Posts Tagged ‘Trust Protector’

New Florida “Trust Protector” Case Shows How the Idea Can Work

DECEMBER 8, 2014 VOLUME 21 NUMBER 44

We’ve written several times about the relatively new concept of “trust protectors.” The idea is that a trust can be much more flexible if someone — necessarily someone who is entirely trustworthy — has the power to make at least some kinds of changes after the trust becomes irrevocable. The precise power of a trust protector can usually be spelled out in the trust document, but frequently includes the power to amend the trust (or even terminate it), to change beneficiaries or to remove a trustee and name a successor.

While trust protectors have been the subject of much writing, they are still new enough not to have been spotted in the court system very often. Some of that, of course, is because the very existence of a trust protector can sometimes avoid the need for court action — or head off a court contest, if someone is unhappy with the trust’s administration. Mostly, though, the idea is too new, and has not even been formalized in many states.

Arizona has a specific statute allowing trust protectors. States are increasingly codifying similar provisions, often as part of the Uniform Trust Code, which has been adopted now in over half of the states. Florida is one of those states, having adopted its version of the Uniform Trust Code — expressly including a provision for trust protectors — in 2008. Now a new appellate case out of Florida gives some insight into how the trust protector might be used.

Zach Moore (not his real name) was a successful businessman who retired to Florida, where he lived with his second wife Patty. He had two children from his first marriage. Like many people, Zach decided that he should have a revocable living trust; he signed trust documents in 1999 and rewrote them in 2008, the same year that Florida adopted the Uniform Trust Code. His new trust included a provision permitting the trustee to name a trust protector in order to amend the trust to clarify any ambiguity in the future. He also included some specific language making it clear that after his death the trust was to be primarily for his wife’s benefit, and that his children’s shares would be created only on her death. He and Patty were named as trustees, and upon his death Patty would continue as sole trustee.

Zach died in 2010, and Patty took over as sole trustee. Not long after that, Zach’s two children brought a suit against Patty alleging that she was not managing the trust properly, and demanding an accounting from her. She filed a motion to dismiss, alleging that they were not beneficiaries of the trust at all — their separate-share trusts, she argued, would be created only upon her death.

The trial judge disagreed, ruling that the trust would divide into separate shares, not be transferred to new trusts. That meant that the children were beneficiaries, although their interests did not arise until Patty’s death. Still, they would have standing to challenge her administration of the trust.

Patty’s response: she appointed a trust protector, as provided for in the trust document. That trust protector amended the trust to make clear that upon Patty’s death the then-trustee was to distribute the remaining assets to a new trust, which would then split into two shares for Zach’s children.

Did that resolve the issue? Not quite. The trial judge ruled that the purported amendment by the trust protector was ineffective, because it did not benefit all the beneficiaries of the original trust — it would leave Zach’s children with no power to challenge Patty’s actions as trustee.

Patty appealed, and the Florida Court of Appeals reversed the trial court’s ruling. The appellate judges first noted that the then-new Florida Trust Code allowed for inclusion of trust protectors, and that the powers given to the trust protector in Zach’s trust were not outside the scope of the law. Importantly, the appellate court specifically rejected the children’s argument that the Uniform Trust Code makes court modification the only way to amend an irrevocable trust.

The Court of Appeals went on to note that the trial judge’s reading of the trust to find a single trust dividing into shares was not unambiguously clear from the trust document. That meant that the trust protector’s actions to clarify an ambiguous provision was clearly within his authority — and the amendment was valid. “From the trust protector’s affidavit,” wrote the court, “it appears that the husband settled on the multiple-trust scheme for the very purpose of preventing the children from challenging the manner in which the wife spent the money” in the trust he had established. That purpose should be upheld, decided the appellate judges; the court specifically approved the trust protector’s amendments. Minassian v. Rachins, December 3, 2014.

Arizona’s trust protector statute is, if anything, broader than Florida’s statute. Powers that can be assigned to a trust protector are spelled out, with the specific provision that they are not limited to those listed. Trust protectors can be an important and effective way to address possible future disputes; it can make sense to include a trust protector, especially in a case where future contentiousness is anticipated.

 

Estate Planning: It Shouldn’t Be About the Lawyers

AUGUST 22, 2011 VOLUME 18 NUMBER 30
Of course it usually makes sense to place your estate planning wishes in the hands of your lawyer to make sure documents are correctly drawn and your wishes carried out. Lawyers can be very protective of what they perceive as their clients’ wishes and best interests, and sometimes that can even get in the way. Take, for instance, the will and trust of Missouri resident William R. Knichel.

Mr. Knichel had two grown children. He also had a 20-year relationship with Anita Madsen. In 2002, shortly after he was diagnosed with brain cancer, he signed a new will and powers of attorney. He named his children as his agents and left his entire estate to the two of them.

At about the same time Ms. Madsen began living with — and taking care of — Mr. Knichel. Two years later, he decided that he wanted to put her in charge of his finances and leave a significant portion of his estate to her. He transferred his home and one bank account into joint tenancy with her, and named her as beneficiary on his life insurance policy.

In 2004, Mr. Knichel and Ms. Madsen made an appointment with St. Louis attorney Charles Amen, of the law firm Purcell & Amen. Mr. Amen prepared a new will and powers of attorney, and a living trust. These documents named Ms. Madsen as personal representative, agent and trustee. The trust was intended to hold Mr. Knichel’s retirement assets, and to distribute them in three equal shares to his two children and Ms. Madsen.

One unusual provision in the trust document: Mr. Amen himself was named as “special co-trustee” with some specific powers. He was to make final decisions about distributions among the beneficiaries, to decide whether any beneficiaries could challenge Ms. Madsen’s administration or distribution decisions, and act as arbitrator if any disputes did arise. Then Mr. Amen and Ms. Madsen began the process of transferring Mr. Knichel’s retirement assets into the trust.

Among the accounts they tried to transfer to the trust was an IRA held at UBS Financial. For reasons not spelled out in the reported court opinion, UBS declined to change the IRA — even though Mr. Amen and Ms. Madsen made several attempts. When Mr. Knichel died a few months later, his children were still named as beneficiaries, rather than the trust.

Mr. Amen continued to work with Ms. Madsen to try to get UBS to change the beneficiary designation, but unsuccessfully. Ultimately UBS distributed the IRA account to the two children. Mr. Amen advised Ms. Madsen to simply make an equivalent distribution from the other trust assets to herself. She did that, and also paid herself a $6,000 fee as trustee and Mr. Amen’s fees of $2,400 for his representation of her as trustee.

In the three years after Mr. Knichel’s death, his children regularly requested a full accounting from Ms. Madsen and Mr. Amen. They did not receive complete information and so, in 2007, they filed suit against Ms. Madsen and Mr. Amen. They specifically sought removal of Mr. Amen and his firm as special co-trustee, arguing that there were multiple conflicts of interest in acting in that capacity while also representing Ms. Madsen, and that Mr. Amen had breached a fiduciary duty to treat the trust’s beneficiaries impartially.

After the trial judge denied Mr. Amen’s motion to dismiss the lawsuit, he withdrew as attorney form Ms. Madsen individually and as trustee. As a result of the proceedings, the court ultimately removed Ms. Madsen as trustee and Mr. Amen and his firm as special co-trustee, froze the trust’s assets and ordered Ms. Madsen to return distributions she had made to herself, her fees and the fees she had paid Mr. Amen. The Judge specifically found that Mr. Amen had breached his fiduciary duties as special co-trustee, because he had not been impartial to the three beneficiaries in his advice and representation of Ms. Madsen.

Mr. Amen appealed the finding. The Missouri Court of Appeals summarily dismissed his appeal, finding that he was not an “interested person” within the meaning of Missouri’s version of the Uniform Trust Code. He did not have a property right in (or a claim against) the trust itself, according to the appellate judges. Consequently, he had no standing to claim that the trial judge had made a mistake.

The Court of Appeals noted that this was not the first case they had heard in which members of Mr. Amen’s firm had named the firm as “special co-trustee.” In an earlier case, Mr. Amen’s partner had named the firm as “special co-trustee” in a trust for a man who was at the time the subject of a guardianship proceeding. When that man’s children dismissed their guardianship petition, Mr. Amen’s partner attempted to appeal the dismissal; the appellate court ruled in that case that he lacked standing to bring the appeal.

Though the circumstances and the legal arguments were somewhat different, the result was the same — dismissal of the appeal. The appellate court was equally unimpressed, incidentally, by Mr. Amen’s other argument — that he would be required to report the finding of breach of fiduciary duty to professional licensing boards and might get in trouble with them, too. In Matter of Knichel, August 16, 2011.

The Knichel case raises a legal question separate from Mr. Amen’s standing to appeal the finding that he breached his fiduciary duty. What is a “special co-trustee,” and what are the duties and powers of such a position?

Under Arizona’s version of the Uniform Trust Code (which is not identical to Missouri’s), the position spelled out in Mr. Amen’s trust would probably be analogous to a “trust protector,” at least to the extent that Mr. Amen’s “special co-trustee” could change the respective shares of beneficiaries. Arizona’s legislative decision to expressly limit any fiduciary duty to beneficiaries might complicate that designation and the analysis of a similar case if one were to arise in the Arizona courts.

What Is a Trust Protector? Do You Need One In Your Trust?

JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”

To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.

So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.

There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:

  1. The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
  2. The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
  3. Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
  4. Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.

These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.

A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.

That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.

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