On March 20, 2023 in Estate Planning by Leighton Tyau

What Is a Trust Protector and Why Should You Consider One?

Trust Protector

A trust protector is a relatively new concept in the realm of estate planning and trusts, but is quickly gaining favor in many dynasty trust plans. While a trust protector is technically a trustee with special powers, in general a trust protector is a third party appointed to oversee the trust and ensure the trustor’s desires are followed.

What is the Trust Protector’s Role?

As stated earlier, a trust protector is a trustee with specific enumerated powers who acts under a fiduciary duty or no fiduciary duty, depending on the trust document. A trust protector does not typically participate in the trust administration or direct the investment decisions or distributions, but rather acts as a safeguard to ensure that the trust is being administered according to the wishes of the trustor. The trust protector may be given the power to make changes to the trust, such as change the terms of the trust, remove and replace a trustee, or install a new trustee if none is acting. 

A typical trust protector power is the ability to remove and replace trustees. This is to ensure that the trust is being administered according to the grantor’s intent, the trustee remains trustworthy, or to adjust to any tax consequences or situs considerations. As such, they act as a sort of check on the trustee’s actions and gives the trust flexibility to meet new tax laws, state laws, or changes to the trust laws.

The Trust Protector Acts in Place of the Grantor

The purpose for having a trust protector is to ensure that the trust is being managed in accordance with the grantor’s wishes and to make any necessary changes to the trust in order to achieve the grantor’s goals and adapt to the times. The trust protector is also responsible for ensuring that the trustee is acting according to the wishes of the grantor and is administering the trust properly. If they are not, the trust protector is generally given the ability to hire and fire the trustee.

Does the Trust Protector Control a Trust?

A trust protector does not control the trust. As previously stated, the trust protector is a trustee with limited special powers. The trust protector can act as a check and balance for the trustee who has effective control over the trust corpus. The trustee is responsible for managing and distributing the trust assets according to the terms of the trust agreement. Contrarily, the trust protector may be empowered to make discretionary changes to the trust agreement (which the trustee cannot for legal and tax reasons), have veto powers, or remove the trustee if necessary to ensure that the trust is being administered in accordance with the grantor’s intentions. Any modifications to the trust agreement would be advantageous if family circumstances change or to gain some tax advantage when the laws change.

Should a Trust Protector be a Fiduciary?

A fiduciary is a person or entity that has a legal duty to act in the best interests of another person. In the case of a trust, the trustee typically acts under a fiduciary duty under the trust laws. Depending on the duties and powers given to the trust protector, a fiduciary standard may or may not be advisable. This author would say that most trusts are probably drafted such that the trust protector shall act under a fiduciary duty, but that may not be the best option depending on what you’d like the trust protector to do.

Who Should be the Protector of Your Trust?

When selecting a trust protector, it is important to choose someone who is trustworthy, available when the need arises, and has the knowledge and expertise to make informed decisions about the trust. This could be a family member, a close friend, or a professional advisor such as an attorney, trust company, or professional fiduciary. If you are creating a dynasty trust, the trust instrument should allow flexibility in the future and give your beneficiaries the means to appoint a new trust protector should the need arise. The trust instrument may also reserve the right to remove and replace the trust protector as long as the grantor is alive.

Many people tend to choose a family member, friend, or attorney to be the trust protector. Still others opt for a professional trustee or company. It’s important to talk to your attorney about who would be an appropriate trust protector and what powers they will have.

The Pros and Cons of Appointing a Trust Protector

The short answer is, it depends on the specific circumstances of your trust and your family. For example, if your trust merely distributes upon your death, a trust protector is not going to add much value other than nominating a replacement trustee if your nominated trustees are unavailable. If, on the other hand, you want a dynasty trust, a trust protector provision will allow your trust greater flexibility to deal with changes in the laws, taxes, or family situations. 

A trust protector can provide many benefits, such as the ability to make changes to the trust without going through the probate court, securing certain tax advantages, and removing problematic trustees. If you have a long-term trust, such as a protection trust, special needs trust, or a dynasty trust, a trust protector may provide flexibility and oversight. The tax laws and family circumstances are nearly guaranteed to change during the existence of the trust, and a good trust will adapt to the circumstances. A trust protector can make necessary modifications to the trust agreement without resorting to probate court or gathering the assent of all remainder beneficiaries, saving time, money, and potential family strife.

If you have special assets in a trust, such as land that’s been in the family for generations or a family business, a trust protector can provide valuable oversight on how to handle that asset or monitor the trustee’s decisions about it. This can ensure that the asset is managed and maintained properly, and that it stays within the family for generations to come.

Yet another reason to add a trust protector provision is if you are concerned about protecting your legacy from creditors. A well-written trust protector clause can save beneficiaries from losing their inheritance to bankruptcy, lawsuits, divorce, and other catastrophic circumstances by removing their ability to demand withdrawals from the trust.

All that said, it is important to note that a trust protector is not a necessary addition for all trusts and it’s important to consult with an attorney who has knowledge and experience in this area to go over your specific needs and desires to determine whether a trust protector is right for your situation.

Can a Trust Protector also be a Trustee? Understanding the Roles and Responsibilities.

While it is technically possible to name a trustee as trust protector, that would defeat the point of having a trust protector position. In order to receive the benefit from having a trust protector position, the roles and responsibilities of a trustee and a trust protector need to be different. A trustee ought to be responsible for managing and administering the trust, while a trust protector is responsible for overseeing the trustee, amending the trust agreement as needed, and generally enforcing the grantor’s intent.

Differences between a Trustee, Trust Advisor, and a Trust Protector

In general, the main difference between a trustee and a trust protector is that a trustee is given the power to manage and control the trust assets, while a trust protector is not. A trustee is responsible for managing the trust assets and making decisions about how the assets are invested and distributed, while a trust protector is responsible for ensuring that the trustee is acting in accordance with the grantor’s intent. A trust advisor is a person or entity appointed to provide advice and recommendations to the trustee regarding investments and other trust-related decisions. 

Who Needs a Trust Protector?

Trust protectors are not just for dynasty trusts. Any irrevocable trust or even your own revocable trust may benefit from having a trusted person able to step in in case of emergency. Or, your trust may find itself in need of someone to step in and assign a new trustee.

Having a trust protector clause is like having umbrella insurance. You may never need it because your trustee will get the job done, but you can’t know the future and being able to meet any unforeseen challenges is the hallmark of a great trust. The ability to adapt to shifting laws and economic circumstances is a necessity to trust survival. An experienced estate planning attorney can help you understand the importance of trust protectors and how to ensure that your trust is properly protected.

What Triggers the Actions of a Trust Protector?

The actions of a trust protector can be triggered by specific events, such as the death or incapacity of the grantor, or if the trustee is unable to act. Or the trust protector is always able to act and is waiting and watching the trust like a guardian angel; waiting for some malady to befall the trust at which point they’ll swoop in and save the day. 

Trust Protectors for Asset Protection while You Are Alive

Unfortunately, a revocable trust provides no protections for the grantor against creditors of the grantor. However, it can provide protections against mental degradation or undue influence. By having a trust protector willing and able to step in when we are unable to manage our own affairs, we can protect the assets in the trust from fraud and undue influence.

In addition, if the grantor becomes incapacitated, the trust protector can take over the management of the trust and ensure that the assets are being managed properly and not lost to waste or neglect.

Should I Worry About Giving Power to a Trust Protector?

When considering the appointment of a trust protector, it is important to consider the potential risks involved. While a trust protector can provide valuable flexibility & protection, such flexibility requires they be giving the power to make significant changes to the trust.

For example, a trust protector may have the power to change the terms of the trust, remove and replace the trustee, or, in some instances, even change the beneficiary of the trust. As such, it is important to choose your trust protector carefully and make sure that you absolutely trust the person you appoint.

One way to minimize the risks associated with giving power to a trust protector is to include specific provisions in the trust agreement that limit the power of the trust protector. We’d be happy to discuss possible options to ensure checks and balances on the trust protector’s powers.

In conclusion, a trust protector can be a valuable addition to your trust, providing a level of flexibility and adaptability that is not possible without one. A trust protector can help your trust adapt to changing laws, family configurations, and shifting assets, without having to resort to the time and money consuming process of court reformation. However, it is important to consult with an attorney who has knowledge and experience in this area to ensure that all legal requirements are met. If you’re interested in learning more about how to implement a trust protector into your estate plan, please do not hesitate to contact us for more information.

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