The basic trust has four components: The person who creates the trust (the “settlor”), the trust itself and its assets, the person who controls the trust and its assets (“trustee”), and those who are to receive the benefits of those assets (“beneficiaries”).
The whole idea of a trust is to accumulate wealth and to transfer assets tax-free, without court involvement. The real concern is the trustee who is not financially well-educated, who lives in a different state or when there are extensive assets to be protected.
There is actually a solution for this problem, and amazingly a relatively easy solution. So, enter the concept of the “Trust Protector” or often just “Protector”. The idea behind the Protector is to have somebody who can help the Trustee with financial decisions, facilitate certain transactions, balance the competing interests of the beneficiaries or terminate a Successor Trustee for any misconduct.
Protectors were sometimes given additional powers, such as to appoint the successor Trustee if one resigned or become incapacitated. Over time, drafting further evolved to prohibit a Protector from being the Trustee, or appointing somebody close to the Protector. From there, the concept of the Protector literally exploded to where today many common types of trusts routinely have provisions for a Protector — which they should.
It is difficult to image the type of trust that should not have a Protector. Consider the most simple form of all trusts — the living trust. This is a trust that you create for your own benefit while you are alive. You are the Trustee of your own Trust, and the beneficiary of your own Trust. You get to control and use the Trust assets freely while you are alive. So why would a living trust need a trust Protector?
While you and your spouse are alive, it is always a good idea to review your financial progress on a quarterly, semi-annual or annual basis. These reviews allow you to increase your financial intelligence, to protect your assets from new tax laws, and to discuss your investment options. You can use this information to grow your assets.
The real problem is that you and your spouse will eventually die. When that happens, your heirs then become the beneficiary of the Trust, and whoever you have appointed as the successor Trustee in your trust document will become the acting Trustee. It is this Trustee that you have to worry about. Again, the idea behind the Protector is to have somebody who can help the Trustee with financial decisions, facilitate certain transactions, balance the competing interests of beneficiaries or terminate a Successor Trustee for any misconduct.
The Protector is so useful, and it has become so commonplace, that the concept should almost always be discussed between estate planners and those looking to form trusts. The Trust Protector is to assist, if needed, in protecting the interests of the beneficiaries so as to achieve the objectives of the settlors of the Trust.
So who should the Protector be? Like the Trustee, it should be somebody that you place your trust in. But, with some exceptions, the trust document should limit the Protector’s powers to regularly reviewing your progress in the growth of your wealth, to remove the Successor Trustee, to appoint a successor Protector, or to give them the power to appoint a new Successor Trustee.
What about older trusts that do not have a trust Protector? Existing trusts that do not have Protector provisions can be re-drafted (the legal term is “amended”) to add a Protector. But suffice it to say that if the trust will hold substantial assets, this is worth serious consideration — don’t be “penny wise and pound foolish” when it comes to preserving wealth.
In summary, the trust Protector can be a wonderful and necessary addition to a trust to safeguard it. Like anything else involved in legal planning, there will usually be issues to be navigated, but in the end it will be worth it for the surviving spouse and other beneficiaries. Contact our trust lawyers for a free consultation