Planning for Life

What are Trust Protectors and Should You Have One?

Posted by Harry S. Margolis on November 25, 2014

Find me on:

By Harry S. Margolis

Trust protectors have become a more common feature of irrevocable trusts in recent years because they offer flexibility and oversight. Having originated with off-shore trusts that are used primarily to protect assets from creditors, trust protectors are now found in special needs and domestic asset protection trusts and sometimes in trusts used for tax planning purposes.

Trusts typically contain three principal roles: the grantor (or donor), the beneficiaries and the trustee.The grantor creates the trusts and contributes the trust property, whether that's real estate or financial assets. The trustee manages the trust assets and makes distributions. And the beneficiaries receive the trust distributions, whether income or principal.

Often one or more of the individuals and institutions in these roles have the right to modify the trust, change its beneficiaries, hire and fire trustees, order distributions, and review accounts of trust activity. In a revocable trust, the grantor generally keeps all of these powers to himself or herself. But if the trust continues after the grantor's death, it may be appropriate to give some or all of these powers to other individuals. For instance, the beneficiaries may then have the right to change trustees and to review trustee accounts.

Trust Protector Powers

However, in some instances, especially in the case of special needs trusts, the beneficiary may not be the appropriate person to have these powers either due to incapacity or that the power would cause the trust's existence to affect the beneficiary's eligibility for public benefits. In some instances, the power to change trustees or to review accounts are simply granted to other family members. Creating the role of trust protector and naming individuals to this position, formalizes the responsibilities and one hopes will cause those appointed to take the role more seriously. It also includes a mechanism for changing the trust protector in case the original individual or individuals can no longer serve.

While family members and beneficiaries are often given the right to change trustees and review accounts, they rarely have the power to change trust terms or trust beneficiaries. This power can be important because a trust created today may not be up-to-date with trust or tax law or changing circumstances 20, 30 or 40 years from now. Often for tax, creditor and public benefits reasons, beneficiaries cannot have the power to change trust terms, but a third-party trust protector can have the power to make the necessary modifications.

Trust protectors can be appointed to step in when a revocable trust becomes irrevocable or immediately in the case of trusts that are irrevocable from their inception. Irrevocable trusts are often used for tax planning, creditor protection and long-term care planning. In these cases, the grantor's retention of the power to change the trust could well defeat its purpose.

Should You Serve?

Lawyers wrestle with the question as to whether they should serve as trust protector should clients ask them to do so. They are often in a good position to assess whether a trustee is fulfilling its responsibilities or a change in the law indicates that a modification of the trust is in order. However, it also carries with it obligations that may be difficult to fulfill. Often after assisting in the creation of a trust, the attorney will have little or only intermittent contact with the trustee or beneficiaries with little or no knowledge of what is going on in the meantime. So the lawyer trust protector may be well-suited to step in when called upon, she may be particularly ill-suited to be keeping watch on the trustees. This problem can be ameliorated if the trust protector's role includes reviewing annual accounts. But will the clients be happy paying the attorney to do this, especially if the attorney is spending considerable time chasing after the trustee to get the accounts or to ask questions about what they do and do not reveal? And if the lawyer has this responsibility and doesn't take the necessary steps, will she be liable in the event of trustee malfeasance?

These are questions that an attorney considering taking on the role of trust protector should consider, as should any non-attorney asked to be a trust protector. Very few states have laws clarifying the responsibilities and liabilities of trust protectors, since it is a relatively new function. While non attorneys probably will not be held to the same standards as attorneys, they should think seriously about stepping in to this role. To some extent the potential liabilities of trust protectors can be mitigated by including language in the trust document clarifying that they are not fiduciaries and barring any legal action against them.

In short, trust protectors can play a very important role in providing oversight and flexibility to irrevocable trusts. In our practice, we use them primarily in special needs trusts, especially when there are no appropriate family members to serve as trustee. This permits family members or others to keep an eye on the trustee, make modifications to the trust to reflect changing laws, and ultimately to help make sure that the trust fulfills its goal of help provide the beneficiary the best possible life.

Topics: trusts, Estate Planning

Subscribe to New Blog Posts

Recent Posts

Most Popular Posts

Posts by Topic

see all