Springing Trust Protectors—Now You See ’Em, Now You Don’t

By Alexander A. Bove Jr.

Alexander A. Bove Jr. is the founding partner of Bove & Langa in Boston, and author of several books, including Trust Protectors: A Practice Manual (Juris Publishing).

It wasn’t that long ago that even the best estate-planning lawyers had no idea of the meaning and use of a trust protector. Today, estate-planning lawyers who are not at least familiar with the term should seriously consider changing their specialties.

As the popularity of such trusts increased, so did the attention given to some of the more “creative” clauses not commonly used here in US trusts, such as the “flee clause” and the protector provisions, the latter apparently offering not only potential re-access to the funds as noted above, but also increased flexibility to the trust, which itself has long been the epitome of flexibility. Furthermore, the near irresistible attraction of the protector concept was its inherent simplicity, making it easy for lawyers to add a protector provision to their trusts. That is, lawyers who were frighteningly intimidated by attempting to draft workable generation-skipping allocation provisions found that they could easily draft trust-protector provisions while riding to the office. But why would they want such a provision in their trusts anyway?

As the popularity of such trusts increased, so did the attention given to some of the more “creative” clauses not commonly used here in US trusts, such as the “flee clause” and the protector provisions, the latter apparently offering not only potential re-access to the funds as noted above, but also increased flexibility to the trust, which itself has long been the epitome of flexibility. Furthermore, the near irresistible attraction of the protector concept was its inherent simplicity, making it easy for lawyers to add a protector provision to their trusts. That is, lawyers who were frighteningly intimidated by attempting to draft workable generation-skipping allocation provisions found that they could easily draft trust-protector provisions while riding to the office. But why would they want such a provision in their trusts anyway?

Most trust problems arise after the trust has become irrevocable and has no provision that allows a change, such as a power to amend the trust or a power of appointment that may change the benefits of the trust. Otherwise, the only way to legally make a change to the trust is to petition the court for a reformation. Lawyers with experience in drafting and administering trusts will readily attest to the costs, complexity, delays, and often disputes encountered in the process of reforming a trust that needs court approval for reformation, and court approval is required for the great majority of estateplanning trusts. No one can predict the nature and extent of the future changes to the applicable law, the family, and the family circumstances, from simple things like changing domicile to more dramatic events such as divorces, lawsuits, untimely death of beneficiaries, and economic booms or disasters. If there were a way to accommodate the unforeseen changes in circumstances without the need for trust reformation, the day would be saved. Enter the trust protector.

I have defined the trust protector as a party who has powers over a trust but who is not a trustee. See Alexander A. Bove Jr., Trust Protectors: A Practice Manual with Forms (Juris Pub’g 2013). Powers that may be given to the protector are in one sense unlimited, but, of course, they are not really unlimited. As with basic trust law, they cannot extend to actions that are illegal or against public policy, but that leaves a wide range of options, and a good drafter will use caution in giving powers to the protector. The powers granted to the trust protector can range from the power to change the trust situs to the power to add or delete beneficiaries and the power to change the very provisions of the trust (a total reformation). Thus, the existence of a trust protector in a trust can completely avoid the need for long and involved court proceedings for reformation.

Simple enough, but, as with any important trust provision, it generates many questions: Who can hold this position? What about the successors? And compensation? How extensive should the protector’s powers be? Can a beneficiary be the protector? Can the protector be removed? And so on.

But what to include in the actual provision for the trust protector is not the only subject of this discussion. (For a thorough discussion of the powers of a trust protector, see Bove, supra.) The main subject is this: Does every trust need a trust protector and The questions that arise with springing protectors include most that apply to all protectors and are the subject of current dispute among estate-planning lawyers. For example, if the protector has the power to remove and replace the trustee (one of the most common powers), does the protector have a duty to periodically monitor the trustee’s performance to determine whether removal is called for? And if the protector merely stands by and does nothing, is the protector still entitled to a fee? Would the protector be liable if the trustee breaches its duty, but the protector stands by and does nothing? This was the issue in Robert T. McLean Irrevocable Trust v. Ponder, 418 S.W.3d 482 (Mo. Ct. App. 2014). All of these issues are normally dealt with in drafting the

The questions that arise with springing protectors include most that apply to all protectors and are the subject of current dispute among estate-planning lawyers. For example, if the protector has the power to remove and replace the trustee (one of the most common powers), does the protector have a duty to periodically monitor the trustee’s performance to determine whether removal is called for? And if the protector merely stands by and does nothing, is the protector still entitled to a fee? Would the protector be liable if the trustee breaches its duty, but the protector stands by and does nothing? This was the issue in Robert T. McLean Irrevocable Trust v. Ponder, 418 S.W.3d 482 (Mo. Ct. App. 2014). All of these issues are normally dealt with in drafting the trust-protector provision itself, whether or not a springing protector. Because the appointment of a springing protector is typically necessitated by the surfacing of a special need or a change in circumstances, however, some provisions tailored to the particular objective may be needed.

Some may ask, is there a legal basis for the role of the springing protector? This question may seem a bit obvious, as it is the same basis as that for a trust “advisor,” a position well and long recognized in the law of trusts. See Trust Advisors, 78 Harv. L. Rev. 1230 (1965); see also, e.g., Tenn. Code. Ann. § 35-16-108(b) (“‘advisor’ includes a trust ‘protector’”). Thus, the position of trust protector or springing trust protector may be legitimately created by simply providing for its creation under the terms of the trust in question. Further, most lawyers are familiar with the concept of a “springing” appointment, as in the case of a springing power of attorney, which takes effect on a person’s certification of incompetence, for example. In this case, we would include a provision in the trust that would allow a party, such as the trustee, the settlor’s law firm, some independent professional acceptable to the settlor, or (not the first choice) a majority of the beneficiaries to name a trust protector, stating the circumstances of the need for a protector. The appointment would state the terms and conditions of the protector’s appointment, including the duration of the appointment. This is a major benefit because, unlike the normal appointment of a “permanent” protector, no actual removal would be necessary. The term of the appointment (and the powers) would simply end; the protector could not refuse to step down. (A permanent protector, on the other hand, might question the authority or applicable conditions for removal and request court confirmation or instructions.) Such an arrangement for the springing protector can be tailored precisely to the need for the protector— e.g., if the trust has a sole trustee—but the family circumstances and the trust assets would be better managed with a second trustee. The springing protector, once satisfied with the propriety of the change, could simply act to amend the trust, appointing a second trustee, and his term could thereupon end, and the trust would continue on its original course.

The trust provision allowing for the appointment of the springing protector might include a suggested set of provisions governing the appointment, such as compensation, exculpations (with a “good faith” rule), the right to trust information, the right to hire agents, and, in general, the right to carry out the protector’s duties. And it should be made clear that the protector will be acting for the benefit of the trust and its beneficaries. See Alexander A. Bove Jr., The Case Against the Trust Protector, 37 ACTEC L.J. 77 (2011).

A related and equally critical issue to keep in mind in appointing the springing protector is the potential adverse tax and creditor exposure implications in choosing the wrong party or giving the protector nonfiduciary, dispositive powers. If the protector’s powers are nonfiduciary, they may be deemed personal and for both tax purposes and creditor’s reach purposes will be regarded as being at the personal disposal of the protector. See Alexander A. Bove Jr., Using the Power of Appointment to Protect Assets, 36 ACTEC L.J. 333, 340 (2010). This problem also extends to a beneficiary who may be appointed as protector. Id.

The beauty of the springing protector is that it can be utilized repeatedly to deal with trust issues as they come along during the full term of the trust, without being bound to one protector and without resorting to court involvement, avoiding the need for a petition for reformation, and helping to ensure a smoother running of the trust.