Tuesday, November 4, 2014

180197523There is much confusion about what a trust protector can and cannot do with respect to a trust for which the trust protector is serving. First and foremost, the trust protector’s powers provided by state statute are often limited to the powers authorized in the trust instrument, as reflected by the Court in Schwartz v. Wellin, 2014 WL 1572767 (D.S.C., April 17, 2014).

Keith Wellin created the Wellin Family 2009 Irrevocable Trust (“Trust”), a dynasty trust for the benefit of his three children and their respective lineal descendants, with his children and the South Dakota Trust Company as the Trustees. After creating this Trust, Milton sold his interest in the Friendship Partners LP (“FLP”) to the Trust, taking back a promissory note for $50 Million. Apparently in 2013, a dispute arose between Keith and his children, when his daughter, Cynthia, as manager of the LLC that was the general partner of the FLP, proposed to sell all of the assets of the FLP, liquidate the FLP, set aside $50 Million to pay the promissory note and distribute the remaining $95 Million to the three children.

In order to prevent such actions, Keith appointed Schwartz as the Trust Protector. The same day, Schwartz amended the Trust to give the trust protector “the power to represent the Trust with respect to any litigation brought by or against the Trust if any Trustee is a party to such litigation”, and “to prosecute or defend such litigation for the protection of trust assets” (“Litigation Provision”). Schwartz also immediately removed the corporate trustee, and the individual Trustees completed the sales and distributions as proposed. The individual Trustees believed their actions were justified to avoid a $40 Million tax liability that would be incurred when Keith turned off the Trust’s grantor trust status.

Schwartz, as trust protector, then filed this action in state court against the three children, individually and as individual Trustees, alleging breach of fiduciary duty, among other causes of action, in that they frustrated the intent of the trust to provide not only for Keith’s children, but also for Keith’s grandchildren and more remote descendants. Schwartz also requested the appointment of a guardian ad litem (GAL) to represent the more remote descendants of the grandchildren because the grandchildren had not objected to the action of their parents in terminating the Trust. The Wellin children removed the case to Federal court and filed opposition to Schwartz’s motion for appointment of a GAL and a motion to dismiss the case for lack of standing.

Recognizing that any action must be brought by a person who has the right to bring the action and a significant interest in the outcome of the action, the Court looked to South Dakota law to determine whether Schwartz was a real party in interest in this case as the Trust’s trust protector. South Dakota law provides that “[t]he powers and discretions of a trust protector shall be as provided in the governing instrument . . .” The trust protector provision in the Trust provide that the trust protector could amend the Trust “with regard to how the beneficiaries will benefit from the trust, and to amend the trust administrative provisions.” It further provided that the trust protector may “release, renounce, suspend, or modify to a lesser extent any or all powers and discretions conferred under this instrument.” Even though the Trust provisions concerning the trust protector were administrative and thus within the scope of the powers to amend the Trust given to the trust protector in the instrument, the Litigation Provision Schwartz had inserted into his amendment to the Trust was an entirely new provision and purported to expand his powers over the Trust. For that reason, the Court determined that the Litigation Provision exceeded the express authority given to the trust protector in the Trust, and was invalid. Since the Litigation Provision in Schwartz’s amendment was invalid, Schwartz could not rely on that Litigation Provision to provide him with the authority to bring the action against the Wellin children. Therefore, the Court dismissed the case, ruling that Schwartz lacked standing to bring this action.

In determining the authority of a trust protector, it is important to look to both state law and the trust instrument under which the trust protector is serving. It is also important for the practitioner, when inserting trust protector provisions in a trust instrument, to be very clear as to what the trust protector is being authorized to do. Simply appointing an alternate decision maker, in and of itself, does not delineate any authority to do anything, unless state law includes a set of powers that are automatically conferred by the mere appointment. Few, if any, states’ statutes addressing alternate decision makers automatically confer such powers.
Interestingly, the Court also had denied Schwartz’s motion for appointment of a GAL on the basis that the grandchildren were adults and virtually represented the interests of their children, born and unborn. The fact that the grandchildren had not objected to their parents’ actions was their choice in determining not to sue their parents. This decision did not constitute a conflict of interests with their descendants.

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