More on Trust Protectors

Gregory S. Alexander (A. Robert Noll Professor of Law, Cornell Law School) has recently published his article Trust Protectors: Who Will Watch the Watchmen?, 27 Cardozo L. Rev. 2807 (2006).
   

In this article, Prof. Alexender looks at the Trust Protector Office as discussed by Stewart Sterk’s article, Trust Protectors, Agency Costs, and Fiduciary Duty, 27 Cardozo L. Rev. 2761 (2006). Sterk’s paper analyzes the office of the Trust Protector via the agency theory of trusts. It then proceeds to lay out the rules that would govern the Trust Protector.  Alexander says that,
   

[t]he trust protector office may turn out to be an effective device in dealing with the agency cost problems that [Sterk], [Robert] Sitkoff, Melanie Leslie and others have identified in trust relationships. At the same time, though, I do worry that trying to ameliorate those problems will create its own set of agency cost problems. If I am right about that, then it is hard to know whether the trust protector position is worth the candle. That is, will the result in most cases be a net reduction in agency costs or will the trust protector office create its own agency costs that offset the reduction in the costs associated with the trustee’s position?
   

Alexander then proceeds to note three complications that may accompany brining another party into the tangled web of relationships already involved in a trust.
   

First, it is not entirely clear who is the trust protector’s principal–the settlor or the beneficiaries, or perhaps in some situations, both?[***] 
   

[Second,] the trustee’s de facto principal might now become the trust protector rather than either the settlor or the beneficiaries. […]The more power you give to the trust protector over the trustee, the more you risk making the trustee look like a mere agent, a development that the settlor probably neither contemplated nor would have wanted. [***]
   

[Third,] [t]he more power you give the trust protector, the more you simply swap one set of agency cost problems for another. (This is point made by Kenneth Arrow in the excerpt that Sterk quotes.)  On the other hand, if you give the trust protector fewer powers in order to avoid the kinds of problems I’ve just identified, then you don’t fully address the agency costs that initially led you to introduce the trust protector into the picture.