A well-written Trust Protector clause can save beneficiaries from losing their inheritances to bankruptcy, lawsuits, divorce, and other catastrophic circumstances. A Trust protector is a trustee with specific enumerated powers who acts under either a fiduciary or nonfiduciary duty, depending on the wording of the trust document.
A Trust protector can monitor a Trustee and, when necessary, make administrative changes to the trust to conform to the Grantor’s Intent or when circumstances change.
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Trust Protector Clause Defined
What is a Trust protector clause? A Trust Protector clause allows the settlor of an irrevocable trust to name someone with powers over the trust. This allows the protector to “fix” problems that might arise from circumstances not contemplated by the grantor when the trust was created. For example, a beneficiary may become bankrupt or be involved in a lawsuit threatening their inheritance. Or, a new law or court case could be passed that would affect the trust’s tax status. A protector can be given as few or as many powers as the grantor wishes.
A significant concern of a grantor is to ensure that their intent in creating an irrevocable trust will be carried out after their death. This is especially important for multigenerational trusts intended to continue in multiple generations. A protector can accomplish tasks that a trustee cannot do due to tax, other legal prohibitions, or disability, and they can help make sure the trust complies with laws that might be passed after the grantor’s death.
A protector can be a fiduciary or a nonfiduciary, depending on how state law classifies the role and if the trust instrument makes it clear. Currently, most states treat protectors as nonfiduciaries by default. The settlor should review the state law and trust instruments to determine the role they want their protector to have.
The Powers of a Trust Protector
Unlike trustees and trust advisors, which have well-set laws regarding their fiduciary duties, the role of a protector is ad hoc. The attorney who drafts the trust instrument will typically delineate specific powers granted to a protector and limitations on that person’s liability (the same as for a trustee).
Typically, a Trust protector can add, remove, or replace trustees. This is important because it allows the Trust protector to monitor the trustee’s activities and ensure the trust creator’s intent is met. By contrast, granting this power to beneficiaries could defeat that intent because they might hastily remove a trustee who does not agree with their every request.
Also, a Trust protector may amend the trust provisions to reflect law changes. This can be important, particularly in irrevocable trusts that begin as revocable and become irrevocable at some point in the future. The amendments could include income and estate tax planning provisions, which can minimize future liabilities. The protector can accomplish these things without court intervention or approval.
This is why a protector with this power should be chosen carefully, often an outside party with extensive knowledge of trust law and tact in navigating family dynamics. If the trust creator names a particular individual as a protector, the trust document should also provide for successors in case that person is unwilling or unable to serve.
The Selection of a Trust Protector
A trust protector can be an essential way to ensure that the terms of your trust are honored, and your wishes are carried out. As such, selecting a trust protector can be one of the most important decisions when planning your estate. Selecting someone with the knowledge, experience, availability, and impartiality is vital to ensure your trust instructions are followed.
Depending on how the trustee clause is drafted, the trust protector may be granted power to do various things. Typically, the most common powers are to add or remove beneficiaries, amend the trust, appoint a new trustee, and change distributions occasionally.
Another power often given to a protector is to fire a trustee. This can be a handy tool for the protector to resolve disputes between co-trustees or between trustee and beneficiary. This is particularly true if the dispute has to do with conflicts of interest or where it is apparent that there is a lack of financial or ethical skills on the part of a trustee.
A protector can also be empowered to amend the trust to reflect changes in law. This can be crucial to ensuring your trust complies with laws in the future, especially as tax codes change.
The Succession of a Trust Protector
It is essential to consider what powers a protector should be given carefully. A protector may be given many types of power, such as adding or removing trustees or controlling investment and distribution decisions. It is also expected to give the protector the power to veto actions of the trustees. Trust protectors can also be granted the power to revise specific provisions within an irrevocable trust if circumstances change, such as responding to tax laws or public benefit eligibility rules.
Giving a protector only a few powers is essential, as this can defeat the purpose of the trust protector clause. A protector should be empowered to examine the trustee’s actions objectively and determine if the trust creator’s intent is being fulfilled or derailed. For example, if beneficiaries have the power to remove and replace trustees, this could result in a rash of hastily removals or replacements due to unsatisfactory performance.
Generally, selecting an outside party with training and experience in trust administration is best. It is also helpful to include language in the trust instrument indicating that the protector should be entitled to all relevant documents and information, including trustee accountings and correspondence between the trustees and the protector. This will ensure that the protector is well-informed and not biased by family dynamics.
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