Luca Brasi was the enforcer (he could be called the “protector”) for Don Corleone in the famous book and movie, The Godfather. No one argued with Luca’s decisions as he coldly carried out the godfather’s instructions, with no regard, and probably no liability, for their effect on people. Solomon was a King of Israel in the 10th century B.C., who became legendary for his infinite wisdom and who assumed full responsibility for his decisions. Your Uncle Mike is far from both and simply desires to please, but tries to steer clear of liability. Though it may be a slight exaggeration to analogize Luca Brasi, Solomon and Uncle Mike to today’s trust protector, the similarities are nonetheless there. So, which type would make the best protector?
For the uninitiated, a trust protector is a party who has powers over a trust, but who’s not a trustee. In exercising his powers, the protector’s decisions can have far-reaching effects on the trust and the beneficiaries, so selection of the best protector for the job can be critical. It may be that the settlor, wanting the terms of her trust to be closely followed and its purposes carefully respected, names a Luca Brasi as protector to see that that’s done, since Luca has such a convincing way about him. On the other hand, the trustee who appoints a protector would more likely look for a Solomon, since Solomon’s decisions will undoubtedly be fair to all the parties, and the babies will be safe. Meanwhile, beneficiaries (who are often given the power to appoint a protector) would head straight for Uncle Mike, for obvious reasons.
There’s no question of the value of a protector, when one is needed. For instance, many of us are aware of the substantial expense, time and publicity associated with a petition for reformation of a trust or removal of a trustee when a drafting error surfaces, circumstances change or the beneficiaries simply want a different trustee.1 If instead, a protector had the power to amend the trust or remove and replace the trustee, the matter becomes incredibly simple and straightforward, except in unusual cases. The role of the protector can be vital to a trust and, therefore, the selection of the protector is equally vital. Let’s also assume here that the protector is a fiduciary, as there should be no question about that if she’s a disinterested party.2
With that in mind, when selecting a protector, there are some guidelines we should consider which will, at the very least, lead to a more efficient, more secure result for the overall benefit of the beneficiaries and the purpose of the trust. After interviewing several trust protectors, here are those guidelines, with comments on each.3
Unlike your Uncle Mike (assuming he’s just plain old Uncle Mike), your protector should have some knowledge and understanding of the concept of a trust and trust operations. This doesn’t mean that your protector must be an attorney or have the ability to manage a trust (although that doesn’t hurt); it means the protector should have the ability to understand what it means, for example, to change the situs and governing law of a trust and whether it’s in the best interests of the beneficiaries and the purposes of the trust to do so. A protector with no knowledge of trust operations, that simply “rubber-stamps” every request made of it, not only exposes the trust to attack as a sham, but also exposes the protector itself to claims by a beneficiary for breach of fiduciary duty.If a professional protector entity is involved, you would want to ascertain that each party of the firm who will be involved in exercising protector’s powers has the desired experience.
It’s interesting, if not disturbing, to note how little attention seems to be given to this extremely important ingredient to the engagement of a protector. Many drafting attorneys take the position that the protector isn’t a fiduciary, and to that end, they include language in the trust that totally exculpates the protector from any liability, regardless of its action or inaction, without condition or limitation, despite the extent of the protector’s powers.Adding to this disregard of the beneficiaries’ protection are several state statutes, which dictate that unless provided otherwise in the trust, the protector shall not be a fiduciary.4 Wishing won’t make it so, and if a protector makes a bad decision or refuses to act, and either results in a loss of the trust’s assets, the protector should bear the liability for that loss.5 Without insurance protection or personal assets of the protector, the beneficiaries would be left holding the bag. All of the professional protector companies I interviewed carried substantial liability insurance. When an individual protector is desired, competent attorneys and accountants might be considered, as most have malpractice insurance, but it should be confirmed that the coverage includes services as a trust protector.
Interestingly, one of the protector companies I interviewed (not one of the companies noted below) was a limited liability company (LLC), founded by an attorney who was the sole member of the LLC that offered protector services. The LLC, he said, was formed to shield him from personal liability in the event he breached his duty as a protector. But when I asked if the LLC has insurance to cover costs of any loss he might cause, he responded that he had none. If it’s between him and Uncle Mike, Uncle Mike might be the better choice here.
One of the most significant factors in using a trust protector is the perceived ease of making changes related to the trust that would take an extended time for a trustee to carry out, if in fact the trustee would agree to make the change at all or, alternatively, to avoid the time-consuming and expensive procedure that accompanies a court-ordered reformation. Thus, it’s important to ascertain that the protector you select can respond quickly and efficiently. Of course, an individual protector doesn’t have to resort to the completion of request forms and conferencing with a committee that meets only once per week, so he should be able to respond very quickly. But the entities I interviewed all indicated that, except in some unusual circumstances, their turnaround time is generally 24 hours after they’re given all the information necessary to make an informed decision (this is largely unheard of with a corporate trustee). One advantage of an entity over an individual is that it’s more likely that someone will always be available to act, as opposed to an individual who may be busy, or just away, when needed.
Typically, professional protector entities are staffed with several experienced people, so there’s always someone to respond when needed. Hiring an entity with a staff of one leaves the trust just as vulnerable as having a single protector.This isn’t to say that a single protector is per se a bad idea. As I often say, if there are no problems, then there will be no problems. Further, even if there’s a problem with the single protector, such as illness or unavailability, then a well-drafted removal and appointment provision should provide a solution. Nevertheless, for especially long-term trusts and some asset protection trusts, the professional entity protector may be a safer bet.
In most jurisdictions (including the United States), it’s not necessary for a protector to be regulated. There are a few jurisdictions, however, such as Jersey and the Bahamas, that require registration and regulation of individuals or entities who are involved with any financial decisions or responsibilities in connection with services they provide to the public. This may offer additional confidence and peace of mind in the choice of protector. Regulation typically consists of formal registration with the agency overseeing financial services, ensuring that the entity has the required experience and staff to render the services it offers, that it’s solvent (there are capital requirements) and that it maintains liability insurance, often over $1 million per incident. In addition, the entity is subject to regular audits. In contrast, the individual trust protector isn’t subject to any such requirements.
This isn’t something that would necessarily be discussed when interviewing a protector, but it’s nevertheless relevant if one of the objectives of the trust is asset protection, especially if the settlor is also a beneficiary. In either event, it’s desirable to have a protector that’s not domiciled or present in the same jurisdiction as the settlor or, in some cases, depending on the terms of the trust, the beneficiaries. In a lawsuit attacking the assets of the trust, we don’t want the protector to be exposed to a court order directing the exercise of a power that would benefit a creditor of the settlor or a beneficiary.Of course, there are several other drafting considerations in connection with the protector versus the asset protection issue, but they’re beyond the scope of this article.
Similar to the fee arrangement for an attorney, accountant, financial advisor or an entity offering protector services, the customary arrangement for a professional protector is an annual base fee, plus hourly charges for special services.The entity protectors also typically charge a small “start-up” fee to review the trust and overall situation. Of course, fees vary and are subject to change (annually, and usually upwards), but the fees I found were as follows: start-up fees, $500 to $1,900; annual fees, $1,750 to $2,000; and hourly fees, $250 to $350. The hourly fees are for services rendered over and above simple and regular monitoring of the trust administration.
Although the foregoing ranges of fees, in my opinion, seem reasonable for the services rendered, remember that many trusts can operate for years without the need for a protector. In this regard, practitioners and clients might consider providing in their trusts for a “springing” protector: one who assumes office only when appointed by the party or parties given the power to appoint under the terms of the trust. The same provision would allow the appointment to be permanent, revocable or for a fixed period of time. It could be under any (legal) terms and conditions set by the appointers and can be repeated from time to time as needed. Of course, fees will be paid to the springing protector, and the same guidelines should be applied in the selection. The only difference is that, in this case, the protector will serve on an as-needed basis.
Note that while at first glance the springing protector appears to be the best of both worlds, this isn’t necessarily the case. A permanent protector can regularly monitor the activities of the trust, the trustee and the beneficiaries. Depending on the size of the trust, the nature of the assets, the term of the trust and the circumstances of the beneficiaries, monitoring on a periodic basis may be the best long-term plan.
I interviewed three companies established for the purpose of acting as protectors for private trusts (although the Jeeves Group offers other fiduciary services). The fees ranged, as noted above, and each of the companies has experienced professionals on staff available to promptly perform these services, as well as insurance to cover any claims. While any of them can act anywhere in the world, the U.S. company, Overseas Oversight Group, LLC, is the only one of its kind I found in the United States. In this regard, it must be noted that if a U.S. settlor establishes a U.S. trust and names a non-U.S. company as protector, the trust may be deemed a foreign trust under Internal Revenue Code Section 7701(a)(30), requiring additional tax and reporting forms to be filed each year (though, generally, no additional tax). Lastly, the two foreign companies mentioned are regulated by the local financial services agency, as explained above, while the U.S. company isn’t regulated by any financial agency in the United States, except, perhaps, insofar as a board of accountancy might do so, but not with respect to their services as a protector.
The three companies are:
Overseas Oversight Group, LLC
Nevada and Liechtenstein
Fiduciary Protectors, Limited
Jersey, Channel Islands
The Jeeves Group
Liechtenstein, Switzerland, Singapore and others
1.Note that, to some extent, the Uniform Trust Code (UTC), enacted in some form in 25 jurisdictions, has simplified the reformation procedure. But, in many cases, court involvement is still required.
2.See, e.g., Alexander A. Bove, Jr. “Exposing the Trust Protector,” Trusts & Estates (May 2012) at p. 48.
3.It should be noted that as a result of the increased need for and use of protectors, a number of professional protector companies have been formed and offer their services as such. In the process of developing this article, I’ve interviewed several of them. Though I stress that this article isn’t an endorsement of any of them in particular, I can say that, in general, I found all of them to be run and staffed by professionals with experience in the trust field.
4.See, e.g., Alaska Stat. Section 13.36.370(d), South Dakota Cod. Law Section 55-1B-1(2) and Arizona Stat. Section 14-10818D.
5.See, e.g., UTC Section 807(d).