Regularizing the Trust Protector

• Author: Paul B. Miller
• Position: Professor of Law, Notre Dame Law School
• Pages: 2097-2118

Regularizing the Trust Protector Paul B. Miller * ABSTRACT: Increasingly, settlors of trusts in on-shore jurisdictions are making use of trust protectors. Protectors serve a variety of functions but generally speaking they are appointed to provide additional security for settlors’ expectations that trusts will be administered in accordance with their intentions. Given the potential breadth and variety of functions performed and powers wielded by protectors, their use generates important and profound theoretical issues. Taking its cues from recent efforts to regularize trust protection, this Article addresses questions concerning the extension of fiduciary duties to trust protectors. Amongst other things, it questions the tenability of proposals for broad extension of fiduciary status to protectors and advocates a structured, fact-based approach to fiduciary characterization of trust protection mandates according to which they may be considered fiduciary only if and to the extent they implicate fiduciary powers. I. INTRODUCTION ......................................................................... 2097 II. THE PROBLEM: THE (ALMOST) INFINITE VARIABILITY OF TRUST PROTECTION ............................................................. 2102 III. PROPOSED SOLUTIONS, AND THEIR LIMITATIONS ..................... 2106 IV. AN ALTERNATIVE ...................................................................... 2113 V. CONCLUSION ............................................................................ 2118 I. INTRODUCTION Trust protectors are an orphan of the law, and only slightly less so, of legal scholarship. The fiduciary regulation of conventionally structured trusts (i.e., those that feature a settlor, trustee(s), and beneficiaries) has drawn * Professor of Law, Notre Dame Law School. I am very grateful for comments from Tom Gallanis, Alexandra Popovici, Rob Sitkoff, and Lionel Smith. I am also appreciative of feedback from fellow symposiasts at the Iowa Law Review Wealth Transfer Law in Comparative and International Perspective Symposium held at the University of Iowa College of Law. Further comments would be most welcome at: paul.miller@nd.edu. 2097 2098 IOWA LAW REVIEW [Vol. 103:2097 considerable attention. The peculiarities associated with fiduciary regulation of conventionally structured charitable trusts are also given thorough treatment. 1 Partly as a result, many trusts scholars hold that fiduciary administration lies within the otherwise disputed “core” of the common law trust, even as they disagree about particular facets of trust fiduciary administration. 2 Equally, and not surprisingly, most general treatments of fiduciary law take the trust as conventionally structured as a paradigmatic kind of fiduciary arrangement. It is taken for granted that trustees—and no one else, for the purposes of trust law—are fiduciaries of trust beneficiaries (or of trust purposes). Likewise, it is taken for granted that the fiduciary regulation of trusts ought to be primarily focused on protecting beneficiaries. Trust protectors disrupt common assumptions about the fiduciary administration of trusts. 3 Protectors are interpolated between trustees and beneficiaries (or, in the case of charitable trusts, regulators) in the administration of trusts. Generally speaking, protectors provide enhanced protection for settlor intent. 4 But, unlike parties to the conventionally structured trust, the status of the protector is largely undefined by law. It is instead left to the fertile minds of lawyers. Protectors may be granted a variety of powers (and, indeed, forms of standing not premised on the possession 1 . See, e.g. , Henry Hansmann, The Role of Trust in Nonprofit Enterprise , in THE STUDY OF NONPROFIT ENTERPRISE: THEORIES AND APPROACHES 115, 118–21 (Helmut Anheier & Avner Ben-Ner eds., 2003) (examining the role and responsibilities of fiduciaries in the charitable trust context); Rob Atkinson, Unsettled Standing: Who (Else) Should Enforce the Duties of Charitable Fiduciaries? , 23 J. CORP. L. 655, 661 (1998); Evelyn Brody, The Limits of Charity Fiduciary Law , 57 MD. L. REV. 1400, 1418–23 (1998); James J. Fishman, Improving Charitable Accountability , 62 MD. L. REV. 218, 228–31 (2003); Harvey J. Goldschmid, The Fiduciary Duties of Nonprofit Directors and Officers: Paradoxes, Problems, and Proposed Reforms , 23 J. CORP. L. 631, 638–49 (1998); Geoffrey A. Manne, Agency Costs and the Oversight of Charitable Organizations , 1999 WIS. L. REV. 227, 237–40; Jeremy Benjamin, Note, Reinvigorating Nonprofit Directors’ Duty of Obedience , 30 CARDOZO L. REV. 1677, 1687 (2009). 2 . See Thomas P. Gallanis, The Contribution of Fiduciary Law , in THE WORLDS OF THE TRUST 388, 390–94 (Lionel Smith ed., 2013); David Hayton, The Irreducible Core Content of Trusteeship , in TRENDS IN CONTEMPORARY TRUST LAW 47, 48–52 (A.J. Oakley ed., 1996); Robert H. Sitkoff, Trust Law as Fiduciary Governance Plus Asset Partitioning , in THE WORLDS OF THE TRUST, supra , at 428, 430–34; Daniel Clarry, The Irreducible Core of the Trust 22–24 (August 2011) (unpublished LL.M. thesis, McGill University Faculty of Law) (on file with ProQuest Dissertations Publishing). 3 . See generally Terence Tan Zhong Wei, The Irreducible Core Content of Modern Trust Law, 15 TR. & TRUSTEES 477 (2009) (describing the ways in which protectors challenge the understanding of trusts). 4. Lawrence A. Frolik, Trust Protectors: Why They Have Become “The Next Big Thing” , 50 REAL PROP. TR. & EST. L.J. 267, 276–82 (2015); see also John F. Wasik, Guardians of Trusts , N.Y. TIMES (Mar. 12, 2014), https://www.nytimes.com/2014/03/13/business/retirementspecial/guardians-of-trusts.html (“T[he] legacy part of retirement can be unsettling. If you have planned carefully and set up trusts and wills, you still might have some nagging doubts about how your wishes will be carried out after you are gone. Say you have appointed a trustee you think you can confide in and who understands your intentions. What happens if that trustee turns out to be less trustworthy or dies, or if estate laws change? Then you might need a third party called a ‘trust protector.’”). 2018] REGULARIZING THE TRUST PROTECTOR 2099 and exercise of legal powers), 5 some of which are identical in nature to powers typically devolved on trustees, but others of which are idiosyncratic. The precise concatenation of powers, or forms of standing granted to a protector, will depend upon what the lawyer drafting the trust deed aims to accomplish for the settlor by making provision for a protector. But in many cases, the protector will enjoy a position of influence over trust administration that will limit or supersede the authority vested in the trustee, and/or condition the rights and expectations of beneficiaries. The scope for significant influence by protectors naturally raises questions about jural and practical relations between settlors, trustees and beneficiaries. More specifically, it gives reason to question assumptions about: (1) settlor passivity and the policy against dead hand control; (2) the unilateral character of authority vested in trustees over matters of trust administration; and (3) the necessity of clear ex ante definition of the beneficial entitlements of beneficiaries and/or their enforcement rights relative to trustees. Unfortunately, these questions have been neglected. A few academic papers describe practices in the use of protectors and take stock of associated legal and practical issues. 6 But trusts scholars have largely ignored protectors. 7 This is unfortunate for several reasons. First, from general theoretical and systemic perspectives, the protector phenomenon offers important lessons about worthy objects of theoretical interest in private law. Private-law theorists typically take the law as posited as static datum for analysis and so neglect underlying forces and processes of change that drive private law’s ongoing evolution. Trust protectors are of interest because they show how innovation in legal form can be driven not just in fits and starts by “top down” deliberative development of legal concepts and categories by lawmakers, but may also derive from practices reflecting innovation in legal craft led by able lawyers responding creatively to client needs. Incremental “bottom up” innovation can be quite disruptive, particularly where accommodation means significant loosening or expansion of the law’s existing modular structures. Again, the protector provides a compelling illustration: The development is almost entirely to the credit of 5. Frolik, supra note 4, at 273–76. 6 . See generally Alexander A. Bove, Jr., The Case Against the Trust Protector , 37 AM. COLL. TR. & EST. COUNSEL L.J. 77 (2011) (defending the concept of the trust protector and arguing that legal precedent exists to clarify the protector’s role); Frolik, supra note 4 (examining the history of protectors and relevant statutes and cases regarding their role); Stuart Pryke, Of Protectors and Enforcers , 16 TR. & TRUSTEES 64 (2010) (comparing the role of protectors to that of enforcers, a role found largely in offshore trusts); Rebecca Puni, Exploring the Many Identities of the Protector , 19 TR. & TRUSTEES 908 (2013) (discussing the role of protectors through agency, contract, and equity principles). 7. Exceptions include Robert H. Sitkoff, An Agency Costs Theory of Trust Law , 89 CORNELL L. REV. 621, 670–71 (2004); see also Stewart E. Sterk, Trust Protectors, Agency Costs, and Fiduciary Duty , 27 CARDOZO L. REV. 2761, 2761–63 (2006) (examining fiduciary duties of trust protectors, and the costs and benefits created by protectors). 2100 IOWA LAW REVIEW [Vol. 103:2097 trust lawyers aiming to make trusts more responsive to settlor intent. Lawmakers have had to play catch-up, and they have done so inconsistently and with mixed success. 8 Second, from the perspective of trust law and theory, recourse to protectors raises intriguing...