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The Uniform Directed Trust Act Should Cover A Trust Director’s Power To Remove The Trustee

Published in the Probate Law Journal of Ohio, November/December 2018

In 2017, the Uniform Law Commission approved and recommended enactment of the Uniform Directed Trust Act (UDTA). The UDTA uses the term “trust director” to refer to any person, other than the trustee, with power over some aspect of the trust’s administration (encompassing other commonly-used terms such as “trust protector” and “trust adviser”). According to the UDTA Prefatory Note, the “main contribution of the act is to address the many complications created by giving a power of direction to a trust director, including the fiduciary duty of the trust director and the fiduciary duty of a directed trustee.”

The July/August 2018 edition of this publication featured an article by Joanne E. Hindel and Katerina Mills, which provided an overview of the UDTA and focused upon the UDTA’s potential application to administrative issues, from the standpoint of a professional trustee. This article will focus instead upon one notable, explicit exclusion from the UDTA’s coverage: the exercise or non-exercise of a trust director’s power to remove a trustee. As explained below, this exclusion is inconsistent with the stated goal of the UDTA to clarify the fiduciary duties of trust directors.

Section 8 of the UDTA, if enacted, would address the question of fiduciary duties by providing that “with respect to a power of direction…a trust director has the same fiduciary duty and liability in the exercise or nonexercise of the power”…as a trustee “in a like position and under similar circumstances.” In a similar vein, UDTA Section 8 would also authorize the terms of a trust to vary the default duties and liabilities of a trust director “to the same extent the terms of the trust could vary the duty or liability of a trustee.” Thus, the UDTA provides helpful guidance on the controversial issue of trust directors’ fiduciary duties by importing the well-known rules that apply to trustees.

However, Section 5 of the UDTA, if enacted, would explicitly state that the UDTA does not apply to certain trust director powers, including the “power to appoint or remove a trustee or trust director.” The Comment following UDTA Section 5 explains that this exclusion “addresses the compelling suggestion to the drafting committee that granting a person a power to appoint or remove a trustee is a common drafting practice that arose separately from the phenomenon of directed trusts,” and that under “prevailing law” the only limit on the exercise of a power to appoint or remove a trustee is that it “must conform to any valid requirements or limitations imposed by the trust terms.” (Citing Restatement (Third) of Trusts Section 37 cmt. c (2003)).

Thus, while the UDTA applies trustee-like fiduciary duties to trust directors in most scenarios, it declines to do so in the case of the trustee removal power. The UDTA would instead leave the removal power to “prevailing law.” However, part of the reason the UDTA became necessary is that the prevailing law regarding the existence and extent of trust director fiduciary duties is less than clear.

Consider, for example, the following hypothetical: a trust settlor with two children (son and daughter) executes a trust agreement that appoints himself as initial trustee and designates the children as remainder beneficiaries; appoints his son successor trustee; appoints the drafting attorney as “trust protector” (the attorney accepts); and provides that the trust protector has the authority to remove the successor trustee, with the only limitation on the trust protector’s removal power being that the trust protector “act in good faith.” The trust settlor later becomes incompetent; the son assumes the successor trusteeship; and the daughter approaches the trust protector with seemingly valid concerns that the son is engaged in a continuing pattern of improper self-dealing and mismanagement (which the son denies).

What are the parameters of the trust protector’s duties and potential liabilities with respect to the exercise or non-exercise of the removal power in this case? The trust instrument provides very little guidance. Moreover, there is no clear answer to be found in Ohio case law, because the proliferation of trust directors is such a relatively recent phenomenon.

Thus, the UDTA should cover this scenario and resolve the uncertainty as it does for other powers to direct, by imposing a default rule of trustee-like duties. Where a trust settlor provides a trust director with the substantial power to remove a trustee, it is reasonable to conclude that the settlor expects the director to exercise the removal power using familiar, trustee-like duties such as prudence and impartiality. Moreover, if the trust settlor and trust director have a different expectation of the trust director’s duties and liabilities, this is easily addressed by the existing language of UDTA Section 8, that “the terms of the trust may vary the director’s duty or liability to the same extent the terms of the trust could vary the duty or liability of a trustee in a like position and under similar circumstances.” 1

This proposal does create one potential pitfall under Ohio law. Where a trust director is also the sole beneficiary, the intent is often that the trust director-beneficiary be empowered to remove and replace the trustee without cause (e.g., if a surviving spouse simply prefers a different trustee). Extending trustee-like duties to the trust director’s trustee removal power would mean that the trust director could only remove the trustee for cause, which is likely the wrong presumption if the trust director is also the sole beneficiary.

This would not pose a problem in states that have adopted fully Uniform Trust Code (UTC) 706, because UTC 706(b) (4) generally allows for a court to remove a trustee where “requested by all of the qualified beneficiaries” so long as the court finds that removal serves the interests of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable successor or co-trustee is available. Ohio law, however, has not adopted UTC 706(b) (4); the current Ohio Trust Code allows removal by a court only for cause. See R.C. 5807.06(B) (1)-(3).

However, this problem is easily curable. The UDTA could still extend trustee-like duties to a trust director’s removal power, but simply add that the trust director is entitled to remove a trustee for any of the grounds for removal by a court under UTC 706(b), including subsection (4), which allows for removal at the request of all qualified beneficiaries. This would create the best of both worlds: the non-beneficiary trust director would be presumed to have trustee-like duties (addressing the hypothetical posed in this article), while the sole-beneficiary trust director (e.g., the surviving spouse) would be presumed to have an essentially absolute removal power. There is no need to wholly exclude the trustee removal power from the operation of the UDTA.

The type of fact pattern described in this article’s hypothetical is not unheard of or academic by any means. In the context of trust litigation, a beneficiary victimized by trustee self-dealing may well wonder whether she has a valid cause of action against a trust director who was empowered to remove the trustee before the trustee did substantial economic damage to the trust, but failed to do so (particularly if the trust director appears more collectible than the bad acting trustee). The UDTA is a missed opportunity to provide clarity on this issue and impose a default rule (subject to reasonable variation in the terms of the trust) that the substantial power to remove a trustee comes with substantial, trustee-like fiduciary duties.

1 For example, R.C. 5810.08 provides that a “term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries or was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.” (Emphasis added) Thus, under the existing language of the UDTA, a trust settlor could exculpate a trust director for anything short of the trust director’s bad faith and reckless indifference.