Establishing a trust for the future benefit of your heirs can be a great way to make sure your wishes are carried out and might also provide tax savings. But problems can still surface after you’ve passed away. Laws may change, for example, reducing the ability of the trust to minimize estate taxes, and your family’s financial situation might also be different than you had expected. In such cases, a little-known estate planning device—the trust protector—could provide relief.
As the name implies, a trust protector is used to safeguard the assets in a trust. It is actually an individual who is granted the power to direct certain matters pertaining to the trust. The scope of the powers available to the trust protector will vary according to the language in the trust document. The trust protector might need to act during your lifetime, after your death, or even after the death of your surviving spouse.
The main benefit of having a trust protector is greater flexibility for the trust. The trust protector can step in to deal with changing circumstances in a way you might have if you were still around—to amend the trust to reflect new tax legislation, for example, or to accommodate your heirs’ shifting needs. The principal drawback is that this provision gives one person significant discretion concerning the interests of trust beneficiaries. It also creates an extra layer of administration for the trust and could add to its costs.
Whom should you name as the trust protector? Start with whom you should not choose. Definitely don’t designate your spouse or a trust beneficiary such as a child, grandchild, or creditor. The most likely choice is a professional such as an estate planning attorney (though normally not the same person who drafted the trust document), a financial advisor, or an accountant. Regardless of whom you choose, the trust protector should have a clear understanding of applicable laws, the trust, and your intentions.
Traditionally, trust protectors have been named when the trust document was created, with the designated person essentially remaining on standby until his or her services are needed. More recently, some trusts have used a “springing appointment” that selects a trust protector when the need arises.
Regardless of whom you choose, or when, the most important consideration is what powers you grant to the trust protector. Though they can be as broad or as limited as you choose, it’s normally not advisable to give the trust protector complete control. Instead, you might bestow only those powers that will be the most beneficial in carrying out the basic purposes of the trust. Some of the “limited powers” typically granted to trust protectors include the right to:
- Remove, replace, or add trustees'
- Direct trust distributions or make investment decisions
- Amend the trust administrative or dispositive provisions
- Consent to the exercise of powers of appointment
- Mediate disputes between trustees and beneficiaries
- Resolve deadlocks between co-trustees
- Change the trust’s state of jurisdiction or the governing law of the trust
- If necessary, terminate the trust
Whatever powers you give a trust protector, that person won’t be allowed to protect himself or herself against negative tax consequences or to use illegal means or methods that go against public policy. Significantly, a trust protector also cannot personally assume any beneficial interest or confer such benefits on a member of his or her family. The trust document may also prohibit the trust protector from disqualifying dispositions from the marital deduction, the maximum estate tax exemption, or a charitable deduction. Similarly, you can prohibit the trust protector from disqualifying the trust as the designated beneficiary of a qualified retirement plan or IRA.
Some of the trust protector’s actions may be based on your “intent”—how you might have been expected to act. To determine intent, your family, friends, or advisors might be consulted, and you could create a memorandum of intent—though not legally binding, it could help spell out your objectives. Such a document may be particularly helpful in the case of a “special needs trust” designed to assist a disabled relative.
We can work with you, your attorney, and your other advisors to help you decide whether a trust protector could ensure that a trust you’ve set up for your heirs provides maximum benefits. Please give us a call to set up an appointment.