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Texas Trust Protector Has No Fiduciary Duty to Settlor

A “trust protector” is a relatively new role in the world of Texas trusts.  An opinion from the U.S. District Court, Southern District of Texas, Ron v. Ron (Memorandum and Recommendation, adopted here), determined that a Texas trust protector had no fiduciary duty to the settlor of the Trust.  We have previously written about a case involving trust protectors in Florida, here.

What Is A Trust Protector Under Texas Law?

The Texas Trust Code began to recognize trust protectors in 2015. See Texas Property 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.

The Texas Trust Code provides that a trust protector may be a fiduciary or nonfiduciary.

The Facts of Ron v. Ron

In Ron v. Ron, a wife created a trust naming her husband as a trustee and their children as the beneficiaries.  The wife named a friend as the trust protector.

The wife then alleged that the husband made inappropriate transfers of community property to the trust both before and after the couple’s divorce.  The wife also accused the trust protector of wrongfully adding the husband as a trust beneficiary.

The wife sued the trust protector for breach of fiduciary duty, among other claims.  The trust protector moved to dismiss the settlor wife’s action, claiming that the trust protector owed no fiduciary duties to the wife.

In response, the wife argued that the trust created a fiduciary relationship between the wife, as the settlor of the trust, and the trust protector.

How Do You Establish A Claim For Breach of Fiduciary Duty Under Texas Law?

To establish a claim for breach of fiduciary duty under Texas law, the plaintiff must show:

  1. a fiduciary relationship between plaintiff and defendants,
  2. breach of the fiduciary duty by defendants, and
  3. injury to plaintiff or benefit  to defendant as a result of the breach.

A fiduciary relationship can be formal or informal.

Formal fiduciary relationships arise as a matter of law and include attorney-client, partnership, and trustee relationships.

“An informal fiduciary relationship can arise from a moral, social, domestic or purely personal relationship of trust and confidence, but to impose an informal fiduciary duty in a business transaction, the special relationship of trust and confidence must exist prior to and apart from the agreement made the basis of the suit.”

Not every relationship involving a high degree of trust and confidence rises to a fiduciary relationship.

Did The Trust Create A Formal Fiduciary Relationship Between The Settlor and Trust Protector?

A trust protector does not automatically have a formal fiduciary relationship with the settlor of the trust, and one was not created here.  In this case the Trust stated that the “Trust Protector’s authority is conferred in a fiduciary capacity.”  However, the mere existence of a fiduciary capacity does not mean that the trust protector had a fiduciary relationship with the settlor.

The magistrate looked to section 4.01 of the Trust, which provided:

“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.”

The wife urged that the above language demonstrated that the Trust Protector’s duties were owed to her.  The magistrate disagreed, stating that, if anything, the provision strongly suggests that the fiduciary relationship is between the trust protector and the trustee.  The trustee is the person that the trust protector is to “direct” and “assist.”

The Trust also contained language providing that only a “trust beneficiary or some other interested party” can file a complaint capable of getting the Trust Protector to act.  This language does not create a fiduciary relationship between the trust protector and the wife, when the wife is neither a trust beneficiary nor an interested party.

Does Texas Law Create A Formal Fiduciary Relationship Between The Trust Settlor and Trust Protector?

No, Texas law does not create a formal fiduciary relationship between a trust protector and trust settlor.  Under the Texas Trust Code, the term “advisor” includes “protector.”  The provision governing trust protectors, section 114.0031(e) 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.

 

The Texas magistrate stated:

This seems to be the only provision in the Texas Trust Code that discusses the fiduciary duty owed by a trust protector. Notably, the section discusses the trust protector in his role as advisor to the trustee. This suggests that the fiduciary relationship is between Stein (Trust Protector) and Avi (Trustee)— again, or perhaps, between Stein (Trust Protector) and the Trust itself.

The magistrate also rejected the allegation that an informal fiduciary relationship was created between the wife and the trust protector.  Under Texas law, “to impose an informal fiduciary duty in a business transaction, the special relationship of trust and confidence must exist prior to and apart from the agreement made the basis of the suit.”

Here, the wife made no allegations of a special relationship of trust and confidence that existed prior to, and apart from, the Trust at issue.

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