Trust protectors can be appointed to oversee the actions of a successor trustee. Grantors often authorize trust protectors to resolve disputes among the trustee and beneficiaries and give them veto power over spending and investment decisions involving trust assets.
Who can you count on to make the proper decisions regarding a trust you've established for your estate plan? More succinctly put: Who can you trust with your trust?
A simple answer is a self-appointed successor trustee, which can be a person or an institution like a bank's trust department. As the term implies, a trustee should be someone or an institution that is highly trustworthy to make fiduciary decisions in the ongoing management, administration and distribution of the assets of a trust to its beneficiaries.
Situations arise, however, that may require oversight of the trustee. Sometimes there's a need for a watchdog to police those entrusted to manage a trust and provide an additional check and balance between the grantor's intentions and the trustee's actions.
Experts say the use of trust protectors rose in popularity in the 1980s and provided grantors with guardian angels to look after trusts created in foreign jurisdictions.
Since then, grantors have utilized trust protectors for a wide variety of other purposes. One may be to arbitrate disputes that occur between trustees and beneficiaries. Another could be to add or remove a trust beneficiary or the successor trustee. A trust protector also might oversee the accounting of the trust and fees paid to the successor trustee. Or, the trust protector might be given sway over specific fiduciary duties usually assigned to the trustee, such as investment decisions or management of a business owned by the trust.
Grantors also assign powers that a trust protector can use without petitioning a court for approval. Among them are the abilities to amend or terminate the trust or move it to another state for tax advantages.
It's important to focus on the term “trust” as a verb when thinking about who to allow to pull the levers on your legacy, advises Forbes contributor and lawyer Jay Adkisson.
“Whether the trust is small or large, we have learned at least one thing after hundreds of years of trust jurisprudence: Trustees often cannot be trusted. The bigger the trust, the more likely the problem,” Adkisson writes. “The temptation is just too great. The whole idea of a trust is to accumulate wealth. Where there is wealth, there is greed, and where there is greed, you'll find temptation - and often misconduct.”
For instance, an ill-motivated trustee may be interested in boosting his compensatory fees paid by the trust. Disputes among beneficiaries can prompt litigation, and litigation can lead to more fees, Adkisson says. Another scenario might entail a trustee instigating litigation to procure referral fees from law firms as a reward for new business. There are numerous other ways for a trustee to engage in misconduct and “milk” a trust.
Problems can develop when the trustee is both a family member and a beneficiary of the trust. The 2018 case involving retired astronaut Edwin “Buzz” Aldrin serves as an example. Aldrin sued his successor trustee - his son - alleging misuse of trust funds. In turn, the son petitioned court to have his father declared incompetent and placed under his guardianship. A trust protector may have been able to resolve the family dispute before it resulted in litigation and wound up making headlines. In other words, a trust protector can purge a trust predator.
To avoid conflicts of interest, grantors are often advised to avoid designating a family member as a trust protector. A better choice may be an accountant or financial adviser; or a law firm or bank could be asked to appoint someone. An impartial overseer may be the best choice to make potentially controversial decisions on adding or removing beneficiaries, allowing discretionary distributions, selling specific assets or other matters.
Trust protectors also can play an important role beyond the oversight function and serve as a consultant and adviser for the trustee. In situations where assistance may be needed to manage financial instruments within a trust - such as matters related to taxation, investments and real estate - a trust protector with expertise in those areas can come in handy.
Another duty may be to protect beneficiaries - often from themselves or unexpected situations. External events - a beneficiary's bankruptcy or substance abuse problem, for example - can put at risk assets intended to serve as an inheritance. Those risks can be alleviated if a trust protector is empowered to amend the terms of the trust and change distributions as life's events warrant.
The authority to transfer assets from one trust to another trust, known as “decanting,” can be another important role for the protector, especially when circumstances have changed significantly since the trust was established. Consider a scenario in which a beneficiary becomes disabled and eligible to receive Supplemental Security Income and Medicaid. A trust protector could transfer funds and establish a special (supplemental) needs trust that would preserve eligibility for those government benefits. A windfall from an inheritance then would be shielded from obligations to pay for medical care.
In most situations, however, trust protectors are unnecessary and state laws are not uniform, Adkisson cautions. “Still, many circumstances arise in which the use of trust protectors can aid in enhancing the oversight of trust matters and reduce the potential for litigation.”
Whether or not a trust protector is necessary can be determined in the process of developing an estate plan. Legacy Assurance Plan membership is one option for consumers to consider. Members are educated in estate planning and provided with access to numerous resources to achieve their planning objectives.