Trust Protectors and Estate Plans

If you have never heard of a trust protector, you are not alone; the role is relatively new to trust and estate law. But a trust protector can be a valuable part of your estate plan, and it may be worth considering appointing one.

In general, the trust protector's role is to oversee certain decisions not reserved to the trustee, grantor or beneficiaries. For example, the trust protector is responsible for certain nonadministrative decisions relating to the trust but not inherently a part of the trustee's role. These decisions might include removing and replacing a trustee (even a corporate trustee), amending the trust if the law changes, changing or adding new descendants or beneficiaries, and resolving disputes between cotrustees or between trustees and beneficiaries. In short, while trustees are fiduciaries who have a duty to strictly follow the terms of the trust document, a trust protector can change certain parts of the trust document without having to go through the courts.

Note that the role of trust protector does not, as yet, have a precise definition. Instead, the definition is evolving. This ambiguity is due, in part, to variations in state law; some states regulate the trust protector's powers and how those powers can be exercised, and other states do not. In addition, there is some question about how similar the trust protector is to a trust adviser. International law may also play a role in how the role is regarded.

All trusts become irrevocable on the grantor's death

Irrevocable trusts are trusts that are set up during the grantor's lifetime. The terms of the trust cannot be changed; they are irrevocable except under very limited circumstances. Revocable trusts are different. They too are set up during the grantor's lifetime, but the grantor can amend the terms of the trust at any time during their lifetime. Once the grantor dies, however, a revocable trust becomes irrevocable.

In general, the trust protector's role becomes important after the grantor's death, when all trusts become irrevocable. A grantor who does not wish to name a trust protector may leave that option open to the beneficiaries by including a trust provision that empowers the beneficiaries to unanimously name someone.

Who can be a trust protector?

Anyone can be named as a trust protector — for example, an individual, a group of individuals, an institution, or family advisers such as a family lawyer or accountant. However, the person must be (1) a third party to the trust (i.e., not the grantor, a trustee or a beneficiary) and (2) unrelated or subordinate to the grantor.

The role of trust protector usually is considered a nonfiduciary position (although there is some question about whether the position is fiduciary, nonfiduciary or quasifiduciary). The powers granted in the trust and by state law may be used to make this determination. In most cases, the trust document achieves the desired result through carefully crafted language.

Appointing a trust protector may not always be necessary, but there are circumstances that make it advisable — for instance, if the grantor is creating a dynasty trust, wants to bifurcate a trustee's duties, opts not to retain certain powers, wants to maintain privacy, or wishes to protect the beneficiaries from losing their inheritance to unforeseen events such as bankruptcy or divorce.

If your trust is already written without a trust protector, you may be able to add a trust protector clause. Consult a tax and estate planning professional to get more specific information about whether and how to include this role in your trust and estate plan.

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