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Structuring Trust Protector Provisions:

Powers & Duties, Trustee Oversight,

Tax and Fiduciary Risks Avoiding Unintentional Fiduciary Classification, Navigating State Differences

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, SEPTEMBER 27, 2017

Presenting a live 90-minute webinar with interactive Q&A

Alexander A. Bove, Jr., Partner, Program Chair, Bove & Langa, Boston

William Kalish, Partner, Johnson Pope Bokor Ruppel & Burns, Tampa, Fla.

Susan J. Merritt, Senior Vice President | Senior Fiduciary Officer, Northern Trust, Newport Beach, Calif.

Elizabeth T. Meck, Vice President | Personal Trust Administration, Northern Trust, Denver

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Your Presenters

Alexander A. Bove, Jr.

Bove & Langa

Direct: 617.720.6040

bove@bovelanga.com

Susan Merritt

The Northern Trust Company

Direct: 303.335.1401

sjm13@ntrs.com

William "Bill" Kalish

Johnson Pope

Direct: 813.501.3956

williamk@jpfirm.com

Elizabeth Meck

The Northern Trust Company

Direct: 303.335.1412

etm3@ntrs.com

Structuring Trust Protector Provisions: Powers & Duties, Trustee Oversight, Tax and Fiduciary Risks

Outline

• Introduction

• The use of trust protectors across the United States

• Powers granted to the trust protector

• Is a trust protector a fiduciary

• Discussion

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Introduction

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Trust Protectors Across the United States

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‒Historic background – adoption from offshore trust practices.

‒May be defined in statutes.

Uniform Trust Code §808 (b) – (d) provisions may apply where

states have adopted UTC.

The following states have adopted the UTC:

Alabama, Arizona, Arkansas, District of Columbia, Florida, Kansas,

Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota,

Mississippi, Missouri, Montana, Nebraska, New Hampshire, New

Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oregon,

Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia,

West Virginia, Wisconsin, and Wyoming.

What is a Protector in the U.S.?

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‒ The following non-UTC states permit the use of trust protectors:

• Alaska, Delaware, Georgia, Illinois, Indiana, Nevada,

Rhode island, South Dakota, Texas, and Washington.

‒ Provisions permitting trust protectors can be incorporated into a trust instrument even without statutory authority.

What is a Protector in the U.S.?

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Trust Protector Powers:

- Powers Related to the Trustee - Powers Unrelated to the Trustee

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Trust Protector Powers – two categories:

Powers related to the trustee Powers unrelated to the trustee

Power to remove and replace an acting trustee Power to change the situs of the trust

Power to appoint additional trustees Power to change the governing law of the trust

Power to act as a tiebreaker when multiple trustees reach an impasse Power to terminate the trust under certain defined conditions

Approval authority for discretionary distributions or the sale or management of specific assets

Power to amend the trust for any valid purpose, such as to respond to changes in federal or state tax law

Power to veto decisions made by the trustee Power to alter the beneficial interests in the trust, such as to add or remove beneficiaries

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Trust Protector Powers • Specific powers given to the TP generally include one

or more of the following:

– To determine whether an event of duress has occurred.

– To approve accounts.

– To settle disputes between the TEE and BEN or among BENs.

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Trust Protector Powers • TP’s powers typically can take on one of four forms:

– Direction (power to direct an action involving the

administration of the trust or to make distributions from the trust).

– Veto Power.

– Power to consent to the TEE’s action.

– Power to initiate change (such as the power to amend the trust or remove the TEE).

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•Are the TP’s powers superior to those of the

Trustee?

— The Trustee’s duty is to administer the trust

according to its terms.

— The TP (depending on the extent of the TP’s

powers) may direct the Trustee otherwise.

Trust Protector Powers

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Source of the Trust Protector Powers

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•Some trust protector statutes specify the powers.

•For example, Nevada Statutes provides for the powers of a Trust Protector

NRS 163.555:

1. A trust protector may exercise the powers provided to the trust protector in the instrument in the best interests of the trust. The powers exercised by a trust protector are at the sole discretion of the trust protector and are binding on all other persons. The powers granted to a trust protector may include, without limitation, the power to:

a)Modify or amend the instrument to achieve a more favorable tax status or to respond to changes in federal or state law. b)Modify or amend the instrument to take advantage of changes in the rule against perpetuities, restraints on alienation or other state laws restricting the terms of a trust, the distribution of trust property or the administration of the trust. c)Increase or decrease the interests of any beneficiary under the trust. d)Modify the terms of any power of appointment granted by the trust. A modification or amendment may not grant a beneficial interest to a person which was not specifically provided for under the trust instrument. e)Remove and appoint a trustee, trust adviser, investment committee member or distribution committee member. f)Terminate the trust. g)Direct or veto trust distributions. h)Change the location or governing law of the trust. i)Appoint a successor trust protector or trust adviser. j)Interpret terms of the instrument at the request of the trustee. k)Advise the trustee on matters concerning a beneficiary. l)Review and approve a trustee’s reports or accounting.

Source of the specific powers

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• Some statutes do not provide specific powers – Florida statute

‒ F.S. 736.0808 – “Powers to Direct”

‒ Relevant case law, Minassian v. Rachins, So.3d, 2014

WL 6775269 (Fla. 4th DCA December 3, 2014)

Florida appellate court sanctioned the use of trust protectors

in a Florida trust proceeding

Source of the specific powers

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•Look to the instrument and state law.

•Power to control a trustee with regard to the

exercise of certain powers.

•Trust Adviser as a third-party decision maker.

Distinction Between a Trust “Adviser” and a Trust “Protector”

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Additional Issues to Consider

• Careful consideration needs to be given

– Powers

– Role

– Individual to be appointed

– Appointment of Successor Protector

– Who can Remove a Protector?

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‒ Too often this is an afterthought – a very important decision that

should be considered early in the drafting process.

‒ Consider drafting in the role with the ability to fill it at a later date if

the grantor cannot identify someone currently

‒ The powers given to the Protector can have an impact on who

should be considered.

Power to modify trust - consider tax implications to grantor

and to person being considered for Protector

Power to add beneficiaries – choose appropriate person to

have this responsibility

Choosing a Trust Protector

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Is the Trust Protector a Fiduciary?

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UTC – establishes a presumption that a trust protector is a fiduciary,

UTC §808 (d). Although this is a default rule which may be waived, the trust instrument may not relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries, UTC §§105 and 1008.

‒Alaska provides that a trust protector is not a fiduciary, unless

otherwise provided by the trust instrument, Alaska Stat. Ann.

§13.36.370

‒Delaware and Illinois both provide that that a trust protector is a

fiduciary, unless otherwise provided in the trust instrument, 12 Del. C.

§3313(a) and 760 ILCS §§16.3,16.7

Is the Trust Protector a Fiduciary?

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Additional Discussion Points

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‒ A TP can be given the authority to make certain tax elections

(e.g., QTIP, S Corp qualification, etc.).

‒ Granting certain powers to a TP could lead to unanticipated tax

consequences:

• Estate Tax: powers exercisable by the TP could cause inclusion

of trust property in the TP’s estate if the power could be

considered a general power of appointment over the trust

assets.

• Income Tax: certain powers such as adding a trust beneficiary,

altering distributions or amending the trust terms could cause

the trust to be considered a grantor trust as to the TP.

• Gift Tax/GST Tax: if the TP has power to amend withdrawal

rights, such changes could cause the gifts to the trust not to

qualify for the annual gift tax exclusion or could result in the loss

of GST exempt status.

Tax Considerations and Trust Protectors

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Additional Sources

Suzanne Shier & Tami Conetta, Trust Protectors: When and How Should They Be Used?, Insights on Wealth Planning, May 2016, available at: https://www.northerntrust.com/documents/commentary/wealthplanning-insights/trust-protectors.pdf.

David Diamond & Simon Beck, The Role of the Trust Protector: Should Every Trust Have One?, STEP Meeting, Miami, Florida, Oct. 18, 2016.

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Disclosures

• LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax

advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.

• OTHER IMPORTANT INFORMATION: This presentation is for educational purposes only. The information is intended for illustrative purposes only and should not be relied upon as investment advice or a recommendation to buy or sell any security. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein. Opinions expressed are current only as of the date appearing in this material and are subject to change without notice.

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