Financial advisors often work with clients who hold or plan to leave assets in trust. But clients may be reluctant to commit to trust terms that may govern for generations in the face of changing laws and circumstances. Appointing a trust protector can provide flexibility to alleviate those concerns, but it can also raise new questions. This article serves to answer frequently asked questions regarding the role.
What Are Trust Protectors and What Can They Do?
A trust protector is a person appointed in a trust instrument to carry out specifically listed purposes that are not already delegated to the trust’s creator (settlor), trustee or beneficiaries. The role originated as a way to provide a check on foreign trustees of offshore trusts, but has evolved to become a solution for potential, but unknown, problems that arise in a trust’s administration.
Powers granted to a trust protector range from administrative to substantive. Administrative powers include the authority to: remove and appoint a successor trustee, consent to or veto a trustee’s actions, amend a trust instrument to benefit from new tax laws, review and approve accountings, and move the principal place of a trust’s administration.
More significant trust protector powers may include the authority to: direct trustees in investment and distribution decisions, increase or decrease the interest of a trust beneficiary, grant a power of appointment to a beneficiary, or exercise a power of appointment. If a trust protector is given a lifetime power to appoint trust assets to a particular class of beneficiaries outright or in trust, the trust protector effectively holds the power to decant the assets into a new trust.
It is important to note when considering the appointment of a trust protector, however, that state laws governing their use and powers vary. Currently, 36 jurisdictions have adopted some version of the Uniform Trust Code (UTC), which provides guidance regarding the role and, notably, looks to the terms of a trust instrument to determine the scope of a trust protector’s powers. Other states, such as New York, have no such statute, but have instead relied on their courts to affirm these powers and obligations.
Will Appointing a Loved One as Trust Protector Burden that Person with Fiduciary Duties?
It depends. UTC states presume that a trust protector is a fiduciary and must act in good faith and adhere to the purposes of the trust and interests of its beneficiaries. That presumption can be rebutted if the trust terms specifically state that the trust protector is not a fiduciary. Even then, courts will look to the powers assigned to the trust protector to determine if a fiduciary role has been assumed.
Whether fiduciary duties are assigned to a trust protector is important because, if so, that individual can be held liable for conduct amounting to a breach of those duties. Such liability cannot, however, be imposed unless the trust protector accepts the duties, either through an express acceptance or informally by exercising the powers which trigger the duties.
A Client Wishes to Appoint the Surviving Spouse as Trustee, But Is Concerned the Spouse May Become Influenced to Squander Trust Assets After the Client’s Death. How Can Appointment of a Trust Protector Help?
The client may consider giving a trust protector the power to veto decisions made by the trustee spouse, which is permitted in UTC states. Other states, however, limit that veto power to investment decisions.
Another useful power to grant a trust protector here is the power to remove and replace a trustee. Trust protectors are often given the power to remove only a trustee who is not the spouse because the removal of a surviving spouse absent incapacity is likely to cause or heighten family tension. But if the client has significant concern about the influence of bad actors, giving the trust protector the power to the remove the spouse as trustee may be an appropriate option. Finally, this settlor should consider giving the trust protector the ability to appoint a co-trustee to serve with the surviving spouse.
What Alternatives to the Appointment of a Trust Protector Can I Consider Instead?
There are other mechanisms available to clients to curb a trustee’s authority. A settlor can appoint an independent co-trustee to restrain the exercise of powers by a family member trustee and mandate that the co-trustees agree to a decision for it to be effective. The trust document can also allow a trust beneficiary (or the majority of beneficiaries), rather than a trust protector, to remove and replace a trustee.
A “trust advisor,” also referred to as an “investment advisor,” is another role that settlors may designate in a trust document to direct investments or manage a closely held business. Finally, for trusts that hold significant assets, “distribution committees” may be appointed to direct trust distributions.
As a final note, while trust protectors can serve as a useful check on trustee powers and provide flexibility in trust administration, financial advisors should encourage clients to carefully consider family dynamics, state laws, and potential fiduciary liability before including trust protector provisions in a trust.
Megan Cannella is counsel and member of the estate planning and administration and trust and estate litigation practices at Bressler, Amery & Ross.