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Are Trust Protectors Fiduciaries?

Posted on: November 16th, 2016
trust protectorsTrust protectors can be granted wide authority over directing the management of a trust. While other parties with authority over the trust, such as trustees, are held to fiduciary standards, not all trust protectors are regarded as fiduciaries. Fiduciary duties generally involve administering the trust according to trust terms and governing law while acting in the best interest of beneficiaries.

Whether a trust protector is considered to be a fiduciary hinges upon two factors – the terms of the trust and state law.

A presentation at the 2015 Heckerling Institute on Estate Planning purported a trust protector’s role as a fiduciary will be recognized or disregarded based on the specific terms in the trust document. However, a trust protector’s fiduciary duties are further defined under state law. While state law might allow the terms of a trust document to override the default rules under state law, the laws of the particular state must be analyzed to determine if this is the case. Thus, the trust protector’s status as a fiduciary and subsequent level of liability is influenced both by trust terms and state law.

Attorney Alexander A. Bove, Jr. published an article this year titled “A Protector by Any Other Name…” in Estate Planning and Community Property Law Journal. Bove explores the confusing role of trust protectors and whether their duties should fall under the fiduciary umbrella. He also presents circumstances in which he believes a trust protector should not be regarded as a fiduciary: When the trust protector is a beneficiary of the same trust they have power over. He states: 
 
This is not to say that a power holder, including a protector, can never have a non-fiduciary role. This may occur, for example, where the protector has authority over discretionary distributions and is also a beneficiary of the trust. There, the presumption is that the settlor intended the arrangement to be akin to a personal power of appointment and the power holder/protector need not be held to fiduciary standards. 

Other considerations Bove poses for whether a trust protector should be held to a fiduciary standard include the powers that a trust protector is granted and those that they act upon. 

In a piece published in late 2015 in Real Property, Trust and Estate Law Journal, scholar and law professor Lawrence A. Frolik poses the question, “Is the Protector a Fiduciary?” (p. 288). Similar to Bove’s piece, Frolik postures that in the absence of state law provisions, the trust document can determine whether the trust protector is held to a fiduciary standard. Ultimately, trust terms and the law of the state where the trust is administered must be carefully reviewed.

Our trust attorneys serve North Carolina, Florida, Tennessee, and New York. In these respective states, trust protectors provisions appear in the law as follows:
 
  • The North Carolina Trust Code (N.C.G.S. § 36C-8A-801 et seq.) was amended in 2012 to provide for trust protectors. Under North Carolina law, a trust protector is considered a “power holder.” A power holder is anyone other than the trustee with authority over trust administration. State law defines a power holder as a fiduciary required to act in good faith and remains responsible for loss due to breach of fiduciary duty.
  • Similar to North Carolina law, The Florida Trust Code includes provisions for power holders (parties—other than beneficiaries—with authority to direct a trust). Power holders are held to a high standard of good faith and act as fiduciaries. Power holders are liable for any loss produced from breach of a fiduciary duty.
  • The Tennessee Trust Code includes provisions different from the aforementioned states. The Code was revised in 2012 to include a new fiduciary classification, an “excluded fiduciary.” The term applies to trust protectors, trustees, and trust advisors who are dismissed of power. This classification can be applied through trust terms, court order, or an agreement of qualified beneficiaries. 
  • New York’s Estates Powers and Trusts Law does not currently provide for trust protectors.
 
The Trust Codes of North Carolina, Florida and Tennessee all allow a trust document to expressly provide that a trust protector acts in non-fiduciary capacity.

During a future plan review, present concerns with a trust attorney or advisor. Schedule a review of your trust with one of our attorneys, or ask us about trust protector services.
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