary on 1.1 with the audience. Mr. Fox referred to the cases in his materials on page 14-6 including Lewis v. State Bar of California and Layton v. State Bar of California.

Mr. Fox next discussed conflicts. He explained that the parameters of the relationship between the estate planning practitioner, the other parties, the estate and the trust need to be set forth at the beginning of the representation.

He noted the reasons that estate planning practitioners may be tempted to leave the relationship as ambiguous on page 14-8 of the materials. He then described the consequences for failing to define the client relationship as described on pages 14-8 and 14-9 of the materials.

Mr. Fox continued talking about conflicts by highlighting Model Rule 1.7(a) and (b) on page 14-12 of the materials.

He noted that estate planning practitioners need to think about whether there is a concurrent conflict. He then discussed joint representation of co-fiduciaries, answering the question of whether a lawyer can represent cotrustees or co-executors. He noted that co-trustees and also co-executors must stay informed and participate in their respective trust administration or estate administration.

Mr. Fox then discussed whether the estate planning practitioner owes a duty to the beneficiaries. He noted that state law, in many instances, should be consulted as in some states, there is no duty to beneficiaries while in other states, there is a duty. He pointed out that the ACTEC Commentaries describe that a fiduciary owes few, if any, duties to estate beneficiaries.

Mr. Fox described the waiveable conflict of the estate planning practitioner representing both the fiduciary and beneficiary; waiveable because what if the surviving spouse is both a fiduciary and beneficiary? He noted the Baker case beginning on page 14-28 of the materials.

Mr. Fox then discussed whether the lawyer can name his or herself in the estate planning documents to be the trustee or the executor. He noted that there are disadvantages to doing this, and insisted that if it is done, the lawyer should get the client’s consent in writing and in some states, the lawyer must get the client’s consent. He noted that the drafting lawyer has no right to probate his or her client’s estate.

Mr. Fox then discussed communication with a focus on communicating with unrepresented third parties. He was particularly adamant that lawyers must not give legal advice to persons not represented.

Mr. Fox went on to discuss confidentiality of information. He noted that if you have joint clients and tell one client something, the other client must also be informed.



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