Trust Protector: What’s that?

If a person isn’t 100% comfortable that their chosen trustee could effectively handle the associated responsibilities, appointing a trust protector might provide a solution. A trust protector oversees the trustee and weighs in on critical decisions. This article discusses the advantages of appointing a protector, but also notes the importance of picking the right one.

Protect your peace of mind with a trust protector

When Will created an irrevocable trust, he understood that he was relinquishing control of the assets he placed in the trust. He appointed a family member as trustee to oversee the distribution of assets after his death, but he wasn’t 100% comfortable that this person could effectively handle all of a trustee’s responsibilities. Will’s estate planning advisor suggested he appoint a trust protector.

What are the responsibilities?

A trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.

There’s virtually no limit to the powers you can confer on a trust protector. For example, a trust protector can be given the powers to replace a trustee, appoint a successor trustee or successor trust protector, approve or veto investment decisions, and resolve disputes between trustees and beneficiaries.

It may be tempting to provide a protector with a broad range of powers, but this can hamper the trustee’s ability to manage the trust efficiently. The idea is to protect the integrity of the trust, not to appoint a co-trustee.

What are the upsides?

Trust protectors offer many benefits. For example, a protector with the power to remove and replace the trustee can do so if the trustee develops a conflict of interest or fails to manage the trust assets in the beneficiaries’ best interests.

A protector with the power to modify the trust’s terms can correct mistakes in the trust document or clarify ambiguous language. Or, a protector with the power to change the way trust assets are distributed if necessary to achieve your original objectives can help ensure your loved ones are provided for in the way you would have desired.

Suppose, for example, that your trust provides that assets will be distributed to your son after he graduates from college and is gainfully employed. After college, however, your son decides to spend two years in the Peace Corps. If that doesn’t meet the trust’s strict definition of “gainfully employed,” yet your son did well academically and has demonstrated an ability to manage money responsibly, the trust could authorize the protector to modify the trust to allow for early distributions.

Whom should you appoint?

Choosing the right trust protector is critical. Given the power he or she has over your family’s wealth, you’ll want to choose someone whom you trust and who’s qualified to make investment and other financial decisions. Many people appoint a trusted advisor — such as an accountant, attorney or investment advisor — who may not be able or willing to serve as trustee but who can provide an extra layer of protection by monitoring the trustee’s performance.

Appointing a family member as protector is possible, but it can be risky. If the protector is a beneficiary or has the power to direct the trust assets to him- or herself (or for his or her benefit), this power could be treated as a general power of appointment, exposing the protector to gift and estate tax liability and potentially triggering other negative tax consequences.

Is a trust protector right for you?

After Will decided to appoint a trust protector for his irrevocable trust, his estate planning advisor ensured that the trust documents clearly defined the protector’s role and authority. Without such clarity, misunderstandings between the trustee and trust protector may result. If you’re considering appointing a protector, your estate planning advisor can help you determine what powers and duties will best complement your estate planning objectives.

Please confirm that you understand the consultation is paid and the fee is $350.