Consider appointing a trust protector

March 28, 2024

Irrevocable trusts can allow for the smooth, tax-advantaged transfer of wealth to family members. There is, however, a drawback – when a trust creator, or grantor, sets up an irrevocable trust, he or she must relinquish the ability to amend or revoke the trust as well as control of all the assets placed in it. What the grantor can control is who will eventually oversee the distribution of assets after their death.

Sometimes, particularly when the grantor isn’t completely confident that the trustee(s) selected will be alive or able to carry out his or her wishes, the grantor might want to consider appointing a trust protector.

Board/CEO relationship

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 while 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.

There’s virtually no limit to the powers a grantor can confer on a trust protector. For example, a trust protector can be empowered to:

• Replace a trustee,
• Appoint a successor trustee, or trustees, or a successor trust protector,
• Approve or veto investment or beneficiary distribution decisions, and,
• Resolve disputes between trustees and beneficiaries.

A word of warning: Although it may be tempting for a grantor to provide a protector with a broad range of powers, this can hamper the original trustee’s ability to manage the trust efficiently. Keep in mind that the idea is to protect the integrity of the trust, not to allow the trust protector to serve as a co-trustee.

Exercise of discretion

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, clarify ambiguous language or change the method or timing of the distribution of trust assets to achieve the original objectives of the grantor.

Wise choice

Choosing the right trust protector is critical given the power he or she will have over the grantor’s wealth. The grantor will want to choose someone who is qualified to make investment, accounting, legal and other critical 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.

Appointing a family member as protector is also possible, but it can be risky. If the protector is a beneficiary or has the power to direct the trust assets for his or her benefit, this power could be treated as a general power of appointment, potentially triggering negative tax consequences.

Powers and duties

If a grantor decides to appoint a trust protector, he or she should ask an attorney to draw up documents that clearly define this individual’s role and authority and specific scenarios that he or she would want to protect against.

For assistance with this or other areas of estate planning, you can contact one of our estate planning attorneys: Russ Russell, Steve Wiggins, Raley Wiggins, or Caty Richardson.

©2024