Establishing a trust is one of the most essential estate planning tools available. Trusts can legally reduce your personal and estate tax obligations. At Ruggiero Law Offices, LLC, we tailor your trust according to your unique circumstances and concerns. This includes identifying the three roles that must be filled when setting up a trust.
Traditionally, they're the settlor (also called a grantor, trustor, or trustmaker), the trustee, and the beneficiary. All three are necessary to create a trust that functions properly. But there's another, the trust protector, that we often recommend. Let's take a closer look at this critical role.
What Is a Trust Protector?
Although it's 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 such as removing or appointing trustees, adding or removing beneficiaries, and amending or even terminating the trust, ensures that your intentions for creating the trust are fulfilled despite changing laws 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, you should name a person who or entity that 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, they should have some understanding of tax law and how it impacts the trust. If a trust protector has the power to veto or direct trust distributions to beneficiaries, your designation should understand the family history and desires of the settlor. Another important note: Different powers may require the selection of various trust protectors or possibly a committee of them.
What Does a Trust Protector Do?
Based on your wishes, the purposes of the trust, and applicable laws, a trust protector is responsible for many aspects, including:
- Administrative powers traditionally held by a trustee, such as the power to make distributions
- Judicial powers traditionally held by a court, such as the power to remove beneficiaries
Trust protector powers can include the ability to:
- Remove a trustee or appoint a successor trustee.
- Add or remove beneficiaries.
- Amend the trust agreement.
- Exercise the voting rights of closely held business interests owned by the trust.
- Interpret the terms of the trust.
- Veto or direct trust distributions.
- Terminate the trust.
- Appoint and remove members of a distribution or investment committee.
This list isn't exhaustive, and you should include any of these or other trust protector powers only after careful consideration of your desires and purposes for creating the trust.
The Value of This Role in Your Trust-Based Estate Plan
There are several reasons to include a trust protector in your trust-based estate plan:
- Flexibility and peace of mind. Administration of a perpetual trust that may last for generations can be a daunting task because no one knows what the future may hold. Including trust protector provisions in your trust agreement ensures that your trust achieves your goals despite changing circumstances and laws.
- Additional oversight and support for a trustee. You'll have another level of assurance that the trustee is properly administering the trust and carrying out its purposes. If the trustee is delinquent in its duties, a trust protector may remove the trustee and appoint one better suited to the role. A trust protector can also help a trustee correctly interpret trust provisions and address changes in the law or beneficiary circumstances.
- An easier and less costly means of modifying a trust. If a trust needs to be modified after the settlor’s death, usually the only route is through the court system, a complicated and costly process. Giving a trust protector the power to adjust these terms can prevent the need to go to court to modify the trust.
Can I 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 testator (the person who makes the will) can, and in many cases should, include trust protector provisions in a testamentary trust to ensure that their 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 this role, or a modified version of these uniform laws, other states haven't addressed trust protectors at all. It's important to consult an attorney familiar with your state’s laws to understand whether trust protector provisions are right for you and your goals.
Turn to Ruggiero Law Offices For Guidance and Solutions
Please contact us to learn more about naming a trust protector and discuss whether it's a good idea for you. We're happy to answer any questions you may have and help you craft an estate plan that is perfect for you and for your loved ones. When is it time to update your estate plan? Watch this video from award-winning WealthCounsel attorney, James J. Ruggiero Jr., Esq., to learn more.