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New ‘trust protector’ role is emerging in state

Lawyers setting up trusts for clients are forging a new role for an advisor charged with seeing that the client’s original intent is carried out: trust protector.

Broadly speaking, the trust protector does not have a day-to-day role in managing the trust, but has a general oversight duty. A designated trust protector is often another lawyer, accountant or other business person with a history with the client. The trust protector may or may not be a fiduciary.

For a client who anticipates possible conflict arising among trust beneficiaries, or between a trustee and beneficiaries, a trust protector can serve as a mediator, who is already in place and may be familiar with the parties.

Naming a trust protector and defining that advisor’s duties also can help a client’s heirs or beneficiaries adjust to changing circumstances.

Roanoke lawyer Neil V. Birkhoff has been using trust protectors for some of his clients for several years.

“You’re building in another advisor into the trust administration,” he said. Birkhoff described the role of a trust protector as an amplification of the precatory language formerly used in instruments – in which a testator or grantor expresses the hope that assets would continue to be used in a certain way – into a more formal role to guide and advise.

“It’s a second set of eyes” on major decisions, Birkhoff said.

Language in the trust instrument is usually fairly explicit about the trust protector’s role. “It’s more narrowly drafted to protect a particular client’s needs,” Birkhoff said.

For instance, a client who wants to pass on a family business may want a trust protector to look over the shoulder of beneficiaries who are thinking about selling business assets. They may know a testator wanted the business to stay intact and in the family. A trust protector can help beneficiaries determine how to honor that intent while coping with economic realities.

The person who acts as trust protector generally is compensated at the usual rate for professional services provided.

Explicit statutory authorization is not needed to designate a trust protector, although a number of states other than Virginia have passed such statutes.

Virginia has adopted the Uniform Trust Code, which includes an advisory comment saying the Code ratifies the use of trust advisors. A 2009 appellate case from Missouri describes a minimum “good faith” standard for assessing a trust protector’s actions, but otherwise there appears to be no case law defining a trust protector’s role.

Lawyers who serve as trust protectors also need to think about malpractice implications, according to Wendy Inge, ALPS Risk Manager for Virginia. Inge appeared on a panel in Richmond Sept. 11 to talk about preventing malpractice claims and ethics complaints.

A lawyer serving as a trust protector may be expected to serve as a “safety net” for the grantor, but may in fact be operating without her own “safety net.” If the lawyer is not acting as a lawyer and not performing legal services, she may not be protected by her legal malpractice insurance policy.

Ethics issues also can arise when trust protectors are used. If the grantor dies, who is the client of a lawyer acting as trust protector? If a lawyer drafts a trust instrument that designates a member of his firm as trust protector, the lawyer needs to make sure the client understands who is doing what, according to Barbara Saunders, assistant ethics counsel for the Virginia State Bar, who also appeared on the Richmond panel.

The ALPS ethics program used a hypothetical in which one lawyer wanted his law partner to serve as trust protector for another client. Saunders pointed out that the trust protector is supposed to be impartial. If the lawyer who serves as trust protector already has separately represented other family members who will be trust beneficiaries, he has to make sure there are no conflicts before serving as a trust protector.

Some states with trust protector statutes establish clear boundaries about some of these relationships, Inge said.

There are times when “it may not be appropriate for a lawyer in the same firm to serve as trust protector,” Inge said.

The “trust protector is not an attorney-client relationship, it’s outside that,” Saunders said.

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