Magistrate Suggests Dismissing A Settlor’s Claim Against Trust Protector Because Of A Lack Of Fiduciary Duty
In Ron v. Ron, a wife created a trust with her husband as a trustee, a friend as a trust protector, and their children as the beneficiaries. No. 3:19-CV-00211, 2020 U.S. Dist. LEXIS 52507 (S.D. Tex. February 4, 2020). The wife alleged that the husband made inappropriate transfers of community property to the trust before and after their divorce and that the trust protector inappropriately added the husband as a beneficiary of the trust. The wife sued the trust protector for breach of fiduciary duty and other similar claims. The trust protector filed a motion to dismiss, arguing that he did not owe her any fiduciary duties.
The federal magistrate discussed the trust protector role in Texas:
The trust protector’s role is relatively new in modern trusts. Thus, “there is little authority discussing the role of trust protectors, which the [Texas] Trust Code only recognized in 2015.” In re Macy Lynne Quintanilla Tr., No. 04-17-00753-CV, 2018 WL 4903068, at *5 (Tex. App.—San Antonio Oct. 10, 2018, no pet.) (citing Tex. Prop. Code § 114.0031). The Texas Trust Code provides that a trust protector has only the power and authority granted to him by the trust terms, which may include: (1) the power to remove and appoint trustees, advisors, trust committee members, and other protectors; (2) the power to modify or amend the trust terms to achieve favorable tax status or to facilitate the efficient administration of the trust; and (3) the power to modify, expand, or restrict the terms of a power of appointment granted to a beneficiary by the trust terms. Tex. Prop. Code § 114.0031(d). See also In re Macy Lynne Quintanilla Tr., 2018 WL 4903068, at *5. The Texas Trust Code recognizes that a trust protector may be a fiduciary or nonfiduciary. See Tex. Prop. Code § 114.0031(e).
The wife contended that the trust created a formal fiduciary relationship between herself and the trust protector. The Trust expressly stated that the “Trust Protector’s authority is conferred in a fiduciary capacity.” Id. The trust also provided that: “The purpose of a Trust Protector is to direct my Trustee in certain matters concerning the trust, and to assist, if needed, in achieving my objectives as expressed by the other provisions of my estate plan hereunder.” Id. In the wife’s view, the use of “my objectives” and “my estate plan hereunder” demonstrates that the trust protector’s duties were owed to her. The magistrate disagreed:
In my view, nothing in Section 4.01 of the Trust creates a fiduciary relationship between Stein and Suzanne. If anything, the provision strongly suggests that the fiduciary relationship is between Stein and the Trustee—who Stein is to “direct” and “assist”—or perhaps, between Stein and the Trust—which contains Suzanne’s memorialized objectives. The mere fact that Section 4.01 references Suzanne’s objectives means nothing when the Trust explicitly states that “[a]ll provisions of this agreement are to be construed to accomplish these objectives.” Given this reality, literally every provision in the Trust is expressly intended to achieve Suzanne’s objectives. Surely, this does not mean that every individual implicated by a given provision has entered a fiduciary relationship with Suzanne.
The wife also argued that the following trust provision created a duty:
To the extent that I have provided in this agreement that a Trust Protector holds any power or authority in a fiduciary capacity, the Trust Protector has no general duty to monitor or remain informed about the trust. Specifically, and not in limitation of the foregoing, the Trust Protector has no duty to investigate the action or inactions of the Trustee, to audit the books of the trust, to review the investments of the trust, or to evaluate the performance of the trust portfolio, unless at least one trust beneficiary or some other interested party (i) files a written complaint with the Trust Protector alleging a breach of trust and detailing the matters the Trust Protector should investigate, audit, review, or evaluate, or (ii) requests an action that I have authorized the Trust Protector to perform. If the Trust Protector possesses the power to direct, consent to, or veto the actions of a Trustee described in the written complaint, I direct that the Trust Protector defer to the Trustee’s judgment except in those instances in which the Trust Protector can find no rational basis for the Trustee’s actions, or failure to act, and the Trust Protector shall only suffer liability for failing to act if the trust surfers monetary loss and the Trust Protector made no reasonable inquiry when alerted that the Trustee might have breached the Trustee’s fiduciary duties; or, even if the Trust Protector made a reasonable inquiry, no other reasonable person would have failed to take action against the Trustee under those circumstances.
The magistrate, once again, disagreed with the wife and held that “nothing in this language implies or even suggests the existence of a fiduciary relationship between Stein and Suzanne.” Id. Rather, “the provision clearly states that only a ‘trust beneficiary or some other interested party’ can file a complaint capable of getting the Trust Protector to act in accordance with the provision.” Id. The magistrate concluded that as the wife was neither a trust beneficiary nor an interested party, that the trust protector did not owe a fiduciary duty to her. Id. (citing Lee v. Rogers Agency, 517 S.W.3d 137, 159-60 (Tex. App.—Texarkana 2016, pet. denied) (“[A] settlor who under the terms of the Trust does not manage any of the aspects of the Trust and does not stand to inherit any of the trust assets is not an ‘interested person’ who has standing to bring an action against a trustee or to bring other proceedings related to a trust under the Texas Property Code.”)).
The magistrate then looked to see if Texas law (as opposed to the trust document) created a duty from the trust protector to the wife. The magistrate considered a provision of the Texas Trust Code that mentions trust protectors and their fiduciary duty. The magistrate stated:
Section 114.0031(a)(1) of the Texas Trust Code states: “‘Advisor’ includes protector.” Tex. Prop. Code § 114.0031(a)(1). Section 114.0031(e) then provides: If the terms of a trust give a person the authority to direct, consent to, or disapprove a trustee’s actual or proposed investment decisions, distribution decisions, or other decisions, the person is an advisor. An advisor is a fiduciary regardless of trust terms to the contrary except that the trust terms may provide that an advisor acts in a nonfiduciary capacity if: (1) the advisor’s only power is to remove and appoint trustees, advisors, trust committee members, or other protectors; and (2) the advisor does not exercise that power to appoint the advisor’s self to a position described by Subdivision.
Id. (citing Tex. Prop. Code § 114.0031(e). The magistrate noted that this section discusses the trust protector in his role as advisor to the trustee and suggests that the fiduciary relationship is between the trust protector and trustee or between the trust protector and the trust itself. The magistrate held that the Texas law does not create a fiduciary duty between the trust protector and the settlor.
After briefly analyzing the wife’s informal confidential relationship allegation, which the magistrate disagreed with, the magistrate recommended dismissing the wife’s claims against the trust protector.