ELITE ADVISOR BEST PRACTICES
The Trust Protector, Part Two
The new kid on the trust block
By Alexander Bove
- Over the last several years, the idea of the trust protector has rapidly developed.
- Trust protectors are especially useful in longer-term trusts, such as those holding family business interests or those providing for grandchildren and great grandchildren.
- Trusts that don’t need a protector at the outset, but that may need one in the future due to unforeseen circumstances, can solve the problem with a “springing” protector.
In Part One, we discussed what a trust protector is and how trust protectors can help resolve estate disputes without resorting to lengthy, expensive and public court cases. Here we’ll look at where the protector came from, best uses of a protector and the “springing” protector.
Where did the protector come from?
So-called offshore asset protection trusts are credited with the origin of the trust protector, and although it can be demonstrated that the position existed long before offshore trusts became “de rigueur,” offshore trusts can definitely be credited with the name tag as well as the huge awareness and increase in popularity of the protector. This came about because offshore trusts would typically be irrevocable and established for the person who created the trust, and that person would want some assurance she could recover her funds in the future when creditors were no longer a threat. The offshore promoter would, therefore, suggest the appointment of a trust protector who had the power, for example, to direct distributions to the creator or even terminate the trust and order the funds sent back to her. As the offshore field developed, so did the array of the protector’s powers, to include such things as the power to remove and replace trustees, to add or delete beneficiaries, to change location (“situs”) and the law of the trust, and even to amend the trust (the broadest power). Thus, any “problems” that arose would simply require the protector’s act to deal with them. Once the idea of such unlimited flexibility in an otherwise unchangeable (without court or beneficiary permission) trust caught on, more and more trust attorneys began to consider their use in onshore trusts, and with good justification. But would every trust need a trust protector? Who should be named protector? What powers should we give the protector? And what about protector’s fees?
When to use a protector
In the typical family’s estate planning trust, which often terminates after the parents’ deaths and when the children reach a certain age, it could well be that a protector will not be necessary. But in longer-term trusts, such as those that hold family business interests or those designed to provide for grandchildren and great-grandchildren, providing for a protector makes good sense, as no one can predict the changes that could come about in 50, 100 or 200 years. Certainly, at the very least, there are bound to be many changes in the laws affecting trusts and taxes, not to mention exponential growth in the number of beneficiaries.
Powers to consider
In that regard, it is not unusual to grant the protector powers to amend the trust in light of such changes in family circumstances or in the law, keeping in mind the wishes of the creator (which should be made clear at the outset — often in a separate statement that is called a “letter of wishes”). In one situation, for example, that occurred a lot less than 50 years from when the trust was established, a person created an irrevocable trust for the benefit of his “natural born” (that is, not adopted) children and grandchildren. One of the beneficiaries later adopted two children from another country. The children became well integrated with the family and in every respect were treated as the parents’ “natural born” children — except that they were not included as beneficiaries because of the language in the trust. Fortunately, the trust had included a trust protector who had the power to amend the trust, including the power to add beneficiaries. Everyone (including the creator of the trust) agreed that the adopted children should be made beneficiaries, so the protector exercised his power to amend the trust and added the children as beneficiaries. Note that even if not everyone agreed, the protector could still have exercised his power. Note also that without a protector who had such powers, it would have been virtually impossible to add the adopted children as beneficiaries.
Another very common power given to the protector (if it is not given to the beneficiaries) is the power to remove and replace the trustee. As suggested in the earlier illustration, without this power it is extremely difficult to remove a trustee and involves expensive and time-consuming court proceedings, or at least beneficiary agreement in states that have adopted the UTC. Of course, there are numerous other powers to consider giving the protector, and these should be discussed with the client’s estate planning attorney.
Who should be the protector?
Selection of the protector is extremely important, as in virtually all instances the protector’s powers are superior to those of the trustee as to the power involved. For instance, it is common to grant the protector the power to direct or veto trust distributions. This means that even though the trustee decides that Junior should not receive a trust distribution to fund a family vacation, the protector could override that decision and order a distribution. Thus, one would select someone who would be fair and who would understand the creator’s wishes, considering all facts and circumstances. Furthermore, there can be unintended tax consequences in naming the “wrong” protector. As a general rule, neither the creator nor her spouse should be the protector, nor should any beneficiary of the trust. Any of these individuals serving as protector could cause income, gift or estate tax problems, as well as loss of creditor protection, or all of the above, if their powers are too broad. The safest and no doubt the wisest approach, then, would be to name an independent party as protector.
The “springing” protector
Trusts that don’t seem to need a protector at the outset, but that may need one in the future due to development of unforeseen circumstances, can solve the problem with a “springing” protector. This can be accomplished by adding a provision in the trust that allows the position to be created at any time by the beneficiaries, by the trustee or by an outside party. When needed, the protector can be appointed and serve for the time necessary to accomplish the purpose intended, and then have its position be dissolved — the best of all possible worlds.
It should be easy to see that the trust protector is a new (in some respects) and extremely useful position that should be considered by anyone who creates a trust. It may not be necessary in all cases, but where it makes sense it can save the day — and the trust.Copyright © 2014 by Alexander A. Bove, Jr., Esq. All rights reserved.