When a trust is created, it is always important to choose the right trustee. Generally, a trustee should be an individual(s) or company that is detail-oriented and will follow all required fiduciary duties. In previous posts, a trustee’s fiduciary duties and responsibilities have been outlined and discussed. Normally, a trustee is all that is needed and desired to follow through on any trust terms.
Trust Protector
However, in some instances, when dynasty or irrevocable trusts are involved, it is useful to have not only a trustee who handles the day-to-day responsibilities of managing a trust, but also a trust protector. A trust protector is a disinterested third party who is frequently provided the power to amend the trust or remove trustees.
When
A protector could be needed because specific types of trusts have unique characteristics that may require additional oversight. In particular, irrevocable trusts, by definition, cannot be changed by a grantor or the trustees, so a trust protector could be put in place to make changes when necessary. Dynasty trusts by their nature continue indefinitely, so laws may change and it could be necessary for the trust terms to be adapted to accommodate those changes. A trust protector is appointed under the trust instrument. As with any role, a successor trust protector should be named if the primary trust protector passes away.
Why
Some of the reasons why a trust protector could be appointed are to provide for flexibility as circumstances change during the life of a trust. These changes might include changes in tax law or family dynamics. Another reason could be to ensure the trustee carries out the settlor’s wishes. The powers typically given to a trust protector include:
- Power to remove and appoint trustees
- Power to add or remove beneficiaries
- Power to approve distributions from the trust
- Power to approve investment recommendations
- Power to terminate the trust
Where
Currently, about half the states in the U.S. allow for trust protectors and more are joining. Some jurisdictions have trust protector statutes which more clearly define the role of the trust protector and the trust protector’s liability and responsibilities. For example, South Dakota has a trust protector statute.
Drawbacks
As with most estate planning tools, there are some drawbacks. Because the concept of a trust protector is still new, there is little statutory or case law to define roles and responsibilities, specifically around whether a trust protector should be considered a fiduciary of a trust and what duties that implies. These unknowns may open a trust protector to litigation, should a beneficiary or trustee believe the trust protector has made an error.
If you are interested in learning more about trust protectors, contact an estate planning attorney in your area.
