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What Is a Trust Protector?

Creating an irrevocable trust can often be a difficult, nerve-racking decision; due to the nature of an irrevocable trust, the Grantor (creator of the trust) is required to give up control of assets which are placed in the trust. Once in the trust, these assets are managed and controlled by your trustees. A Trust Protector can be named in the trust to oversee the trustees and make sure that the trust is being administered according to applicable law and the grantor’s wishes. The role of the Trust Protector is to be the grantor’s representative. With a Trust Protector, although the grantor cannot directly control the trust assets or change the trust terms, at least the grantor now has a representative in the trust to oversee the trust, and make needed changes as new circumstances arise.

Most commonly, the Trust Protector is given the power to remove a trustee. In order to preserve the asset protection and tax advantages of the trust, the grantor would not have that authority in an irrevocable trust. In a revocable trust, (or a trust where the grantor retains too much power or control), the Grantor may retain the power to change trustees or modify the trust terms, but that type of trusts is not an effective asset protection device, or estate planning tool. A trust where the Grantor retains too much control over the trust could expose trust assets to creditor claims and result in assets being included in your estate as well as other possible unfavorable tax consequences.

Depending on how the trust is drafted, the Trust Protector is often given authority to make other decisions and changes to the trust that could not be made by the grantor. The Trust Protector may be given the power to terminate the trust, or amend the terms of the trust, including who the beneficiaries are, the State where the trust is administered, what the governing law is, and how the trust principal and income are distributed.

Thus, apart from making sure that the grantor’s intentions are carried out, a Trust Protector may also provide a great deal of flexibility to the trust. When the situations surrounding the trust, the trustee and the beneficiaries change over time, the Trust Protector can step in to change the trust to best fit the new situation. If a beneficiary goes into debt, gets sick, gets divorced or develops an addiction, the Trust Protector can amend the distributions to that beneficiary or remove them entirely. As grandchildren and great grandchildren are born, the Trust Protector can add them as beneficiaries. If one state passes a law granting favorable tax rate to trust income, the Trust Protector could move the location of trust to that state and take advantage of that favorable rate.

The role of the Trust Protector is that of a fiduciary, unless the powers of the Trust Protector are found to be purely personal, such as where the Trust Protector is also a beneficiary or can otherwise modify the trust for their own benefit. A well drafted trust should define the powers and duties of the Trust Protector so that is readily apparent that the Grantor wishes for the Trust Protector to act as a fiduciary.

As a fiduciary acting pursuant to the powers given by the trust document, and acting on behalf of the trust, the Trust Protector is entitled to reasonable compensation and reimbursement for his reasonable expenses. However, many trusts typically do not provide for compensation for the Trust protector, unless the Trust Protector is also an accountant or an attorney. While there are only a limited number of cases directly addressing trust protectors as a fiduciary, it should be the case that the Trust Protector has a lien on the trust assets for his reasonable fees and expenses when acting on behalf of the trust.

The trust document itself will place limits on the fiduciary responsibility and liability of the Trust Protector, as it does with the trustee. It is the balance between the powers granted to the Trust Protector and the restrictions on liability that determines the extent of the duty owed by the Trust Protector to the beneficiaries of the trust. The extent of the powers of the Trust Protector are determined when the trust instrument is created and executed by the Grantor.

Here are some of the basic provisions that may be included in a trust to provide for a Trust Protector and some of the attendant benefits:

Standard Trust Protector Powers and Responsibilities:

  • Remove and appoint trustees, agents & advisors
    • Remove or replace a trustee
    • Appoint additional trustees
    • Appoint successor trustees
    • approve the appointment of an agent or adviser, either generally, or in relation to specific matters
    • appoint replacement protectors
  • Provide oversight to the actions of the trustee & advisors
    • Approve or veto investment decisions
    • Approve or veto discretionary distributions
    • Resolve disputes between the trustee and beneficiaries
    • approve investment recommendations
  • Modify the trust
    • approve the addition or removal of beneficiaries
    • approve a change of governing law or situs
    • terminate the trust or approve the termination of the trust

Benefits of Using a Trust Protector:

  • Adds flexibility to the trust document
    • Allows the trust to deal with changes in circumstances (death, divorce, previously unknown children)
      • Change trustees
      • Change beneficiaries
    • Allows the trust to deal with changes in law (tax law, state law, federal law)
      • Change governing law and/or situs of the trust – move the trust to a different state or country to get favorable treatment
      • amend the trust as to administrative provisions
      • amend the trust as to dispositive provisions
    • Ability to terminate the trust if appropriate
    • Added security that trustee will abide by grantor’s wishes and act in conformity with legal requirements
      • approve trustee accounts
    • Ability to split trustee’s powers amongst multiple people
      • veto or direct investment decisions
      • consent to the exercise of a power of appointment
    • Acts as 3rd party to settle disputes between trustees and beneficiaries
      • determine whether an event of duress has occurred
    • Ability to modify an irrevocable trust instrument
      • amendment and restatement of trust provisions – the Trust Protector modifies the terms of the trust directly
      • judicial reformation – the Trust Protector asks a court to set aside or clarify ambiguous trust terms
    • Trust Protector can extend the life of the trust by adding decanting provisions

These are only some of the types of provisions and benefits that may be applicable. Each and every trust instrument should be carefully crafted to meet the needs of the grantor and beneficiaries. As state and federal requirements may change over time, some flexibility is desirable and can be provided for.

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