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Trust Protectors: Are They a Good Fit for Your Client? |
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Traditionally, the three roles that must be filled when setting up a trust are the settlor (also called a grantor, trustor, or trustmaker), the trustee, and the beneficiary. All three roles are necessary to create a trust that functions properly. Although it is relatively common to use trust protectors in foreign asset protection trusts, a trust protector is a fairly new role in trusts drafted in the United States for estate planning purposes. However, as the number of trusts designed to last for generations grows, estate plans need more built-in flexibility. Giving a trust protector, through the terms of the trust, certain powers over the trust, such as removing or appointing trustees, adding or removing beneficiaries, and amending or even terminating the trust, ensures that your client's intentions for creating the trust are fulfilled despite changing law or circumstances. How Is a Trust Protector Selected? A settlor may select as a trust protector any individual or group of individuals, such as family members, business associates, friends, attorneys, accountants, or other professional advisors. The naming of a trust protector may be specific, such as "my neighbor John Doe," or general, such as "a CPA selected by the majority of the owners of the [ABC CPA Firm]." The settlor provides for and selects a trust protector in the trust agreement. Who Makes a Good Trust Protector? Because of the many and varied powers that a trust protector can hold, your client should name a trust protector who has attributes, knowledge, or skills suitable for the responsibilities of the role. For example, if the trust protector has the power to amend the terms of the trust to account for changes in tax law, the selected trust protector should have some understanding of tax law and how it will impact the trust. If a trust protector has the power to veto or direct trust distributions to beneficiaries, the selected trust protector should understand the family history and desires of the settlor. Different powers may require the selection of different trust protectors or possibly a committee of trust protectors. What Does a Trust Protector Do? Based on your client's wishes, the purposes of the trust, and applicable laws, the trust protector can hold many different powers, including administrative powers traditionally held by a trustee, such as the power to make distributions, and judicial powers traditionally held by a court, such as the power to remove beneficiaries. Trust protector powers can include the power to
Why Your Client May Want to Include a Trust Protector in Their Trust-Based Estate Plan There are several reasons why a client may want to include a trust protector in their trust-based estate plan:
Can My Client Name a Trust Protector for a Testamentary Trust? A testamentary trust, usually created through a will, comes into existence after the settlor dies and the will has been probated. A settlor can, and in many cases should, include trust protector provisions in a testamentary trust to ensure that your client's intent for the trust is properly carried out over time. Does Every State Allow Trust Protectors? State law varies in its treatment and classification of, and guidance for, trust protectors. Though many states have adopted a uniform set of laws governing trust protectors, or a modified version of these uniform laws, other states have not addressed trust protectors at all. It is important to consult an attorney familiar with your state's laws to understand whether trust protector provisions are right for your client's estate planning goals. Feel free to contact us to learn more about whether naming a trust protector makes sense for your clients. We are happy to answer any questions you or your clients may have and help them craft an estate plan that is perfect for them and their loved ones. This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies. |
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