Trust Protector: Valuable Safeguard for Your Trust and Beneficiary
A Trust Protector could safeguard the viability and purpose of your trust by overseeing it with broader authority than the trustee. By exercising their powers to fix unforeseen problems arising with a trust, a Trust Protector could possibly avert costly, time-consuming, public, and uncertain court proceedings.
Trust Basics
A trust is a legal entity in which an owner of assets gives legal title of some of those assets to a trustee to manage for the sole benefit of a beneficiary. A trust agreement documents the creation, purpose and terms of a trust.
Parties in a Trust’s Ecosystem
The key parties in a trust’s ecosystem include the:
- Trustor, who has specific intentions for how their assets will be used to support a beneficiary. The Trustor starts the creation of a trust into which assets are transferred. Other names for the Trustor include trust-maker, settlor, grantor, founder, donor, and creator.
- Trustee, who takes over legal ownership of trust assets, and has the fiduciary responsibility to manage the properties in the best interest of the beneficiary. The trustee’s responsibilities generally would include investing the trust’s properties, distributing assets to the beneficiary, paying bills, preparing accounting statements, and filing tax returns.
- Beneficiary, who receives distributions of assets from the trust. The trustor creates a trust for the beneficiary to receive property in accordance with their intentions as documented in the provisions of the trust.
- Attorney, who writes the trust agreement. The attorney translates a Trustor’s intentions into the legal terms of the trust. The attorney has a fiduciary responsibility to serve in the best interest of the Trustor.
- State’s laws, which specify the legal requirements for making a valid trust. A state’s laws would also dictate which courts have jurisdiction over trusts, as well as what can be done when provisions of a trust are breached.
- Courts, which interpret state laws to resolve disputes or fix problems with a trust. For example, courts could rule on disputes over replacing a trustee who is not fulfilling their responsibilities. A court could also rule on allowing changes to the terms of a trust if those terms were to become illegal, impossible to follow, or considered counter to a trust’s stated purpose.
Benefits and Costs of Trusts
Trusts can provide many benefits. These benefits include avoiding probate, ensuring privacy, providing for beneficiaries in accordance with the Trustor’s wishes, reducing estate and generation-skipping taxes, and shielding assets from creditors. However, trusts also cost money and time to set up and maintain.
My Revocable Living Trust
I created a revocable living trust (RLT) for some of my assets. The RLT would allow those properties to avoid probate. It also would ensure privacy for those assets and clearly specify how they would be distributed to my beneficiaries.
My Additional Trust: IDGT
In addition to my RLT, I also created an Intentionally Defective Grantor Trust (IDGT) to gain added benefits for my assets. The assets I transferred into my IDGT would be shielded from creditors, and my potential estate and generation-skipping taxes could be less.
Surprise party in my IDGT
During the drafting of my IDGT, my attorney advised me to include a trust protector. What is a trust protector? What is its purpose?
Definition of Trust Protector
A Trust Protector could be thought of as a party to a trust, who is independent of the Trustor, Trustee and Beneficiary. Through powers given by the trust’s terms, they have broader authority than the trustee.
Trust Protector’s Purpose
The purpose of a Trust Protector is to safeguard the integrity and intentions of a trust. In practice, safeguarding means avoid going to court to fix unforeseen problems with a trust. Averting court proceedings could preserve privacy, reduce costs, save time, and take away the risk of an unfavorable ruling.
Unforeseen Problems of a Trust
After the creation of a trust, unexpected and adverse circumstances might occur which could require:
- removing and replacing a Trustee
- resolving disputes between a Trustee and Beneficiary
- mediating disagreement among Beneficiaries
- adapting the trust to changes in state laws
- moving a trust to different jurisdiction
- modifying trust terms to take adapt to revisions in tax regulations
- authorizing changes to trustee compensation
- approving a trustee’s accounting of the trust
- dissolving a trust
With proper powers provided by the trust, a Trust Protector could possibly fix such problems without involving a court.
Origins of the Recent Rise in Trust Protector’s Role
In the 1980s, U.S. trustors trended toward creating trusts in non-U.S. jurisdictions to gain a greater degree of asset protection. However, they also were concerned with giving control of trust assets to professional, but unfamiliar trustees in a foreign country. To address this concern, attorneys wrote into trusts the role of a trust protector with powers to change trustees as well as the jurisdiction of a trust.
Role Still Evolving in State and Case Law
Current use of a trust protector is varied. State laws relating to trust protectors are diverse and evolving. For example, some states require a trust protector to be a fiduciary, but other states do not. In addition, there have been few court cases testing interpretation of state laws on the nature and role of the trust protector.
3 Takeaways: Trust Protector Safeguards Your Trust
1- A Trust Protector could preserve the integrity and intentions of a trust by overseeing the trust with broader authority than the trustee.
2- Expensive, time-consuming, public and uncertain court proceedings could potentially be avoided by a Trust Protector exercising their powers to fix unforeseen problems arising in a trust.
3- Discuss with your attorney the proper role a Trust Protector can play in your trust.
Important Disclosures: Age Wisely Financial, LLC is a registered investment advisor offering advisory services in the States of Delaware, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information on this site should not be relied upon for purposes of transacting in securities or other investment vehicles.
Age Wisely Financial does not warrant that the information will be free from error.
Meet the Author
Kevin Lam CFP® CPRS™
Serving retirees and folks age 60+ in planning their retirement income, wealth, safety and legacy. Helping guide them on their personal finance and life journeys with understanding, wisdom and care. With more than 45 years of finance experience, I am a flat-fee, advice-only financial planner based in Wilmington, DE working with clients virtually nationwide.
