We have written before about “trust protectors,” a relatively new concept in American trust law. Because there is not a lot of case law on the subject, the limits of a trust protector’s power (and duty) has not been well-established. Now a new California case fills in a little more detail.
Trust protectors — a developing idea
The notion of having a trust protector named in a trust document is relatively new. It first became popular in so-called “asset protection” trusts, and especially trusts established in foreign jurisdictions. In recent years, though, it has become more common to see all sorts of trust documents name a trust protector.
Why would you want to have a trust protector in your trust document? Primarily for flexibility to deal with future developments. If, for example, you particularly want to protect the primary beneficiary from challenges by later beneficiaries, a trust protector might be one way to provide for that kind of insulation.
That said, there is little agreement among lawyers (and trustees) about the proper role for a trust protector. What should a trust protector’s powers be? Should they be broad, or limited?
Put another way: should a trust protector normally be a reactive position, or one that acts affirmatively? Would you want your trust protector to affirmatively insist on proper behavior, or to just be available to settle disputes if they should arise? A given trust document might answer that question clearly, but most do not spell out the precise limits of a trust protector’s power — or duty.
The McMillan-Gordon trust
When George McMillan-Gordon died in 2014, he left a widow and six children. He also left a trust that became irrevocable with his death.
Although there appear to have been some disputes about administration of the trust, the family members quickly worked out any difficulties. A court proceeding to clarify one administrative question was unopposed, and ultimately withdrawn. The trust beneficiaries and trustees came to an agreement before the court was asked to rule.
The McMillan-Gordon trust included a provision naming a trust protector. The original trust protector, a Los Angeles lawyer, had resigned the position, and named his own successor. The new trust protector, also an attorney but from San Francisco, wanted to know more about the family dispute and its resolution.
Some of the trust protector’s power and duties were listed in the trust document. He could appoint a new trustee if no one was serving, or if a trustee was not fulfilling his or her duties. The trust also authorized the trust protector to move the trust to a different state, or to eliminate unnecessary sub-trusts.
Other provisions of the trust spelled out the trust protector’s duties. He was not obligated to investigate a trustee’s actions, or to audit the trust’s books. The trust protector would not be responsible for the trust’s investment performance. Perhaps most importantly, the trust document said that the trust protector “has no general duty to monitor or remain informed about the trust.”
The trust protector’s lawsuit
Nonetheless, the trust protector thought it was important to monitor the trust’s administration. He insisted on an accounting from the trustees, and he asked a number of questions about the dispute and its resolution. The trust’s lawyers balked.
Eventually, the trust protector filed a lawsuit. He asked the court to order the trustees to answer his questions and provide an accounting. He also questioned whether the trust’s tax filings were current. Finally, he noted that the two co-trustees had separate attorneys, and asked if the fees might be excessive as a result.
One co-trustee responded to the court petition, objecting that the trust protector lacked standing to bring the action. More pointedly, the trustees both argued that one of the concerns raised by the trust protector — about high administrative costs — was at least partly about the fees charged by the prior trust protector.
The trial judge agreed that the trust protector’s powers did not include authority to demand an accounting through the courts. His petition was denied.
The appellate decision
The California Court of Appeals affirmed the denial. In an unreported decision, the appellate court agreed that the trust did not require the trustees to account to the trust protector. Whatever the trust protector’s powers might be, they did not include authority to affirmatively seek oversight of the trust.
According to the trust protector, he had wanted more than just an accounting. He had asked the trial court to direct the trustees to give him “information about what was going on.” That request, said the appellate court, was too amorphous to be enforceable. If he could describe exactly what he needed, the court might consider a follow-up request. Carberry v. Kaltschmid, June 7, 2018.
What about your Arizona trust?
Would the Carberry case tell an Arizona trust protector what authority he or she might have? Not directly, for several reasons:
- The California case interprets California trust law, which differs from Arizona law. Mostly, though, the principles are the same; a court decision from a sister state would be somewhat persuasive to an Arizona court.
- The Carberry decision is unreported. That means that the Carberry court itself felt that it should not be used as precedent for later, similar cases.
- The trust in Carberry is different from your trust. We are pretty comfortable in saying that, because every trust’s language is different. Small language changes could have lead to very different outcomes.
Still, the Carberry decision gives some insight into how an appellate court views the developing law of trust protectors. Does a trust protector’s power extend to the ability to force the trustees to provide accounting and other information? Not necessarily. Look at the document itself, and consider the alternatives, costs and authority of the various parties in each trust case.
Does the California case give any helpful direction to people considering using a trust protector? Absolutely. If you think a trust protector might help maintain flexibility or protection for your trust, consider exactly what powers and duties you want to give them. That’s the important lesson from this unreported California trust protector case.