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In what could be a ground breaking decision, for the very first time we now have a Florida appellate court explicitly sanctioning the use of trust protectors in a domestic trust proceeding.

Historically, trust protectors were a standard feature in offshore trusts, but rarely used domestically. Well, as Dylan once famously observed, the times they are a-changin’. Over the last few years there’s been a trend towards wider use of trust protectors in domestic trusts, and this 4th DCA opinion in Minassian v. Rachins may go a long way towards accelerating that trend.

In Minassian the authority for resolving any ambiguities in the trust agreement was shifted from the courts to the trust protector, thereby effectively privatizing the dispute-resolution process. As readers of this blog know, I’m all for privatizing inheritance litigation whenever possible. The tool I’ve pointed to in the past for getting that job done is mandatory arbitration (see here). We now have another court-sanctioned tool that’s potentially even more powerful: a trust protector authorized to resolve trust-construction ambiguities by amending or terminating the trust after the settlor’s death.

Case Study

Minassian v. Rachins, — So.3d —-, 2014 WL 6775269 (Fla. 4th DCA December 03, 2014)

In Minassian the settlor named his estate planning attorney (i.e., the professional with most knowledge regarding his testamentary intent) as his trust protector. According to the estate planning attorney, his client had very specific intentions regarding how his trust should be administered after his death for the benefit of his wife, and he also expected his children might be less than thrilled with his plans (especially one estranged daughter). 4th DCA:

The trust protector testified in a deposition that he met with the husband twice, first in person to discuss his estate planning desires, and second over the phone to discuss and execute the documents he had drafted. During the husband’s life, the husband and wife’s “lives revolved around horse racing and legal gambling,” and, in the trust, the husband wanted “to provide for [the wife] in the way they had lived in the past….” . . . The trust protector also stated, “This challenge by the children is exactly what [the husband] expected.” The trust protector noted that the husband referred to his daughter in derogatory terms, and that the daughter had not seen her father in years.

When husband died, the litigation he feared (and wisely planned for) materialized in the form a lawsuit filed by his children against his wife (the trust’s sole trustee) alleging she’d breached her fiduciary duties as trustee by improperly administering the trust. Both sides filed summary judgment motions claiming the trust agreement supported their side of the case. When the trial court ruled against wife, she triggered the trust protector clause to simply re-write the trust agreement in a way that favored her litigation position (effectively doing an end run around the trial court’s adverse ruling). 4th DCA:

In the midst of litigation in which the trustee of a family trust was being sued for accountings and breach of fiduciary duty, the trustee appointed a “trust protector,” as allowed by the terms of the trust, to modify the trust’s provisions. These modifications were unfavorable to the litigation position of the beneficiaries, and they filed a supplemental complaint to declare the trust protector’s modifications invalid.

And here’s how the 4th DCA summarized the operative trust-protector clause:

After the trial court denied the motion, the wife appointed a “trust protector” pursuant to Article 16, Section 18 of the trust. This section authorizes the wife, after the husband’s death, to appoint a trust protector “to protect … the interests of the beneficiaries as the Trust Protector deems, in its sole and absolute discretion, to be in accordance with my intentions….” The trust protector is empowered to modify or amend the trust provisions to, inter alia: (1) “correct ambiguities that might otherwise require court construction”; or (2) “correct a drafting error that defeats my intent, as determined by the Trust Protector in its sole and absolute discretion, following the guidelines provided in this Agreement[.]” The trust protector can act without court authorization under certain circumstances. The trust directs the trust protector, prior to amending the trust, to “determine my intent and consider the interests of current and future beneficiaries as a whole,” and to amend “only if the amendment will either benefit the beneficiaries as a group (even though particular beneficiaries may thereby be disadvantaged), or further my probable wishes in an appropriate way.” The trust provided that “any exercise … of the powers and discretions granted to the Trust Protector shall be in the sole and absolute discretion of the Trust Protector, and shall be binding and conclusive on all persons.”

After wife pulled the trigger on the trust-protector clause, plaintiffs cried foul, and the trial court agreed with them, overriding the trust protector’s actions. Wrong answer says the 4th DCA. Here’s why:

  1. trust protectors are authorized by Florida law;
  2. the powers granted to the trust protector in this case are authorized by Florida law; and
  3. the settlor’s intent to use a trust protector (instead of our courts) to resolve this dispute works under Florida law.

Each of these points is a big deal for Florida trusts and estates attorneys (be it as planners or litigators). What makes the 4th DCA’s analysis so useful to working lawyers is its heavy reliance on Florida’s existing Trust Code, which means we now have a statutory road map — blessed by an appellate court — for using trust protectors in Florida trust agreements. You’ll want to hold on to this opinion.

Trust Protector — OK? 4th DCA: YES:

The Florida Trust Code provides: “The terms of a trust may confer on a trustee or other person a power to direct the modification or termination of the trust.” § 736.0808(3), Fla. Stat. (2008) (emphasis added). This section was adopted from the Uniform Trust Code, which contains identical language in section 808(c). See Unif. Trust Code § 808 (2000). The commentary to this section states:

Subsections (b)-(d) ratify the use of trust protectors and advisers…. Subsection (c) is similar to Restatement (Third) of Trusts Section 64(2) (Tentative Draft No. 3, approved 2001)…. “Trust protector,” a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust. Subsection (c) [as enacted in section 736.0808(3), Florida Statutes] ratifies the recent trend to grant third persons such broader powers….

The provisions of this section may be altered in the terms of the trust. See Section 105. A settlor can provide that the trustee must accept the decision of the power holder without question. Or a settler could provide that the holder of the power is not to be held to the standards of a fiduciary….

Id. at Editors’ Notes (emphasis supplied). See generally Peter B. Tiernan, Evaluate and Draft Helpful Trust Protector Provisions, 38 ESTATE PLANNING 24 (July 2011).

Trust Amendment — OK? 4th DCA: YES:

The children make two arguments as to the inapplicability of section 736.0808(3). First, they contend that this provision conflicts with “the black letter common law rule … that a trustee may not delegate discretionary powers to another.” Second, they argue that sections 736.0410–736.04115 and 736.0412, Florida Statutes, provide the exclusive means of modifying a trust under the Florida Trust Code. We reject both arguments.

As to the conflict with the common law, which precludes non-delegation of a trustee’s discretionary powers, this argument fails for two reasons. First, it is not the trustee that is delegating a duty in this case, but the settlor of the trust, who delegates his power to modify to a third person for specific reasons. Second, “The common law of trusts and principles of equity supplement [the Florida Trust Code], except to the extent modified by this code or another law of this state.” § 736.0106, Fla. Stat. (2008) (emphasis added); see also Abraham Mora, et al., 12 FLA. PRAC., ESTATE PLANNING § 6:1 (2013–14 ed.) (“The common law of trusts supplements the Florida Trust Code unless it contradicts the Florida Trust Code or any other Florida law.”). Thus, section 736.0808, Florida Statutes, supplements common law, and to the extent the common law conflicts with it, it overrides common law principles.

Sections 736.0410–736.04115 and 736.0412, Florida Statutes, provide means of modifying a trust under the Florida Trust Code. The children argue the terms of the trust cannot prevail over these provisions, so as to add a method of modification via trust protector, because section 736.0105 provides, “The terms of a trust prevail over any provision of this code except … [t]he ability to modify a trust under s. 736.0412, except as provided in s. 736.0412(4)(b).” § 736.0105(2)(k), Fla. Stat. (2008). Yet section 736.0808(3), Florida Statutes, expressly allows a trust to confer the power to direct modification of the trust on persons other than trustees. “[A] court must consider the plain language of the statute, give effect to all statutory provisions, and construe related provisions in harmony with one another.” Hechtman v. Nations Title Ins. of New York, 840 So.2d 993, 996 (Fla.2003). These provisions of Chapter 736 can be harmonized by concluding that the sections on modifying trusts do not provide the exclusive means to do so, at least insofar as a trust document grants a trust protector the power to do so. Otherwise, section 736.0808(3) would have no effect. Therefore, we conclude that the Florida Statutes do permit the appointment of a trust protector to modify the terms of the trust.

Privatizing dispute-resolution process — OK? 4th DCA: YES:

It was the settlor’s intent that, where his trust was ambiguous or imperfectly drafted, the use of a trust protector would be his preferred method of resolving those issues. Removing that authority from the trust protector and assigning it to a court violates the intent of the settlor.

We therefore reverse the partial final judgment of the trial court and remand with directions that the trust protector’s amendments are valid. We reject all other arguments made by the children against the validity of these provisions, although not ruling on any matters beyond that issue.

Lesson learned?

The overwhelming majority of trusts established in international financial centers include trust-protector clauses. Domestically, this tool has yet to gain much traction (trust protectors aren’t even mentioned in Florida’s Trust Code). I predict competitive market forces are going to change all that. If I’m right, we can expect to see more and more trust protectors in our domestic trust agreements, and cases like this one — providing a detailed statutory road map for their use — are going to pave the way for that change.

For those who may not be all that familiar with trust protectors and how they work, a good starting place to learn more about them is the article by Florida attorney Peter Tiernan cited in the 4th DCA’s opinion: Evaluate and Draft Helpful Trust Protector Provisions, 38 ESTATE PLANNING 24 (July 2011). Here’s an excerpt:

Trust protectors are no longer a feature of only offshore asset protection trusts. Now trust protectors are being used more and more in domestic trusts as well. The expansion of time that a trust can exist without violating the rule against perpetuities in many states is one reason to consider using trust protectors. A lot can change if a trust is to last for a hundred years or more. Appointing a trust protector (or in this case a series of trust protectors) is an excellent way to deal with those changes.

This expanded use of trust protectors leads to some interesting questions:

  • Who should be appointed as trust protector?
  • What powers should be given to them?
  • Are a protector’s powers fiduciary powers, and should they be?
  • Assuming that fiduciary powers are involved, to what standard of conduct should the trust protector be held?
  • What liability is there to a trustee who blindly follows the directions of a protector?
  • If requested by a prospective trust protector to give an opinion as to whether to accept the position of trust protector, what advice should be given?