A Trust Protector can help Ensure that Your Trust will Fulfill Your Goals
Your estate plan should be flexible enough to adapt to changing laws, family circumstances and financial situations. If it includes an irrevocable trust, there’s a risk that the trustee will be unwilling (or unable) to make appropriate moves in response to changes. A trust protector can provide the needed flexibility and mitigate other risks that could derail your wishes.
What powers can you bestow?
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.
There’s virtually no limit to the powers you can confer on a trust protector. For example, you can enable a trust protector to:
Replace a trustee,
Appoint a successor trustee or successor trust protector,
Approve or veto investment or beneficiary distribution decisions, and
Resolve disputes between trustees and beneficiaries.
More specifically, 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 how trust assets are distributed, if necessary to achieve your original objectives, can help ensure your loved ones are provided for as you would have desired.
A word of warning: Although it may be tempting to provide a protector with a broad range of powers, this can hamper the trustee’s ability to manage the trust efficiently. Keep in mind that the idea is to protect the integrity of the trust, not to appoint a co-trustee.
What are the qualifications?
Choosing 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.
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 to him- or herself (or for his or her benefit), this power could be treated as a general power of appointment, potentially triggering negative tax consequences.
The right decision for your family
Bear in mind that a trust protector isn’t essential. In most circumstances, well-established irrevocable trusts function according to their original owners’ intentions without a protector’s intervention. But if you decide to mitigate any lingering risk by naming a protector, work with experienced legal and estate planning advisors to draw up the paperwork that specifies your protector’s powers. Contact FMD for additional details.
