What You Need to Know about Trust Protectors

June 7, 2023

Your attorney might suggest appointing a Trust Protector to your estate plan for added benefits. Discover the dynamic role and responsibilities of a Trust Protector, which extends beyond that of the Grantor, Trustee, or Beneficiary.

A Trust Protector, typically an impartial third party, assumes one or both of the following functions:

  1. Monitoring and Oversight: One primary role of the Trust Protector involves actively observing the actions of the Trustee. This includes granting the power to remove an unsuitable Trustee and potentially appointing a replacement.
  2. Facilitating Special Activities: The Trust Protector steps in to perform specific tasks on behalf of the Grantor, which the Grantor cannot carry out due to legal restrictions or tax limitations. For instance, they can execute actions such as changing the Trust's jurisdiction to a more favorable one or ensuring the fulfillment of the Grantor's intentions for an irrevocable Trust or a Trust left behind by a deceased Grantor.

When should you consider having a Trust Protector?

  1. Limiting Powers: If certain powers held by the Grantor or granted to a Beneficiary could cause tax issues or estate inclusion, a Trust Protector can possess and exercise those powers without triggering such consequences. Additionally, when a Trustee's fiduciary duty restricts the effective use of certain powers, a Trust Protector acting in a non-fiduciary capacity can step in and fulfill those roles.
  2. Flexibility in Long-Term Trusts: In Trusts intended to span multiple generations or endure for a considerable period, having a Trust Protector can provide the necessary adaptability to adjust the Trust terms according to evolving circumstances.
  3. Special Asset Management: When a Trust contains unique or specialized assets, the Grantor may appoint a Trust Protector with specific expertise in handling those assets or to oversee the Trustee's decisions regarding them, especially if the Trustee lacks the necessary proficiency.
  4. Privacy Concerns: To maintain privacy regarding Trust administration and avoid court involvement, the Grantor can grant powers to the Trust Protector that would typically fall under the jurisdiction of the courts. This empowers the Trust Protector to make decisions related to changing the governing law of the Trust, removing or replacing trustees, or interpreting the Trust instrument.
  5. Selective Trust Functions: In situations where a corporate Trustee is desired for their administrative and investment expertise, but the Grantor wants a Trust Protector to monitor discretionary distributions to Beneficiaries, a Trust Protector can be appointed to fulfill this specific role.

It's important to note that the rights and duties of a Trust Protector may vary depending on the terms of the trust document and relevant case law. Unlike Trustees, Trust Protectors are not involved in the day-to-day administration but step in when necessary to perform designated functions. The power to replace a trustee is commonly granted authority to a Trust Protector.

The specific powers of a Trust Protector may include:

  • Modifying the trust document to optimize tax advantages or avoid unfavorable consequences, especially in response to changes in tax laws.
  • Adjusting the interests of any Trust beneficiary with just cause and within defined limitations.
  • Modifying a trustee's power of appointment for valid reasons.
  • Appointing or removing trustees or other authorities, such as investment advisors.
  • Terminating the trust or a sub-trust if sufficient cause exists.
  • Ensuring that the distribution of trust property aligns with the trust's purpose, sometimes necessitating a veto power over distributions.
  • Altering the governing law of the trust, particularly in response to adverse changes in trusts and estates law.
  • Interpreting the terms of the trust document within specified boundaries.
  • Providing guidance and advice to the trustee(s).
  • Amending the trust document to enhance trust administration, particularly in response to unfavorable changes in trusts and estates law.
  • Appointing a successor trust protector.