Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Duty of Trust Protector to Supervise Trustee

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Duty of Trust Protector to Supervise Trustee

McLean v. Davis,283 S.W.3d 786 (Mo. Ct. App. 2009). In 1996, Robert McLean was paralyzed in an automobile accident.  Robert, through his mother, hired J. Michael Ponder to represent him in a personal injury action arising from that accident.  The case settled for a substantial sum and Robert’s grandmother set up the trust at issue as a Special Needs Trust and funded it with the settlement proceeds.  The trust named Merrill Lynch Trust Company and David Potashnick as co-trustees and named Ponder as the “Trust Protector” to act in a fiduciary capacity to remove the trustee and appoint a successor trustee.

The original co-trustees eventually resigned and Ponder exercised his power as Trust Protector to appoint Patrick Davis and Daniel Rau as successor co-trustees.  Ponder had long-standing working relationships with Davis and Rau that had resulted in substantial legal fees shared between the three.

According to the complaint, Robert, through his attorney, informed Ponder that Davis and Rau were inappropriately spending trust funds.  Around the same time, Ponder resigned as Trust Protector and appointed Tim Gilmore as successor Trust Protector and Brian Menz to take Davis’s place as successor trustee.  Menz later resigned and Robert’s mother, Linda, was appointed successor trustee.  Linda then brought this suit against Davis, Rau, Menz, Ponder and Gilmore alleging various breaches of fiduciary duties.  Specifically, Linda claimed that Ponder breached his fiduciary duties to Robert by failing to monitor and report expenditures, failing to prevent the trustees from self-dealing, and placing the interests of the trustees above those of Robert.  Ponder filed a motion to dismiss or, in the alternative, for summary judgment.

The trial court granted Ponder’s motion and concluded that as Trust Protector Ponder had no duty to supervise the trustees.  On appeal, Ponder argued that Linda failed to show that Ponder had a duty to supervise the trustees, or that any breach of this alleged duty caused Robert’s damages because Robert had an alternative means for relief in equity by requesting removal of the trustees.  Regarding the causation argument, the appellate court held that Ponder had failed to present any legal authority or undisputed facts supporting his position and therefore failed to meet his burden on this element.

Addressing the issue of duty, the appellate court held Missouri law imposes no specific duties on a Trust Protector other than those duties expressed in the trust agreement, which, in the instant case, did not include any duty to supervise the trustees.  Nevertheless, one who assumes the role of Trust Protector assumes basic fiduciary duties of loyalty and confidentiality.  Moreover, the court held that the limited immunity from liability for actions taken by the Trust Protector in good faith implied the existence of a duty of care and liability for actions taken in bad faith.  Because material questions of fact existed regarding to whom the duties to act in good faith were owed, whether the Trust Protector had a duty to protect the trust from foreseeable injury, and whether the grantor intended the Trust Protector to exercise supervisory authority over the trustees, the appellate court held that summary judgment was inappropriate and reversed the decision of the trial court.

In Kincaid v. Kincaid, 2011 WL 3862153 (Ky.App.), the court held:

The grandsons contend that because Mr. Kincaid’s will did not expressly provide for payment to the advisory committee members and because there is no specific statute addressing compensation to an estate or trust advisory committee, compensation is precluded as a matter of law. Consequently, the committee members served as non-compensated volunteers. In the alternative, they contend that the advisory committee waived any right to seek compensation for their service.

The grandsons are correct that advisory committees are not mentioned in our statutes authorizing compensation to personal representatives. Nevertheless, it has been recognized that advisory committee members vested with broad powers in the administration of an estate are fiduciaries.

The advisors are not, strictly speaking, trustees under the will, but their status and their duties partake of the nature of the status and duties of a trustee, or it might be proper to consider them as co-trustees with the principal one, but with limited authority. The settlor may appoint an advisor to his trustee whose consent to certain acts may be prerequisite to the valid execution of parts of the trust. Trusts and Trustees, by Bogert, Vol. 1, § 122; Marshall’s Trustee v. Marshall, 225 Ky. 168, 7 S.W.2d 1062, 61 A.L.R. 1365 [ (1928) ]. We think they may be said to be advisory trustees with strictly limited capacities and duties, that is, an assistant to the trustee limited in his capacity by the terms of the trust, having no right or authority further than the capacity of advising as provided in the instrument.

Gathright’s Trustee v. Gaut, 276 Ky. 562, 124 S.W.2d 782, 783–784 (Ky.App.1939).

* * *

We do not comment on the merits of the arguments pertaining to the advisory committee members’ right to seek compensation directly from the estate because the grandsons’ arguments became moot when Central Bank asserted its statutory right to seek a supplemental fee to compensate the advisory committee. We conclude that the sole issue to be decided is whether Central Bank is entitled to supplement its fee for the purpose of compensating the advisory committee members for their services. We hold that, as a matter of law, Central Bank, as executor of the estate, is entitled to pay reasonable compensation to the advisory committee for its advice and administration of the estate pursuant to KRS 395.150 and KRS 395.195(18).

KRS 395.150 provides:

(1) The compensation of an executor, administrator or curator, for services as such, shall not exceed five percent (5%) of the value of the personal estate of the decedent, plus five percent (5%) of the income collected by the executor, administrator or curator for the estate.

(2) Upon proof submitted showing that an executor, administrator or curator has performed additional services in the administration of the decedent’s estate, the court may allow to the executor, administrator or curator such additional compensation as would be fair and reasonable for the additional services rendered, if the additional services were:

(a) Unusual or extraordinary and not normally incident to the administration of a decedent’s estate; or

(b) Performed in connection with real estate or with estate and inheritance taxes claimed against property that is not a part of the decedent’s estate but is included in the decedent’s estate for the purpose of asserting such taxes.

Additionally, KRS 395.195(18) provides that a personal representative may:

[e]mploy persons, including attorneys, auditors, investment advisors, or agents, to advise or assist the personal representative in the performance of his administrative duties; act without independent investigation upon their recommendations; and instead of acting personally, employ one (1) or more agents to perform any act of administration, whether or not discretionary[;]

Consistent with the statutory provisions, the will expressly permits the executor to employ advisors.

In Shelton v. Tamposi, No. 2010-634 (N.H.2013), investment directors had authority to direct the trustee and trustee must follow their directions.

Sam Tamposi, Sr. created irrevocable trusts in the mid-1990s that were later merged.  The merged trust had an individual trustee, and also investment advisors.

The trust instrument provided that the “trustee shall make” purchases and sales only as directed by the investment advisors and that the investment advisors “shall have full power and authority to direct the retention or sale” of trust assets.  In addition, the trustee was directed to “entrust” management and control of any operating entities owned by the trust to the investment advisors.

The court concluded that the trust created two classes of fiduciaries, the trustee and the investment advisors, and that the language of the trust was clear in the duties it allocated to each fiduciary.  The trustee was to determine the needs of beneficiaries and to distribute to them in accordance with the applicable ascertainable standard and the investment directors had authority and responsibility over the investment and management of trust assets.

The New Hampshire statutes contain “directed trustee” provisions.  RSA 564-B:7-711 provides that if the trust agreement, an agreement among the beneficiaries, or a court order “requires a trustee, trust advisor, or trust protector to follow the direction of a trust advisor or trust protector and the trustee, trust advisor, or trust protector acts in accordance with such direction, then the trustee, trust advisor, or trust protector shall be treated as an excluded fiduciary.”  RSA 564-B:1-103(24) defines an “excluded fiduciary” as “any trustee, trust advisor, or trust protector to the extent that, under the terms of the trust, an agreement of the qualified beneficiaries, or court order, (i) the trustee, trust advisor, or trust protector is excluded from exercising a power, or is relieved of a duty, and (ii) the power or duty is granted or reserved to another person.”

Turney P. Berry

Louisville, Kentucky

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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