What Is a Trust Protector?
Traditionally, the three roles that must be filled when setting up a trust are the settlor (also called a grantor, trustor, or trustmaker), the trustee, and the beneficiary. All three roles are necessary to create a trust that functions properly. Although it is relatively common to use trust protectors in foreign asset protection trusts, a trust protector is a fairly new role in trusts drafted in the United States for estate planning purposes. However, as the number of trusts designed to last for generations grows, estate plans need more built-in flexibility. Giving a trust protector, through the terms of the trust, certain powers over the trust, such as removing or appointing trustees, adding or removing beneficiaries, and amending or even terminating the trust, ensures that your client’s intentions for creating the trust are fulfilled despite changing law or circumstances.
How Is a Trust Protector Selected?
A settlor may select as a trust protector any individual or group of individuals, such as family members, business associates, friends, attorneys, accountants, or other professional advisors. The naming of a trust protector may be specific, such as “my neighbor John Doe,” or general, such as “a CPA selected by the majority of the owners of the [ABC CPA Firm].” The settlor provides for and selects a trust protector in the trust agreement.
Who Makes a Good Trust Protector?
Because of the many and varied powers that a trust protector can hold, your client should name a trust protector who has attributes, knowledge, or skills suitable for the responsibilities of the role. For example, if the trust protector has the power to amend the terms of the trust to account for changes in tax law, the selected trust protector should have some understanding of tax law and how it will impact the trust. Perhaps a trusted family member could still serve in this role as long as he/she obtains appropriate tax advice. If a trust protector has the power to veto or direct trust distributions to beneficiaries, the selected trust protector should understand the family history and desires of the settlor. Different powers may require the selection of different trust protectors or possibly a committee of trust protectors.
What Does a Trust Protector Do?
Based on your client’s wishes, the purposes of the trust, and applicable laws, the trust protector can hold many different powers, including administrative powers traditionally held by a trustee, such as the power to make distributions, and judicial powers traditionally held by a court, such as the power to remove beneficiaries. Trust protector powers can include the power to
- remove a trustee or appoint a successor trustee,
- add or remove beneficiaries,
- amend the trust agreement,
- exercise the voting rights of closely held business interests owned by the trust,
- interpret the terms of the trust,
- veto or direct trust distributions,
- terminate the trust, and
- appoint and remove members of a distribution or investment committee.
This list is not exhaustive, and inclusion of any of these or other trust protector powers should only occur after careful consideration of your client’s desires and purposes for creating the trust.
Why Your Client May Want to Include a Trust Protector in Their Trust-Based Estate Plan
There are several reasons why a client may want to include a trust protector in their trust-based estate plan:
- Trust protectors offer increased flexibility and peace of mind. The administration of a perpetual trust that may last for generations can be a daunting task because no one knows what the future may hold. Including trust protector provisions in a trust agreement can ensure that the client’s trust achieves the client’s goals despite changing circumstances and laws.
- Trust protectors can provide additional oversight and support for a trustee. A trust protector can ensure that a trustee is properly administering the trust and carrying out the trust’s purposes. If the trustee is delinquent in its duties, a trust protector may remove the trustee and appoint a better-suited trustee. A trust protector can also help a trustee correctly interpret trust provisions and address changes in the law or beneficiary circumstances.
- Trust protectors provide an easier and less costly means of modifying a trust. If a trust needs to be modified after the settlor’s death, usually the only route is through the court system, a complicated and costly process. Giving a trust protector the power to modify the terms of a trust can prevent the need to go to court to modify the trust.
Can My Client Name a Trust Protector for a Testamentary Trust?
A testamentary trust, usually created through a will, comes into existence after the settlor dies and the will has been probated. A settlor can, and in many cases should, include trust protector provisions in a testamentary trust to ensure that your client’s intent for the trust is properly carried out over time.
Does Every State Allow Trust Protectors?
State law varies in its treatment and classification of, and guidance for, trust protectors and Indiana law permits their use. Many states have adopted a uniform set of laws governing trust protectors, or a modified version of these uniform laws, while other states have not addressed trust protectors at all. You may be working with clients who are residents of state’s other than Indiana and it is important to consult an attorney familiar with that state’s laws to understand whether trust protector provisions are right for your client’s estate planning goals. For your Indiana based clients, we are happy to help.
Feel free to contact us to learn more about whether naming a trust protector makes sense for your clients. We are happy to answer any questions you or your clients may have and help them craft an estate plan that is perfect for them and their loved ones.