Who is Fit to Be Trustee?

§3.2 Who is Fit to Be Trustee?

For as a trust is an office necessary in the concerns between man and man, and which, if faithfully discharged, is attended with no small degree of trouble, and anxiety, it is an act of kindness to accept it.1

     Trust administration is not for every personality and every ethic. It is not for the wheeler-dealer and the dabbler. A trust is a legally complicated relationship requiring sustained attention, often over a period of many years, with myriad tasks, of which some are clerical in nature (e.g., keeping track of dividends) and some are not (e.g., making discretionary distributions). Stewardship of another's property in and of itself is serious business, and yet it is only one of the trustee's many nondelegable functions.

     Above all the trustee must act solely in the interest of the beneficiaries.2 The trustee may not transact with the trust property for personal benefit, absent authority from the settlor, the court, or from all the beneficiaries. One of the hallmarks of the trust relationship is the trustee's duty of absolute loyalty to the trust. One should not accept the office of trustee if there are any doubts about one's ability to carry out the duty of loyalty.3

     This does not mean that trust administration should be something other than a business. It is a business, and it should be. Compensation provides a trustee with the incentive to keep trust matters high on his list of priorities. However, trusteeship should not degrade to a state where it is merely an adjunct to other businesses such as brokerage, law, accounting, banking, or financial planning. Trust administration is a worthy profession in and of itself; it is a profession that thrives on regular attention over the long term, stability of personnel, the tried and true, and slow incremental changes for the better.

     The court may appoint a trustee, or the governing trust instrument may empower an individual to appoint one.4 In appointing a trustee the court will have due regard for the wishes of the settlor but will decline to appoint an unfit person.5 Thus, if someone authorized by the governing trust instrument selects an unfit or incapable person as trustee, the court may review the appointment. Ordinarily, one should not appoint oneself as trustee. The responsible individual should, giving due regard to the intentions of the settlor, consult the beneficiaries and appoint someone agreeable to them; this is what a court is expected to do.

     Courts are reluctant to appoint nonresidents but, as a practical matter, they often do, particularly where some or all of the beneficiaries or property are out of state and especially if nominated by the testator.6 In some states, the court may appoint a cotrustee to serve with a nonresident trustee.7

     A substance abuser8 or person of dishonest or bad character9 will not be appointed since the property would not be in safe hands.10 Unfitness would include mental incapacity.11 It could also include a lack of “basic ability to administer the trust.”12 The entire matter of appointment and removal lies in the reasonable discretion of the court with due deference being given to reasonable provisions in the governing instrument.13 “Before removing a trustee for unfitness the court should consider the extent to which the problem might be cured by a delegation of functions the trustee is personally incapable of performing.”14

§3.2.1 The Professional Trustee and Single-Purpose Trust Company

A private trust company is an attractive option for many wealthy families because it allows a family to bundle and rebundle investment management, trust and custodial services according to family needs and desires. But such companies operate in the same legal framework as other trust institutions, and thus are no place for hobbyists.15

     In an ideal world, only single-purpose trust companies16 and individuals engaged full-time in the business of trust administration would serve as trustees. Experience in and knowledge of trust matters would be broad and deep. Attention to the welfare of the trust would be exclusive, focused, and sustained. Goods and services would be contracted for at arm's length on behalf of the trust.

     Economic realities, however, are such that only a small percentage of the population has the wherewithal to purchase the services of trustees so single-mindedly committed. Moreover, there are those who feel that the professional trustee, no matter how competent, is unacceptable because of its inability to offer the personal attention that a family member or a family private trust company17 ostensibly provides. In a less than ideal world, persons in other lines of work are called upon to serve as trustees. While their involvement is not per se undesirable, each category raises its own collection of red flags.

§3.2.2 The Lawyer

In an 1891 issue of Punch in an article entitled Taken Upon Trust a maiden laments that she has a lawyer for our trustee, who is most unobliging and expensive.…[Chantal Stebbing in her book The Private Trustee in Victorian England18]…states that by the end of the Victorian Period, a tenth of the large estates in England were in the hands of solicitor-trustees.19

     The advantage of having a lawyer serve as trustee is that lawyers understand the equitable rights and obligations of the parties.20 The disadvantage is that the lawyer who renders legal services to the trust for compensation over and above his or her reasonable trustee's fees brushes with a conflict of interest.21 The lawyer-trustee is after all transacting with the trust “for his own account.” It is not always clear when one is acting as trustee and when one is acting as counsel, nor is it clear what portion of the compensation is attributable to actions as trustee and what portion is attributable to the rendering of legal services. But perhaps the fundamental problem with administering a trust out of a multidisciplinary practice22 is the loss to the trust of the independent perspective, of the checks and balances that operate when the functions are assumed by different entities.23 It is a loss to the beneficiaries that cannot be mitigated or rationalized away by compensation adjustment. When functions are separated, the trustee to some extent monitors the lawyer and vice versa. When the functions coalesce in one person, there arises the danger that the lawyer as a practical matter is unaccountable as to performance and compensation.24

     In any case, “a certain critical mass of trust business, and reasonable working capital, may be necessary before the practicing lawyer can afford to be equipped sufficiently to accept any trusteeship.”25 The practicing lawyer who intends to get into the business of serving as a trustee would do well to consult the Guide for ACTEC Fellows Serving as Trustees.26

§3.2.3 The Stockbroker

     The trustee, under a duty to act solely in the interests of the beneficiaries, faces a built-in, structural incentive to violate that duty when he or she also serves as the trust's commissioned stockbroker. By selling when it is in the interest of the beneficiaries to hold and by buying when it is in the interests of the beneficiaries not to buy, the trustee-stockbroker personally benefits when the portfolio is “churned.”27

     One solution is for the trustee-stockbroker to place trades with another firm. This avoids the conflict inherent in placing trades with the trustee-stockbroker's firm, but it will not eliminate the indirect personal benefit—in goodwill and implied IOUs—that inevitably accrues to someone who parcels out business. Of course, this conflict is not confined to brokers of stock. It would also apply to brokers of insurance and real estate. If the trustee intends to operate the trust out of a brokerage facility, at the very least the facility's infrastructure should be capable of accommodating the trust's specialized operational requirements, particularly the separate accounting of income and principal.

§3.2.4 The Bank

It was perhaps something of an accident that the corporations which have obtained power to administer trusts are banking institutions. There is no necessary connection between the business of banking and the business of administering trusts.…In the first edition of Ames's Cases on Trusts there is only one case in which the trustee was a corporation, and in that case the trustee was the Massachusetts Hospital Life Insurance Company, which was the first corporation empowered to act as trustee, being incorporated in 1818.28

In the United States, however, from early on, certain corporations have been authorized to act as trustee. The first specific grant of such powers seems to have been to the Farmer's Fire Insurance & Loan Company, chartered in New York in 1822.29

     A full-service bank is said to have two sides: the commercial side and the trust side. The trust side operates in the fiduciary's labor-intensive world, where beneficiaries are entitled to full disclosure, deference, and a degree of intimacy, while the commercial side operates in the world of the marketplace and by its rules. If a loan to a commercial customer goes bad, generally the lender is not bound by fiduciary ties and can take necessary steps to protect its interest. The bank in its role as creditor is different from the bank acting as trustee. As trustee, the bank is the legal owner of the property and as trustee, has a fiduciary duty to place the interest of the beneficiaries ahead of its own interests. “It is crucial that the trust department be a strong organization, so that it can exercise its own discretion, independent of the commercial banking department,”30 the cultures being so different:

…[A]mid financial-industry consolidation, many trusts are ending up under the purview of geographically remote managers who work for vast corporations. Customers complain of problems such as frequent turnover, relentless marketing and poor communications.…Big banks face more pressure “to sell the corporate product of the month,” says Mike Carroll, president and chief executive of independent trust company Heritage Trust Co. in Oklahoma City. But, he says, it's tough business for large institutions: “It's too time-consuming, too much touch, too much relationship-driven.”31

     The commercial officers who run a full-service bank must strive to understand and adequately fund its trust function—a function that operates in a world that values, among other things, continuity of management and a smooth-running operational and administrative infrastructure.

     In some situations, by state or federal law one or more of the trustees of a trust must be a bank or trust company. A so-called corporate trust established by a bond issuer to secure the contractual rights of its bondholders comes to mind.32 For a discussion of the rights, duties, and obligations of the trustees of such trusts, known in the trade as “indenture trustees,” see Section 9.31 of this handbook.

§3.2.5 The Family Member

Furthermore, when a beneficiary serves as trustee or when other conflict-of-interest situations exist, the conduct of the trustee in the administration of the trust will be subject to especially careful scrutiny.33

     When the trustee is also a beneficiary, the general duty of loyalty,34 as well as one its sub-duties, the duty of impartiality,35 is squarely implicated: “The trustee who is also a beneficiary may not, in administering the trust, favor the trustee's own interest at the expense of the other beneficiaries, unless the terms of the trust so provide.”36 But apart from the legal considerations, there are personal ones as well: The seeds of family disharmony are all too often sown when a beneficiary is appointed trustee, particularly when the apparent default rule that a trustee-beneficiary may not participate in decisions regarding distributions of income and principal to himself is overridden by express language in the governing instrument.37 Take the appointment of a child of the settlor as trustee of a trust for the benefit of all the settlor's children and other issue.38 Either the sibling-trustee is tempted to bend over backwards to his economic detriment or to the economic detriment of his issue in order to avoid even the appearance of impropriety and conflict of interest39 (thus perhaps thwarting the settlor's wishes that all siblings and their issue be treated fairly) or the sibling-trustee is tempted to take unfair advantage of the office in furtherance of his economic interests to the exclusion of the interests of the other beneficiaries. Even under the best of circumstances, the sibling-trustee should expect to be regarded with suspicion by the other siblings and their spouses.40 On the other hand, it can be a prescription for gridlock and deadlock if all the siblings are serving as cotrustees.41 Moreover, the matter of trustee compensation can become a sensitive issue when the trustee is also a beneficiary.

     The appointment of a beneficiary's near relation brings with it its own set of problems, although in the United States relations are more often appointed than strangers. Laxness of management, the overweening influence of beneficiaries, and condonations of misconduct too often are the price of these family arrangements.

     There is no rule against making the spouse of a beneficiary a trustee. However, the risk does exist that the marriage will end in divorce before the trust terminates. In addition, it would be a tragedy if the spouse's appointment itself were to have a destabilizing effect on a marriage that until then had been solid.

§3.2.6 Considerations in the Selection of a Trustee

A power to direct must be distinguished from a veto power. A power to direct involves action initiated and within the control of a third party. The trustee usually has no responsibility other than to carry out the direction when made. But if a third party holds a veto power, the trustee is responsible for initiating the decision, subject to the third party's approval. A trustee who administers a trust subject to a veto power occupies a position akin to that of a cotrustee and is responsible for taking appropriate action if the third party's refusal to consent would result in a serious breach of trust.42

     Factors to consider in the selection of a trustee. The expected duration of the trust, the complexity of its assets, the needs of the beneficiaries, the level of administrative and investment expertise required, and the fees a professional trustee will charge must be considered in the selection of a trustee. The settlor should take the long view. A trust for a child with a mental disability or an orphaned grandchild, for example, could extend well beyond the settlor's lifetime, long after the settlor's close friends and relatives have died. In other words, the trust needs a spine. This could take the form of an institution in the first instance, an institution as a cotrustee, or an institution as a fall-back in default of named individuals.43

     A trustee cannot be a guardian of the person. The settlor should not confuse the function of a guardian of the person44 with the function of a trustee. The loving grandfather may be the perfect guardian of the orphaned grandchild's person, but he may be totally unsuited because of his age to act as trustee.45

     Separation of fiduciary functions is advisable. Moreover, if different people hold both positions, the guardian benefits from the trustee's independent perspective and the child benefits from the checks and balances inherent in a separation of these responsibilities. A separation of responsibilities is also preferable if the settlor intends that the guardian of the person receive generous discretionary distributions of income and principal for domestic help, the construction of an addition on the guardian's house, or such other purposes as will lessen the financial burden of the guardianship.46 It is always awkward for trustees, even though duly authorized, to make discretionary distributions to themselves.47 Even the possession of such a power could have tax implications for the trustee personally.48

     There is more to a trusteeship than investment management. The settlor ought not to measure one's suitability to be a trustee solely by his or her investment successes. There is much more to a trusteeship than merely investing.

     Declarations of trust and trustee succession. If the settlor intends to name himself as trustee in the first instance, he should make sure that matters of trustee succession are adequately addressed in the governing instrument. It is very important that the matter of the settlor's incapacity be addressed.

     Trustee selection need not be an either/or choice between the bank or the lawyer or the family member. Many permutations and combinations of cotrusteeships49 and orders of succession can exploit strengths and mitigate weaknesses. The governing instrument might provide for the appointment of a third party to “advise” the trustee,50 or to designate new or successor trustees.51

     Trustee removal and replacement powers. For the settlor wishing to build in a measure of nonjudicial oversight, there are provisions for trustee removal and replacement that need not create tax problems if properly drafted.52 However, care should be taken to draft any “donor control” provisions in a charitable trust in a way that neither jeopardizes the charitable tax deduction nor frustrates the intended use of the gift.53

The trust protector. Alexander A. Bove, Jr. defines the trust protector as a “party who has overriding discretionary powers with respect to the trust but who is not a trustee” and makes the case that the concept of the trust protector is nothing new.53.1 It is essentially a form of trust advisor (not to be confused with someone whom the trustee is merely requested to consult but from whom the trustee is not required to take directions) whose powers could extend beyond asset management to include some form of nonjudicial oversight of the trustee’s other activities:

What may come as a surprise to many is the fact that the concept of trust protector, especially in the history of U.S. law, is not new at all; at best it is only the term that is new, as well as practitioners’ recent “discovery” of what actually is an old concept in trust law…[T]rust attorneys in the U.S. and elsewhere have been employing the concept of trust “advisors” for decades, but unlike the “protector,” it was more the role of the trust advisor than the name tag that was given formal recognition…Thus in earlier days it was not uncommon, for instance, for a settlor to name an “advisor” who had the power to direct and control all investments, or to remove and replace trustees. Although the term “advisor” is still customarily used when a power over only trust investments is granted, if the power extends beyond that, today that party is more likely to be called a “protector.”53.2

     In England and the offshore jurisdictions, nonjudicial third-party oversight of the trustee's activities is often effected through an express appointment in the governing instrument of a trust protector.54 More and more this is the case in the United States as well.

     Because the scope of a trust protector's duties tends to fall somewhere between the nonexistent or limited scope of duties of the holder of a special power of appointment and the broad scope of duties of a full-fledged trustee,55 extreme caution should be exercised by anyone contemplating serving as a trustee or a trust protector of a trust that provides for both offices if that trust is to be subject to the jurisdiction of a state of the United States.56 Before accepting either office pursuant to the terms of a particular trust instrument, the nominee would be well advised to obtain a written legal opinion spelling out the responsibilities of the trustee, if any, to monitor the activities of the trust protector; the duties and liabilities of the trustee protector, e.g., whether or not he is a fiduciary; the rights of the trust protector, e.g., whether or not he is entitled to be compensated for his services and indemnified for his liabilities; and the tax consequences for all concerned of the trust protector possessing and/or exercising his authority.57

     It is the position of the Restatement (Third) of Trusts that “[a]bsent some clear indication of a settlor's contrary intent, powers granted to a protector…probably should be deemed to be held in a fiduciary capacity…, even if not strictly that of a trustee.”58 Mr. Bove is generally in accord.58.1 Clearly indicating such a contrary intent, however, may be easier said than done. Take a trust with the following provision: “For the avoidance of doubt, it is hereby declared that no power is vested in the protector in a fiduciary capacity.” In a case involving a trust with just such language the court ruled that because the express terms of the trust elsewhere in the instrument provided that the protector shall exercise his powers for the benefit of the beneficiaries, specifically the powers to appoint successor trustees and protectors, he was bound by fiduciary constraints in their exercise.58.2 The only purpose of the exoneration language was to relieve the protector of any fiduciary duty to consider from time to time whether or not to exercise.58.3 In other words, he had no fiduciary duty to be pro-active.

     A lawyer practicing in the United States contemplating serving as a trust protector will want to ascertain whether his or her legal malpractice liability policy covers such activity.59 It should be noted that in Alaska the stakes might not be as high as elsewhere. Alaska has by legislation clarified the default law relative to the protector's legal status: Subject to the terms of the governing instrument, a trust protector is not liable or accountable as a trustee or fiduciary because of an act or omission of the trust protector taken when performing the function of a trust protector under the trust instrument.60

     It should also be noted here that Alaska has clarified by legislation61 what powers a settlor may give to a trust protector. They are the following:

• To remove and appoint a trustee.
• To modify or amend the trust instrument to achieve favorable tax status or to respond to changes in 26 U.S.C. (Internal Revenue Code) or state law, or the ruling and regulations under those laws.
• To increase or decrease the interests of any beneficiary to the trusts but not to grant a beneficial interest to an individual or a class of individuals unless the individual or class of individuals is specifically provided for under the terms of the trust instrument.
• To modify the terms of a power of appointment granted by the trust.

     The rights, duties, and obligations of the directed trustee. The Uniform Trust Code attempts to clear up some of the confusion in the default law that would govern those with the power to give directions, as well as those who are the recipients of those directions. The Code provides that if the terms of a trust confer upon a person other than the settlor of a revocable trust power to direct certain actions of the trustee, the trustee shall act in accordance with an exercise of the power unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows that the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust.62 The Restatement (Third) of Trusts is generally in accord.63

     What is that duty? A person, other than a beneficiary, who holds a power to direct, is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries.64 The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty.65 In other words, the duties and liabilities of a fiduciary power holder generally are comparable to those of a trustee.66

     The trustee has a fiduciary duty not to comply with the directions of a powerholder if the trustee knows that to do so would cause a violation of the powerholder's fiduciary duties.67 The trustee even may have liability for complying with a direction that he knows, or should know, would violate the powerholder's fiduciary duties.68 The New Hampshire legislature has addressed the issue squarely by providing that a directed trustee shall have no duty to review the actions of an exclusive powerholder.69 It would insulate the directed trustee from liability for losses occasioned by following, pursuant to the terms of the trust, the powerholder’s directions, or for the actions and inactions of the powerholder generally.70 Whether a directed trustee who knowingly assists a powerholder in breaching the powerholder’s fiduciary duties could escape liability altogether remains to be seen.

     If proper administration of the trust depends upon directions and/or consents that have not been forthcoming, then the directed trustee would have a fiduciary duty to apply to the court for instructions.71 This assumes that the powerholder has been informed of the problem, yet has chosen, for whatever reason, not to exercise the directory power. If all else fails, the directed trustee might even have a duty to attempt to remove powerholders from the equation altogether by bringing a complaint for equitable deviation.72

     A directory power held in a nonfiduciary capacity. One easily can conjure up situations where someone with a power to direct or otherwise control the actions of the trustee would not be a fiduciary. A power, for example, granted to a surviving spouse to invest in a residence or to prevent the sale of entrusted real estate in which he or she is living would not be a power held in a fiduciary capacity.73 Change the facts slightly, and we have a power of appointment, e.g., the power to direct the trustee to distribute the real estate outright and free of trust to the power holder or someone else.74 “Ultimately, the purposes of a power and the nature and extent of the rights, duties, and liabilities of the power holder, and thus also of the trustee, depend upon trust language and all relevant circumstances.”75 In any case, a power that is for the sole benefit of the powerholder is not a fiduciary power.76 The trustee, however, has a fiduciary duty to make sure that the terms of the power, to the extent it is exercised, are honored.77

     Information to which a powerholder is entitled. A prospective trustee of a trust under which a nonbeneficiary is to be granted a power to control certain actions of the trustee should insist that the governing instrument clearly spell out what the trustee's duties shall be when it comes to furnishing the powerholder with accountings and other information about the trust.78 After all, under default law the trustee has a countervailing duty to the beneficiaries of confidentiality.79 This should be done whether the exercise of the power is to be permissive or mandatory.80 Presumably, when a power to control is mandatory and extensive, the powerholder's right to information about the trust is virtually absolute, as is the trustee's duty proactively to furnish the powerholder with that information.81

     Death or incapacity of a powerholder. The governing instrument also should address the contingency of the incapacity or death of the powerholder before the trust's termination.82 In the event of incapacity, is the power suspended?83 May it be exercised by proxy?84 In the event of death, does the directory or veto power terminate?85 If not, what is the replacement mechanism? These are just some of the questions that need to be addressed in the governing instrument.86 When they are not, there is always a risk that down the road the trustee will have a fiduciary duty to get the answers from a court,87 as well as a right to deduct the attendant costs from the trust estate.88 This is because the applicable default law is in a state of considerable flux, and is likely to remain so for some time:

A number of older cases held that a trustee's power of sale that was subject to the consent of a third person terminated on the death of the third person. It would seem, however, that the result ought generally to differ these days, now that it is more widely understood that it is ordinarily better to empower, than to restrict, trustees' powers. The Restatement (Third) of Trusts takes the position that, upon the death or disability of the powerholder or the release of the power, the trustee is generally authorized to proceed with the administration of the trust as if the power had never existed.89

     A trustee’s power to delegate certain functions may expand the class of acceptable trustee candidates. There have been some recent developments on the delegation front90 as well that a prospective settlor needs to take into account when looking for the right trustee. The Uniform Prudent Investor Act, versions of which have been adopted in a number of jurisdictions, has reversed the common law default rule that a trustee may not delegate investment and management functions.91 The Act provides that a trustee will not be liable “to the beneficiaries or to the trust” for the decision or actions of his agents, provided the trustee exercises reasonable care, skill, and caution in selecting the agents, establishes the scope and terms of their responsibilities, and periodically monitors their activities.92 The common law private trustees now have the same incentive to parcel out investment and management responsibilities to third parties that their ERISA counterparts have had since 1974.93

     In language that tracks the spirit if not the letter of the Prudent Investor Rule, the Uniform Trust Code grants a trustee general authority to delegate “duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances.”94 In other words, whether there has been prudent delegation of a particular duty is dependent on the facts and circumstances of the particular trust relationship.95 “For example, delegating some administrative and reporting duties might be prudent for a family trustee but unnecessary for a corporate trustee.”96 A trustee who exercises reasonable care, skill, and caution in delegating his duties is not liable to the beneficiaries or the trust for an action of the agent to whom the function was delegated.97 As between the trustee and the beneficiary, the beneficiary now would bear the loss.98 The beneficiary's only recourse would be to the agent: “In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.”99

     From the perspective of the prospective settlor seeking the right trustee, this ability of a trustee to shift primary liability for failing to prudently carry out a particular investment or management function onto the shoulders of a third party, can be both a good thing and a bad thing. For the prospective settlor who has been coming up dry, it can open up the field of eligible trustee candidates to those who do not have investment or management expertise. On the other hand, the prospective settlor may not be entirely comfortable with the prospect of having important investment and management responsibilities shunted off to strangers. This is understandable. “The traditional prohibition on the delegation of discretionary duties, or the duties that trustees would be expected to perform themselves, was founded upon the belief that the typical trustee has been selected because of the settlor's confidence in the personal qualities and skills of the trustee.”100

     In any case, it is probably best that the prospective settlor and prospective trustee hammer out in advance what limitations, if any, are to be placed on the trustee's authority to delegate. The extent of the trustee's authority to delegate should then be set forth in the governing instrument. The prospective settlor may want to consider including in the governing instrument provisions that (1) limit or eliminate the trustee's authority to delegate specified functions; (2) expressly allocate responsibilities, such as investment management, to third parties;101 and/or (3) establish criteria for the selection of the trustee's agents. A provision requiring that the trustee retain a particular lawyer to represent the trustee in trust matters, however, most likely would not be enforceable. Luckily, the Act's provisions are default rules.

     For the public policy arguments in favor of the Act's delegation provisions, the reader is referred to John H. Langbein.102 For the other view, the reader is referred to Jerome J. Curtis, Jr.103

     When the scrivener has an affiliation with a prospective trustee. A final word of caution for trustee-seeking settlors and their lawyers: A prospective settlor would be well advised to shop around before selecting an individual or corporation with whom the settlor's lawyer has an informal or formal business referral relationship. As for the lawyer, he or she would be well advised not to “allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed interest.”104

____________________________

Copyright © 2011 Charles E. Rounds, Jr. Used by permission. All rights reserved.

• 1. Lord Chancellor Hardwicke in Knight v. Earl of Plymouth, 21 Eng. Rep. 214, 216 (1747).
• 2. Restatement (Third) of Trusts §170(1) (1992).
• 3. See §6.1.3 of this handbook (duty to be loyal to the trust).
• 4. See generally 2 Scott on Trusts §108.2 (Appointment by the Court), §108.3 (Noncourt Appointments).
• 5. See Blake v. Pegram, 109 Mass. 541, 553 (1872) (charges to the trust of legal fees by the lawyer/trustee are “open to serious question, because of the liability to abuse, or, at least, to the suspicion of abuse,” this because the lawyer/trustee “is his own client”). See also Kentucky Nat’l Bank v. Stone, 93 Ky. 623, 20 S.W. 1040 (1893); Estate of Lankershim, 6 Cal. 2d 568, 58 P.2d 1282 (1936); Ontjes v. MacNider, 234 Iowa 208, 12 N.W.2d 284 (1943); Florida Bar v. Della-Donna, 583 So. 2d 307 (Fla. 1989); First Nat’l Bank of Boston v. Brink, 372 Mass. 257, 268, 361 N.E.2d 406, 412 (1977) (Liacos, J., concurring in part and dissenting in part) (commenting on the perceived or actual conflicts of interest that can arise when an attorney and fiduciary are one and the same). See generally Krier, The Attorney as Personal Representative or Trustee, 65 Fla. B.J. 69 (1991). See generally§6.1.3.3 of this handbook (when the trustee benefits as a buyer or seller of trust property).
• 6. See generally Bogert, Trusts and Trustees §132.
• 7. See, e.g., 20 Pa. Cons. Stat. Ann. §7103 (Purdon 1975).
• 8. See, e.g., Ohio Rev. Code Ann. §2109.24 (Anderson 1953) (intoxication grounds for removing a trustee). The Pennsylvania fiduciary removal statute, however, has been amended to eliminate a reference to intoxication. 20 Pa. Cons. Stat. Ann. §3182 (Purdon 1992).
• 9. See, e.g., Parkman v. Hanna, 426 S.E.2d 743 (S.C. 1992) (holding that a disbarred attorney's past conduct was relevant in determining fitness to serve as a fiduciary).
• 10. See generally 2 Scott on Trusts §107; Bogert, Trusts and Trustees §519 (The Court's Power to Remove Trustee).
• 11. Uniform Trust Code §706 cmt. (available on the Internet at <http://www. law.upenn.edu/bll/ulc/ulc.htm>).
• 12. Ibid.
• 13. See generally 2 Scott on Trusts §108.2.
• 14. Uniform Trust Code §706 cmt. (available on the Internet at <http://www. law.upenn.edu/bll/ulc/ulc.htm>). See also§6.1.4 of this handbook (duty to give personal attention (not to delegate)).
• 15. John P. C. Duncan, Forming a Private Trust Company: Elements and Process, 136 Tr. & Est. 36 (Aug. 1997). See also John P. C. Duncan, The Private Trust Company: It Has Come of Age, 142 Tr. & Est. 49 (Aug. 2003) (discussing the advantages of a state adopting the Conference of State Bank Supervisors' Model Multistate Trust Institutions Act).
• 16. See generally John P. C. Duncan, Forming a Private Trust Company: Elements and Process, 136 Tr. & Est. 36 (Aug. 1997). See also John P. C. Duncan, The Private Trust Company: It Has Come of Age, 142 Tr. & Est. 49 (Aug. 2003) (discussing the advantages of a state adopting the Conference of State Bank Supervisors' Model Multistate Trust Institutions Act) and §8.6 of this handbook (the trustee who is not a human being; corporate trustees; bank trustees; foreign trust companies) (discussing in part the common law and/or statutory authority of a corporation to act as trustee).
• 17. See generally John P. C. Duncan, Forming a Private Trust Company: Elements and Process, 136 Tr. & Est. 36 (Aug. 1997). See also John P. C. Duncan, The Private Trust Company: It Has Come of Age, 142 Tr. & Est. 49 (Aug. 2003) (discussing the advantages of a state adopting the Conference of State Bank Supervisors' Model Multistate Trust Institutions Act) and §8.6 of this handbook (the trustee who is not a human being; corporate trustees; bank trustees) (discussing in part the common law and/or statutory authority of a corporation to act as trustee).
• 18. Cambridge University Press, 2002.
• 19. Malcolm A. Moore, The Joseph Trachtman Lecture—The Origin of Our Species: Trust and Estate Lawyers and How They Grew, 32 ACTEC J. 159, 173 (2006).
• 20. But see Charles E. Rounds, Jr., The Case for a Return to Mandatory Instruction in the Fiduciary Aspects of Agency and Trusts in the American Law School, Together With a Model Fiduciary Relations Course Syllabus, 18 Regent U. L. Rev. 251 (2005–2006); §8.25 of this handbook (most American law schools no longer require Trusts, Agency and Equity).
• 21. See Blake v. Pegram, 109 Mass. 541, 553 (1872) (charges to the trust of legal fees by the lawyer/trustee are “open to serious question, because of the liability to abuse, or, at least, to the suspicion of abuse,” this because the lawyer/trustee “is his own client”). See also Kentucky Nat’l Bank v. Stone, 93 Ky. 623, 20 S.W. 1040 (1893); Estate of Lankershim, 6 Cal. 2d 568, 58 P.2d 1282 (1936); Ontjes v. MacNider, 234 Iowa 208, 12 N.W.2d 284 (1943); Florida Bar v. Della-Donna, 583 So. 2d 307 (Fla. 1989); First Nat’l Bank of Boston v. Brink, 372 Mass. 257, 268, 361 N.E.2d 406, 412 (1977) (Liacos, J., concurring in part and dissenting in part) (commenting on the perceived or actual conflicts of interest that can arise when an attorney and fiduciary are one and the same). See generally Krier, The Attorney as Personal Representative or Trustee, 65 Fla. B.J. 69 (1991). See generally §6.1.3.3 of this handbook (when the trustee benefits as a buyer or seller of trust property).
• 22. See generally§6.1.3.3 of this handbook (when the trustee benefits as a buyer or seller of trust property) and §6.1.3.5 of this handbook (the trustee’s duty of loyalty to the beneficiary in non-trust matters).
• 23. See ACTEC Commentaries on the Model Rules of Professional Conduct (3d ed. 1999), at 59 (suggesting that “[a] lawyer undertaking to serve in both capacities should attempt to ameliorate any disadvantages that may come from dual service, including the potential loss of the benefits that are obtained by having a separate fiduciary and lawyer, such as the checks and balances that a separate fiduciary might provide upon the amount of fees sought by the lawyer and vice versa”).
• 24. See generally Gibbs v. Breed, Abbott and Morgan, 649 N.Y.S.2d 974, 170 Misc. 2d 493 (1996) (suggesting unacceptable stress is placed on a lawyer-executor's duty of undivided loyalty when his law firm requires that he remit to the firm (out of fiduciary commissions) any shortfall in his legal fees).
• 25. ACTEC Practice Committee, Fiduciary Matters Subcommittee, Guide for ACTEC Fellows Serving as Trustees, 26 ACTEC Notes 313, 316 (2001).
• 26. Ibid.
• 27. See, e.g., Armstrong v. McAlpin, 699 F.2d 79 (2d Cir. 1983).
• 28. Scott on Trusts §96.5 (1939) (referring to Durant v. Massachusetts Hosp. Life Ins. Co., 2 Lowell 575, Fed. Cas. No. 4188 (1877)). See generally§8.6 of this handbook (the trustee who is not a human being; corporate trustees; bank trustees).
• 29. 1 Scott & Ascher §1.9.
• 30. 3 Scott & Ascher §17.2.14.6.
• 31. Rachel Emma Silverman & Carrick Mollenkamp, As Financial Services Consolidate, Trust Managers Come Under Fire, Wall St. J., July 20, 2004, p. A1, col. 5.
• 32. See The Barkley Trust Indenture Act of 1939, 15 U.S.C.A. §77jjj.
• 33. Restatement (Third) of Trusts §37 cmt. f(I).
• 34. See generally§6.1.3 of this handbook (the trustee’s duty of loyalty to the beneficiaries or to the trust’s charitable purposes).
• 35. See generally§6.2.5 of this handbook (the trustee’s duty of impartiality).
• 36. 3 Scott & Ascher §17.15.
• 37. See generally Bogert, Trusts and Trustees §129; §3.5.3.2(a) of this handbook (the trustee’s power to make discretionary payments of income and principal (the discretionary trust)). See, e.g., Dana v. Gring, 374 Mass. 109, 371 N.E.2d 755 (1977). Presumably, the default rule that a trustee-beneficiary may not participate in decisions regarding distributions of principal to himself may be overridden by express language in the governing instrument. See, e.g., Garfield v. United States, 47 A.F.T.R.2d ¶81-1583, 80-2 USTC ¶13,381 (D. Mass.).
• 38. See, e.g., Fletcher v. Fletcher, 480 S.E.2d 488 (Va. 1997) (involving an unsuccessful attempt on the part of the sibling trustee to deny a sibling beneficiary access to the entire trust document).
• 39. See Restatement (Third) of Trusts §78 cmt. c(2) (suggesting that the “common situation in which one or more of a trust's beneficiaries are selected or authorized by the settlor to serve as trustee or co-trustee inevitably presents an array of conflicts between the trustee's interests as a beneficiary and the interests of other beneficiaries”).
• 40. “[T]here is…a general recognition that a trustee-beneficiary's conduct is to be closely scrutinized for abuse, including abuse by less than appropriate regard for the duty of impartiality.” Restatement (Third) of Trusts §79 cmt. b(1).
• 41. See Uniform Trust Code §706(b)(2) (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>) (providing that the court may remove a trustee if lack of cooperation among cotrustees substantially impairs the administration of the trust). “Removal is particularly appropriate if the naming of an even number of trustees, combined with their failure to agree, has resulted in deadlock requiring court resolution.” Uniform Trust Code §706 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>).
• 42. Uniform Trust Code §808 cmt. (available on the Internet at <www.law.upenn.edu/bll/ulc/ulc.htm>).
• 43. “One advantage of a corporate trustee is ‘permanence.’” Restatement (Third) of Trusts, Reporter's Notes on §33. See, e.g., In New England Mut. Nat’l Bank v. Centenary Methodist Church, 342 Mass. 360, 173 N.E.2d 294 (1961) (a trustee-bank having converted from a state bank to a national bank and merged with another bank, the new entity by statute succeeded to the trusteeship without reappointment or appointment).
• 44. A “guardian” makes decisions with respect to personal care; a “conservator” manages property. Uniform Trust Code §103 cmt. (available on the Internet at <www.law.upenn.edu/bll/ulc/ulc.htm>). The terminology used is that employed in Article V of the Uniform Probate Code and its freestanding Uniform Guardianship and Protective Proceedings Act. Uniform Trust Code §103 cmt. (available on the Internet at <www.law.upenn.edu/bll/ulc/ulc.htm>).
• 45. In civil law jurisdictions, restricted transfers to minors are often made by means of a “guardianship.” The civil law guardian or tutor, however, is likely to be charged with supervising both the child's person and the child's property. See generally Jeffrey A. Schoenblum, 1 Multistate and Multinational Estate Planning 1249 (1999). This linking of the personal and the financial makes the civil law guardianship a less than ideal as a trust substitute. See generally§8.12.1 of this handbook (civil law alternatives to the trust).
• 46. See Restatement (Third) of Trusts §50 cmt. f, specifically the comments on illustration 14. See generally§3.5.3.2(a) of this handbook (the trustee’s power to make discretionary payments of income and principal (the discretionary trust)).
• 47. See generally 3 Scott & Ascher §18.2.5 (Trustee With Discretionary Power to Distribute to Self).
• 48. See generally 3 Scott & Ascher §18.2.5 (Trustee With Discretionary Power to Distribute to Self). See also§8.9.3 of this handbook (tax-sensitive powers).
• 49. “Cotrusteeship should not be called for without careful reflection.” Uniform Trust Code §703 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>). To be sure, “[h]aving multiple decision-makers serves as a safeguard against eccentricity or misconduct.” Uniform Trust Code §703 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>). On the other hand, “[d]ivision of responsibility among cotrustees is often confused; the accountability of any individual trustee is uncertain; obtaining consent of all trustees can be burdensome; and, unless an odd number of trustees is named, deadlocks requiring court resolution can occur.” Uniform Trust Code §703 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>). See generally§§3.4.4.1 of this handbook (trustees) and 7.2.4 of this handbook (cofiduciary and predecessor liability and contribution in the trust context).
• 50. 50See J. R. Kemper L.L.B, Annot., Construction and operation of will or trust provision appointing advisors to trustee or executor, 56 A.L.R.3d 1249 (1974). “‘Advisers' have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business.” Uniform Trust Code §808 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>). (Under Alaska's default law, a trustee is not required to follow the advice of the advisor; and the advisor is not liable as or considered to be a trustee of the trust or a fiduciary when acting as an advisor pursuant to the terms of the trust. See Alaska Stat. §13.36.370.) “‘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.” Uniform Trust Code §808 cmt.
• 51. 2 Scott & Ascher §11.11.3.
• 52. Uniform Trust Code §705 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>). See generally Estate of Wall v. Commissioner, 101 T.C. 300 (1993) (holding that the settlor's reserved power to remove and replace corporate trustees would not generate adverse estate-tax consequences upon the death of the settlor); Rev. Rul. 95-58, 1995-2 C.B. 191 (suggesting that a reserved power to remove and replace trustees will not bring adverse estate tax consequences upon death of settlor, provided the power does not extend to appointing an individual or corporate successor that is related or subordinate to the settlor within the meaning of §672(c) of the Internal Revenue Code). See also Berall, New Ruling Provides More Flexibility in Removal of Trustees, 23 Est. Planning 99 (Mar./Apr. 1996). See generally §§8.9.3 of this handbook (tax-sensitive powers) and 8.15.15 of this handbook (the ascertainable standard).
• 53. See generally Alan F. Rothschild, Jr., The Dos and Don'ts of Donor Control, 30 ACTEC J. 261 (2005).
• 53.1. See Alexander A. Bove, Jr., The Trust Protector: Friend, Foe, or Fiduciary? 34th Annual Notre Dame Tax and Estate Planning Institute, South Bend, Indiana, September 25–26, 2008.
• 53.2. Ibid.
• 54. See generally 1 Jeffrey A. Schoenblum, Multistate and Multinational Estate Planning 1372–1374 (1999); Uniform Trust Code §808 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>); 5 Scott & Ascher §33.1.3 n.1 (Termination or Modification by Third Person).
• 55. Trust protectors have been given authority to do one or more of the following: remove and appoint trustees; review the trust administration and approve accounts; appoint auditors; agree to trustee compensation; approve self-dealing by trustees; petition the court on behalf of unborn or unascertained remaindermen; export the trust and change the governing law; trigger or cancel flight arrangements in flee clauses; withhold consent to investment, distributive, and administrative decisions of the trustees; direct trustees to exercise of investment, distributive, and/or administrative discretions; provide and obtain tax advice for the trustees; veto the settlor's exercise of reserved powers; decide whether the settlor is incapacitated so as to trigger suspension of reserved powers; and add members to or subtract members from a class of permissible discretionary beneficiaries. 1 Jeffrey A. Schoenblum, Multistate and Multinational Estate Planning 1372–1374 (1999). Prof. Schoenblum acknowledges Professor David Hayton for developing a comprehensive list of trust protector functions. David Hayton, English Fiduciary Standards and Trust Law, 32 Vand. J. Transnat’l L. 555, 583–584 (1999). That list is reproduced in §18.18[C][9] of Prof. Schoenblum's treatise. A slightly modified version of the list appears in this footnote. See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 56. See generally James L. Dam, More Estate Planners Are Using “Trust Protectors,” 2001 LWUSA 854 (Oct. 29, 2001) (citing a Pennsylvania estate-planning attorney to the effect that in the United States settlors who designate trust protectors are venturing into “uncharted territory”).
• 57. See generally James L. Dam, More Estate Planners Are Using “Trust Protectors,” 2001 LWUSA 854 (Oct. 29, 2001) (suggesting that there is little “default law” addressing the powers and duties of protectors). See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 58. Restatement (Third) of Trusts, Reporter's Notes on §64. See also 5 Scott & Ascher §33.1.3 (Termination or Modification by Third Person).
• 58.1. See Alexander A. Bove, Jr., The Trust Protector: Friend, Foe, or Fiduciary? 34th Annual Notre Dame Tax and Estate Planning Institute, South Bend, Indiana, September 25–26, 2008.
• 58.2. Centre Trustees v. Van Rooyen, [2010] WTLR 17 (decided by the Royal Court of Jersey).
• 58.3. Ibid.
• 59. See generally §3.5.4.2 of this handbook (insuring the trustee against personal liability).
• 60. Alaska Stat. §13.36.370.
• 61. Ibid.
• 62. Uniform Trust Code §808(b) (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>).
• 63. Restatement (Third) of Trusts §74.
• 64. Uniform Trust Code §808(d) (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>); Restatement (Third) of Trusts §75 cmt. e.
• 65. Uniform Trust Code §808(d) (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>); Restatement (Third) of Trusts §75 cmt. f.
• 66. Restatement (Third) of Trusts §75 cmt. f.
• 67. Restatement (Third) of Trusts §75 cmt. e. Cf. §7.2.4 of this handbook (co-fiduciary and predecessor liability and contribution). See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 68. Ibid.
• 69. RSA 564-B: 12-1204.
• 70. RSA 564-B: 12-1205.
• 71. Restatement (Third) of Trusts §75 cmt. G; 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 72. See §8.15.20 of this handbook (doctrine of equitable deviation).
• 73. See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 74. See generally§8.1 of this handbook (powers of appointment).
• 75. Restatement (Third) of Trusts §75 cmt. c(1).
• 76. Restatement (Third) of Trusts §75 cmt. d.
• 77. Restatement (Third) of Trusts §75 cmt. d. See generally §8.15.26 of this handbook (fraud on the power doctrine).
• 78. Restatement (Third) of Trusts §75 cmt. b(1).
• 79. See generally§§5.4.1.1 of this handbook (beneficiary’s right to information and confidentiality) and 6.2.3 of this handbook (trustee's duty of confidentiality).
• 80. See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 81. See generally§§5.4.1.1 of this handbook (trust beneficiary’s right to information and confidentiality) and 6.2.3 of this handbook (trustee's duty of confidentiality); 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 82. For some default law, see Restatement (Third) of Trusts §75 cmt. g(1).
• 83. See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 84. Cf. §8.2.2.2 of this handbook (the revocable trust) (discussing the exercise of rights of revocation by conservators and agents acting under durable powers of attorney).
• 85. See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 86. Ibid.
• 87. Restatement (Third) of Trusts §75 cmt. g(1).
• 88. See generally§3.5.2.3 of this handbook (trustee’s right in equity to exoneration and reimbursement from the trust estate to include the payment of the trustee’s attorneys' fees).
• 89. 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 90. See generally §6.1.4 of this handbook (trustee’s duty not to delegate critical functions).
• 91. Uniform Prudent Investor Act, Prefatory Note, 7B U.L.A. 280, 281 (2000). The Uniform Prudent Investor Act with the referenced prefatory note is available on the Internet at http://www.law.upenn.edu/bll/ulc/ulc.htm as Article 9 of the Uniform Trust Code.
• 92. Uniform Prudent Investor Act §9.
• 93. ERISA §3(21)(A) (ERISA is the acronym for Employee Retirement Income Security Act of 1974, a topic we take up in §9.5.1 of this handbook).
• 94. Uniform Trust Code §807(a) (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>).
• 95. Uniform Trust Code §807 cmt. (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>).
• 96. Ibid.
• 97. Uniform Trust Code §807(c) (available on the Internet at <http://www.law.upenn.edu/bll/ulc/ulc.htm>).
• 98. Ibid.
• 99. Uniform Prudent Investor Act §9(b).
• 100. Jerome J. Curtis, Jr., The Transmogrification of the American Trust, 3 Real Prop. Prob. & Tr. J. 251, 273 (1996).
• 101. See generally 3 Scott & Ascher §16.7 (Effect of Power to Direct or Control Trustee).
• 102. The Uniform Prudent Investor Act and the Future of Trust Investing, 81 Iowa L. Rev. 641 (1996).
• 103. The Transmogrification of the American Trust, 31 Real Prop. Prob. & Tr. J. 251 (1996).
• 104. Mass. Rules of Professional Conduct Rule 1.7 cmt. [6]. The lawyer making the referral would be an agent of the client who is shopping for trustees. This type of agency is a fiduciary relationship. As a fiduciary, the lawyer has a duty to the client of full disclosure. See generally Chapter 1 of this handbook (containing in part a definition of the term fiduciary). The lawyer has a duty to his client of undivided loyalty as well. If the lawyer is simultaneously in a de facto agency relationship with the individual or corporation to whom he is referring clients for trust services, the lawyer runs the risk of at best violating the duty of undivided loyalty and at worst engaging in self-dealing. See generally§6.1.3.3 of this handbook (discussing in part the multidisciplinary practice concept).