A trust protector is a person or advisor appointed to oversee certain aspects of a trust and respond when circumstances change. Depending on the trust document, a trust protector may have authority to replace a trustee, approve major decisions, resolve disputes, or modify trust terms to help preserve the trust’s original purpose.
When it comes to changing laws, family circumstances, and financial situations, your estate plan should be flexible enough to adapt in every scenario. However, there’s a risk that the trustee will be unwilling or unable to make appropriate moves in the face of change if your estate plan includes an irrevocable trust. A trust protector can help combat this by providing flexibility while mitigating other risks to help make sure your wishes aren’t derailed.
What Powers Can You Bestow?
A trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.
There’s virtually no limit to the powers you can confer on a trust protector. For example, you can enable a trust protector to:
- Replace a trustee,
- Appoint a successor trustee or successor trust protector
- Approve or veto investment or beneficiary distribution decisions
- Resolve disputes between trustees and beneficiaries
More specifically, a protector with the power to remove and replace the trustee can do so if the trustee develops a conflict of interest or fails to manage the trust assets in the beneficiaries’ best interests. A protector with the power to modify the trust’s terms can correct mistakes in the trust document or clarify ambiguous language. Or a protector with the power to change how trust assets are distributed, if necessary to achieve your original objectives, can help ensure your loved ones are provided for as you would have desired.
A word of warning: Although it may be tempting to provide a protector with a broad range of powers, this can hamper the trustee’s ability to manage the trust efficiently. Keep in mind that the idea is to protect the integrity of the trust, not to appoint a co-trustee.
What Are The Qualifications?
Choosing the right trust protector is critical. Given the power they have over your family’s wealth, you’ll want to choose someone whom you trust and who’s qualified to make investment and other financial decisions. Many people appoint a trusted advisor — such as an accountant, attorney, or investment advisor — who may not be able or willing to serve as trustee, but who can provide an extra layer of protection by monitoring the trustee’s performance.
Appointing a family member as protector is also possible, but it can be risky. If the protector is a beneficiary or has the power to direct the trust assets to themself (or for their benefit), this power could be treated as a general power of appointment, potentially triggering negative tax consequences.
Trust Protector FAQ
What Is A Trust Protector?
A trust protector is a person or advisor appointed to oversee certain trust matters and take action when specified events occur. The trust document determines the protector’s authority, which may include replacing a trustee, approving major transactions, resolving disputes, or modifying trust terms.
How Is A Trust Protector Different From A Trustee?
A trustee manages the trust’s day-to-day administration, including distributions, investments, recordkeeping, and beneficiary communications. A trust protector typically has more limited oversight powers and steps in for specific decisions or circumstances outlined in the trust document.
What Powers Can A Trust Protector Have?
A trust protector may be given authority to replace a trustee, appoint a successor trustee, approve or veto certain distributions, resolve trustee-beneficiary disputes, or modify trust terms. The scope should be carefully drafted so the protector supports the trust’s purpose without creating confusion over the trustee’s role.
Who Should Serve As A Trust Protector?
A trust protector is often a trusted advisor, accountant, attorney, or investment professional with the judgment and financial knowledge to evaluate major trust decisions. A family member may serve in some situations, but potential conflicts of interest and tax consequences should be reviewed first.
Can A Trust Protector Create Tax Issues?
Yes, depending on the powers granted. For example, if a beneficiary or family member has authority to direct assets to themself or for their own benefit, that authority may be treated as a general power of appointment, which can create estate tax implications. The IRS regulations under 26 CFR § 20.2041-1 address estate inclusion rules for certain powers of appointment.
The Right Decision For Your Family
Bear in mind that a trust protector isn’t essential. In most circumstances, well-established irrevocable trusts function according to their original owners’ intentions without a protector’s intervention. But if you decide to mitigate any lingering risk by naming a protector, work with experienced legal and estate planning advisors to draw up the paperwork that specifies your protector’s powers. Contact us for additional details.
