You likely have several different types of trusts in your
estate plan. In general, to achieve the greatest tax savings, these trusts must
be irrevocable, thus requiring you to give up control over the trust assets. Even
though you appoint a trustee to oversee distribution of the trust’s assets, you
can go a step further by appointing a trust protector. This person will serve
as an overseer of the trustee’s actions. Taking this step can also provide you
peace of mind because the trust protector has the power to alter the trust in
light of changing family situations or tax laws.
Powers available
Essentially, a trust protector is to a trustee what a corporate
board of directors is to a CEO. A trustee manages the trust on a day-to-day
basis. The protector oversees the trustee and weighs in on critical decisions,
such as the sale of closely held business interests or investment transactions
involving large dollar amounts.
You can confer very broad powers on a trust protector.
Examples include the power to:
- Remove or replace a trustee,
- Appoint a successor trustee or successor trust
protector,
- Change the trust’s “situs” — that is, its home
state for legal purposes,
- Amend the trust terms to correct administrative
provisions, clarify ambiguous language or alter beneficiaries’ interests to
comply with new laws or reflect changed circumstances,
- Direct, approve or veto investment decisions,
- Resolve deadlocks between co-trustees or
disputes between trustees and beneficiaries, and
- Terminate the trust — for example, if Congress
were to repeal the estate tax.
While it may be tempting to provide a protector with a broad
range of powers, it’s important to note that this can hamper the trustee’s
ability to manage the trust efficiently. The idea is to protect the integrity
of the trust, not to appoint a co-trustee.
Trust protector in
action
Trust protectors offer many benefits. For example, a
protector with the power to remove and replace the trustee can do so if the
trustee develops a conflict of interest or fails to manage the trust assets in
the beneficiaries’ best interests.
A protector with the power to modify the trust’s terms can
correct mistakes in the trust document or clarify ambiguous language. Or, a
protector with the power to change the way trust assets are distributed if
necessary to achieve your original objectives can help ensure your loved ones are
provided for in the way you would have desired.
Choosing the right
person
Appointing the right trust protector is critical. Given the
power he or she has over your family’s wealth, you’ll want to choose someone
whom you trust and who’s qualified to make investment and other financial
decisions. Many people appoint a trusted advisor — such as an accountant,
attorney or investment advisor — who may not be able or willing to serve as
trustee but who can provide an extra layer of protection by monitoring the
trustee’s performance.
Choosing a family member as protector is possible, but it
can be risky. If the protector is a beneficiary or has the power to direct the
trust assets to him- or herself (or for his or her benefit), this power could
be treated as a general power of appointment, exposing the protector to gift
and estate tax liability and potentially triggering other negative tax
consequences.
Due diligence is a
must
Before deciding on appointing a trust protector, it’s
important for you and your estate planning advisor to review the trusts in your
estate plan to ensure they’re drafted in a way such that there are no
misunderstandings regarding the protector’s role and the authority you grant
him or her.
In addition, consider relevant state laws, if any. Although
protectors are common in offshore trusts, their use with domestic trusts is a
relatively recent phenomenon.
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