Trust Protectors - The Key to Protecting Your Assets

September 13, 2023

 

A Trust Protector is crucial for certain trusts, including long-term beliefs like those for minors and special needs beneficiaries or those used to pass on family assets across generations. In these cases, circumstances and laws are bound to shift over time – and catastrophe can result without an able adapter.

Protecting Assets

Although a trustee is responsible for managing assets daily and distributing proceeds to beneficiaries, a protector generally oversees the trust. This can include removing and replacing a trustee, controlling investment decisions, and making discretionary distributions to beneficiaries. While confidence can utilize a protector, they are most commonly used in irrevocable trusts.

Because of the broad scope of their responsibilities, a Trust Protector should be someone you have confidence in. This person may be an attorney, a CPA, or a financial adviser who is familiar with your estate planning goals and can help ensure the integrity of your plan.

Besides monitoring the Trustee, a protector can also take steps to amend the trust if needed. This is useful in unforeseen events, such as a beneficiary's divorce or the state adopting laws that make your revocable trust no longer suitable for your purposes (e.g., Medicaid or VA benefits qualification or asset protection).

The difference between a protector and an advisor can be blurry, depending on the specifics of the powers granted in the trust document and the law of the jurisdiction where the trust is situated. Generally, a protector's ability to change the trust document is considered fiduciary, while an advisor's powers are not. This distinction is essential, as it could impact how the trust is treated in the future, particularly in states that have adopted Section 808 of the Uniform Trust Code.

Preventing Disputes

If you are putting assets into a trust, it is essential to ensure that the terms of the trust do what you intend them to do. If something goes wrong, it can cost time and money to get a court to "fix" the trust so that it follows your intentions or reflects changes in law or circumstances.

Trust Protector can be a beneficial tool in doing this. They can be given very narrow or broad powers, depending on your choice and your trust's purpose. However, working with an experienced attorney is essential to help you understand the benefits and risks of including this tool in your plan.

For example, consider including a clause in your trust that gives the Trust Protector the power to remove or appoint trustees, advisors, and beneficiaries and to amend the trust's governing instrument. This is very useful to prevent a misbehaving Trustee from milking the trust for fees or engaging in other misconduct.

A Trust Protector can also resolve disputes between co-trustees or between beneficiaries. In some cases, they can modify distributions to reflect changing circumstances, such as requiring an heir to incur significant expenses. They can also amend the trust to accommodate new tax laws.

Avoiding Probate

Trust protectors have a unique role in estate planning. They are granted contractual powers that help guide corporate trustees and beneficiaries through legal complexities and tax rules to ensure the trust is administered according to the settlor's intent. Trust protectors are relatively new in the United States and have only recently begun to gain traction. Still, they can be precious when a family is attempting to avoid probate and other issues that might arise.

The specific powers that a protector can be granted vary. However, one of the most common is monitoring the Trustee's actions. Suppose a trustee needs to act according to the trust document or in a manner that benefits the beneficiaries. In that case, the Protector can take action to remove and replace the offending Trustee. This power can also be used to monitor investment activities and amend terms within the trust.

In addition, a Protector can be given the ability to veto the actions of a trustee or to control investments within the trust. In these instances, the Protector will likely be paid a fee. The fees can be included in the total trustee fees or be separate.

Whether you are creating a Revocable or Irrevocable Trust, using a Trust Protector is something to discuss with your estate planning attorney. These individuals can be a lifesaver if an immediate successor trustee goes "rogue" or does not have the knowledge, skills, or tools to handle your trust correctly.

Avoiding Taxes

If a person creates an irrevocable trust, the assets transferred to this trust will not be considered part of their estate and, therefore, not subject to tax upon death. This is a great way to protect assets from creditors and divorce proceedings. However, sometimes things go differently than planned. It may be that the Trustee makes a mistake, or the law changes, and the trust needs to be amended. This is where a Trust Protector can come in.

A protector can be empowered with many different powers, such as removing and replacing trustees, controlling investment and distribution decisions, vetoing the actions of a trustee, changing distributions based on circumstances that have changed for beneficiaries, etc. The person chosen for this role should be someone who has been well-trained and has experience in trust administration and a good understanding of family dynamics. Ideally, the Protector should also be an outsider to the family to avoid a conflict of interest and animosity between family members.

While you could name your friend Fred a Trust Protector, they might need more professional time to do this job properly. This is one of the reasons that using an attorney as a Trust Protector is often preferable, as they will have the time and experience needed to act effectively.

 

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