Trust protectors are appointed to advise and supervise trustees. The trustor, or the person who creates the trust and donates the property to the trust, appoints both the trustee and the trust protector, if there is one. While a trust must have a trustor, a trustee, and at least one beneficiary, there is no legal requirement that a trust have a protector.
The widespread appointment of trust protectors is a relatively new development in the U. S. In the past, protectors were most often used when the trusts were situated “offshore,” or held in a bank outside the country.
A trustee is meant to administer the trust for the benefit of its beneficiaries. A trustee’s duties include carrying out the terms of the trust agreement, which is a written legal document that creates a trust. The trustee must invest the trust assets if they can be invested. Otherwise, the trustee must manage and maintain the assets, distributing them as provided in the trust document. A trustee should also keep the beneficiaries informed of their activities. The trustor tries to pick a trustee who is trustworthy, however, sometimes the trustee behaves disloyally or breaches their fiduciary duty, such as by trying to make money from the trust for themselves.
Of course, it is when a trustee breaches their fiduciary duty that a trust protector can be most important. The trustor appoints the protector, as well as the trustee. The protector’s primary duty is to make sure the trustee is doing their job correctly, and have them removed if they are not. The protector may also appoint trustees. The trustee might also need to be replaced if they pass away or otherwise become unable to administer the trust properly.
A trust protector plays a role different from that of a trust advisor. A trust advisor is a person who has the power to direct, or maybe even only advise, a trustee in their actions. A trust protector acts separately from the trustee and has powers that the trustee does not have. This is not the case with a trust advisor.
What Are the Benefits of a Trust Protector?
Trust protectors are most commonly appointed to oversee the trustees of irrevocable trusts. This type of trust, once created, cannot have its terms changed by the person who created it, the trustor. However, a trustee has the power to make sure that certain changes in trust and tax law, the field of law governing trusts, are reflected in the trust instrument.
Some examples of the common duties of a trust protector would include:
- Removal of Trustee: Removing trustees when necessary and appointing new ones. Trustees may be removed for mismanagement. Or, they may need to be replaced if they die or become incapacitated in some way;
- Adding and Removing Beneficiaries: For trusts that may exist through generations, members of the family not yet born at the time of the creation of the trust may need to be added to the list of beneficiaries, while others who die may need to be removed. Additional assets may be added to the trust property as well;
- Appointing Their Own Replacement: A trust protector can often choose their replacement if they know they will be unable to continue as the trust protector;
- Changes in Trust Language: A trust protector may be able to approve changes in the language of the trust to reflect developments in the law without the necessity of going to court to amend the trust. This may be done most often to ensure that the trust receives maximum tax advantages;
- Terminating the Trust: In the event that there is a reason to terminate a trust, the protector can make sure that the trust is ended correctly;
- Overseeing Distributions of Trust Assets to Beneficiaries: The trustee who has become disloyal may refuse to distribute the assets to the beneficiaries. In this case, if the trust instrument gives the protector the power to make these distributions, the protector may be able to act in the place of the trustee. In some cases, it might be possible for the protector to step in to replace the trustee.
As an additional safety mechanism, a trustor may want a successor protector if the original protector cannot perform their duties.
Do You Need a Trust Protector for Special Needs Planning?
Some trusts are created for people who have special needs, so their guardians can ensure their financial welfare after the guardian dies. For this type of special needs trust, experts recommend appointing a trust protector. As described above, a protector can ensure additional security measures for the proper financial administration of a trust. In the case of a special needs trust, it is especially important to avoid breaches of their fiduciary duty by the trustee and possible squandering of trust assets.
This is not the only useful function that a protector can perform in the case of a trust for an individual with disabilities. The trust protector of such a trust may carry out additional duties that may be helpful to the beneficiary. The trust protector may be vigilant in searching for new medical treatment possibilities for the beneficiary. They can also remain aware of any possibilities for the beneficiary to receive public benefits or respond if they are taken away.
Ultimately, it adds another layer of protection for the beneficiary of the special needs trust will continue to receive the benefits of the trust, even if there are issues with a disloyal trustee. Special needs trusts are created to protect the most vulnerable people, so ensuring that every safety measure possible is in place can help the trustors of the trust rest easy, confident that the trust will survive to serve the beneficiary as long as it is needed.
Are There Potential Drawbacks to Having a Trust Protector?
As with trustees, there is potential for protectors to fail to serve their intended purpose, even though they are meant to be neutral third parties who carry out their role impartially and competently. They are supposed to serve as a check on the trustee, and the trustee, in turn, can serve as a check on the protector. However, this system does sometimes fail.
A trust protector should be an individual whom the trustor trusts in the extreme. Some experts recommend limiting the trust protector’s powers, specified in writing in the trust document. There is always the possibility that the trust protector will not faithfully protect the trust if they are given too much power over the trust and the beneficiary.
Should I Consult an Attorney If I Need a Trust Protector?
When setting up a trust, it is best to choose a trust protector who is extremely honest, trustworthy, and competent. It should be someone unrelated to the trustor, a neutral third party. A person creating a trust may not know an appropriate person to serve in this capacity. So they can turn to an experienced trust lawyer to help. First of all, it is best practice to have a lawyer draft the trust document and define the roles of the trustee and the trust protector.
Then, the lawyer should be able to recommend a protector. Sometimes the lawyer can serve as the protector. If that lawyer does not wish to serve in that role, they may be able to provide recommendations of other possible candidates.
Other possible candidates might be a financial planner, an accountant, or the trust officer of a bank. Above all, the person should be neutral, and the trustor should feel confident that the protector can be relied on to administer the trust in the interests of the beneficiaries.