¶ 1901
Overview
Scope of the chapter. Chapters 17 and 18 examined what a trust protects and against whom. This chapter examines who governs the trust and how its terms can change over time. Governance matters to asset protection for two reasons. First, the protection of a trust depends on the independence of the persons who make its decisions: a trust governed in practice by the beneficiary or the settlor is exposed to the alter ego, sham and contempt theories examined in earlier chapters (see supra ¶¶ 1740.02, 1860.03–1860.04). Second, a trust intended to last for decades must be able to respond to changes in law, in the family and in the threats the family faces, without returning control to the persons it is meant to protect. The tools examined here, directed trusts (see infra ¶ 1910), trust protectors (see infra ¶ 1920), duress and situs provisions (see infra ¶ 1930), decanting (see infra ¶ 1940), modification (see infra ¶ 1950) and private trust companies (see infra ¶ 1960), serve both purposes. The chapter then addresses the line between legitimate family involvement and control that defeats protection (see infra ¶ 1970), the governance documents that support a trust in practice (see infra ¶ 1980) and the place of governance in the Threat Matrix (see infra ¶ 1990).
The traditional model and its limits. The traditional trust placed every function in a single trustee: custody, investment, distribution, accounting and tax. A family that wanted a corporate trustee's independence for distributions had to accept the corporate trustee's investment policies, and a family that wanted to keep a closely held business in the trust had to persuade a corporate trustee to accept the risk of holding it. The prudent investor rule, which requires diversification unless the trust's purposes are better served without it, pressed trustees to sell concentrated holdings. Unif. Prudent Investor Act § 3 (Unif. L. Comm'n 1994). The modern governance tools developed to separate these functions, so that each can be placed with the person best suited to it.
The protective principle. The principle of this chapter can be stated in a sentence: any power that would let the beneficiary or the settlor obtain trust property for personal use should be held by someone else, and that person should be independent in fact. Powers that do not bear on distributions, such as investment management, may be held by family members with less risk. A drafter who allocates powers according to this principle can give the family significant involvement without weakening the trust.