Trust protectors are a relative innovation in estate planning. They became popular in the context of offshore trusts for asset protection.
A trust protector can have a broad range of powers, depending on your authority. They can do everything from removing and replacing trustees to mediating beneficiary conflicts.
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Protection of the Trust Assets
Trust protectors can be given the ability to make a wide range of decisions and changes within a trust that the Grantor or beneficiaries cannot do. This can include changing who is named trustee, the state where the Trust is administered, or how the trust principal and income are distributed. They can also be granted the power to remove or replace trustees and monitor the trustee’s actions.
It is not uncommon for laws and family situations to change between when a revocable trust is set up and the death of the Grantor. This can often require the need to amend the Trust to ensure that it complies with the law and the original intent of the Grantor. A trust protector can be given the authority to do this without going to court.
A Protector must not be related or subordinate to the Grantor and heirs/beneficiaries of a trust to avoid any claims by creditors that the Protector is working in collaboration with beneficiaries to hinder or defraud them. In addition, a Protector should not be the same person as a trustee or any other fiduciary in the Trust. A good rule of thumb is that a Protector should be an independent third party, such as a trusted friend or advisor.
Tax Savings
The role of a trust protector often includes several necessary powers that allow the person to change the terms of the irrevocable Trust as situations change. For instance, if an adult beneficiary is in debt or gets sick, the Trust Protector may add them to the list of beneficiaries so they can receive payments again. A Trust Protector may also be able to remove trustees if they’re not doing the job correctly or if family dynamics change.
In addition, the Trust Protector can amend the Trust to keep it up to date with changing laws and the evolving needs of beneficiaries. For example, if someone with special needs moves to another state with different laws or public benefits systems, the Trust Protector could revise the Trust to consider those changes.
While a non-attorney can be named the Trust Protector, choosing an estate planning attorney with professional experience and the time to act in this capacity is often more practical. Moreover, an attorney with a firm specializing in estate planning will be held to the highest ethical standards and is more likely to know what to do in this role than your friend. That said, it’s essential to discuss the issue with an estate planner to decide whether or not a trust protector provision is necessary for your situation.
Conflict Resolution
A trust protector can mediate disputes between trustees and beneficiaries, promoting harmony and reducing the likelihood of costly litigation. They should be experienced in trust administration and estate planning, able to act impartially, and have sufficient time to devote to his or their duties.
Unlike a trustee, who must follow the rules outlined in the trust instrument, a trust protector can modify specific provisions of an irrevocable trust that are inconsistent with the Grantor’s Intent or due to changes in circumstances. For example, if one of your children marries and has twins and you are concerned about them draining the trust assets, a trust protector can remove those grandchildren as beneficiary designations.
Trust protectors can also modify the “situs” of a trust, which may be necessary when a beneficiary moves to a new state with different laws or public benefits systems. A trust protector with the power to change a trust’s governing law and situs is usually optional to obtain court approval, but this will vary from state to state.
While you might think of a trusted friend to serve as your trust protector, they should have the professional time and skills to handle these tasks effectively. Moreover, the trust protector should be willing to take on this role and not be subject to conflict of interest concerns or family pressures.
Flexibility
The powers granted to a trust protector can vary significantly. This is a crucial reason why estate planning attorneys should carefully discuss with clients what capacity they want to give the trustee protector. The Protector could have the ability to remove and replace trustees, control investment and distribution decisions, veto the action of a trustee, and many other powers.
Typically, the Grantor (who makes the Trust) will name someone unrelated to them as the Trust Protector. However, a family member can serve in this role. It is also common for a private professional fiduciary to be named as a trust protector. Often, this person is the attorney who drafted the Trust instrument.
One of the primary tasks a trust protector performs is monitoring the actions of the trustee and reporting back to the beneficiaries. This is particularly important when there are concerns about a particular trustee’s abilities or long-term honesty.
Including this protection in any irrevocable trust after your death is critical. Without this protection, a wrong trustee could milk the Trust for money, take inappropriate personal loans, or even harbor grudges against certain heirs and beneficiaries. This could cost your loved ones considerable wealth, not to mention the time and expense of pursuing legal action to remedy these problems.