Beneficiaries of Trust Can Contest Trust Protector’s Amendment On Grounds of Undue Influence

A "trust protector" is a person or institution appointed by a settlor (a person creating a trust) to protect the trust, or more directly, to protect a vulnerable beneficiary of the trust.  The original idea behind the protector was to appoint somebody who could oversee the Trustee, and, if necessary, terminate the Trustee for misconduct without resorting to a court process.

This planning device is increasingly common, and, as you might expect, takes on different characteristics in design and implementation within different trusts.  Originally crafted, the only power conferred to a trust protector was discretion to terminate a trustee. As design of trusts evolved, protectors were conferred additional powers, such as the power to appoint the successor Trustee if one is fired, or even, sometimes, to amend a trust.

With the rise in the number of trust protectors appointed by trust instruments, it is inevitable that protectors will be embroiled in legal disputes, notwithstanding that the intention of the planning device is to reduce such disputes, and more, to avoid resort to court for a remedy for misconduct, particularly, unresponsive, slow, or distracted trustees.  Of course, the more authority conferred to a trust protector, the more likely any individual  protector is likely to be embroiled in a dispute.  That is what happened to a trust protector in a recent case in Arizona.  

Austin Bates suffered from Parkinson’s disease and was in the process of getting a divorce when he hired an attorney to create a trust for him. The trust provided distributions to his ex-wife, daughters, and his caretaker. Mr. Bates selected a professional trustee and designated his attorney as trust protector. The trust protector could, according to the terms of the trust, alter or amend the trust consistent with Mr. Bates’s wishes. Once his divorce was final, Mr. Bates married his caretaker, Lindi Bates. After meeting with Mr. Bates and his new wife, the trust protector amended the trust adding a "no contest" clause (legally referred to as an in terrorem clause), which invalidated the interests of anyone who contested the trust, and eliminating the distribution to Mr. Bates’s ex-wife, providing instead income to his new wife for her life and making Mr. Bates’s daughters the remainder beneficiaries after the death of the new wife.

Mr. Bates’s daughters sued to invalidate the trust amendment on the grounds that the amendment was procured through undue influence. The new wife moved to dismiss the undue influence claim, arguing that the daughters alleged she influenced Mr. Bates, but that Mr. Bates had no ability to amend the trust. The court dismissed the undue influence claim and enforced the in terrorem clause, disinheriting the daughters as beneficiaries. The daughters appealed.

The Arizona Court of Appeals reversed, holding that the the lower court improperly dismissed the undue influence claim because the new wife could be found to have exercised undue influence over Mr. Bates, and  although Mr. Bates didn’t have authority to amend the trust, the trust protector was duty bound to follow Mr. Bates’s wishes.  Bates v. Bates, (Az. Ct. App., Div. 1, No. CA-CV 19-0845, May 11, 2021). According to the court, state law “does not require a claimant to allege the defendant exerted undue influence directly over the person with final authority to amend the trust; instead, it broadly states that a trust amendment is void if ‘its creation was induced’ by undue influence.”  Bates, at pp. 7-8.

The Bates case is instructive regarding how the court treated the undue influence claim. More, though, the case is instructive regarding the court's treatment of the trust protector given that protector's involvement as, essentially, an agent of the settlor in the case.  It is possible that better design and drafting might have avoided the claim, but there is little question that the broad grant of authority conferred to the protector, and the exercise of that authority, caused the protector to become embroiled in an all-too-common family squabble. 

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